Tim Lowe of Attestant writes that, created in 2009, bitcoin is a “Peer-to-Peer Electronic Cash System”. Vitalik Buterin extended bitcoin and launched Ethereum in 2015, a “Decentralised Application Platform”.
ETH and BTC are the tokens used to pay transaction fees and to reward those running blockchain software. BTC is referred to as an inflation hedge or digital gold. ETH could be digital oil, fuel that enables Digital Apps (dApps). Ethereum dApps enable tokenisation, financial infrastructure, games and even social media networks. Applications also enable Ethereum’s use as a backbone for blockchains known as Layer 2s. These are designed around specific requirements such as speed, then use Ethereum as a secure, settlement layer between chains and institutions.
The market capitalisation of cryptocurrencies has grown over the last five years, however they are still volatile. Bitcoin can be considered digital gold… for the brave. Physical gold still has substantially lower volatility. Despite the differences in the blockchains, they are still highly correlated in terms of price. Changes in BTC price currently drive the crypto market as a whole.
Issuance of new tokens is one area of difference and is defined in the software of each blockchain rather than by committees. Bitcoin issues a fixed number of BTC “rewards” every block paid to “miners” operating the network. Initially 50 BTC per block, the software enforces a 50 per cent reduction every 210,000 blocks (~4 years). From July 2024, the reward was 3.125 BTC and will halve again in 2028.
Ethereum requires “Validators” to provide an ETH “Stake”. Rewards are issued in proportion to the stake. Ethereum also removes a portion of transaction fees from circulation. Block rewards increase new ETH, transactions remove ETH from circulation. Since 2022 the supply of ETH has reduced by 335k ETH.
Validators running the Ethereum software earn rewards (~3.071 per cent) however this is complex and has created a new industry where technical service providers run the software on behalf of holders in return for a small percentage of the rewards. This provides an opportunity for all ETH holders to earn yield.
Longer term, staking maybe a differentiator between ETH ETFs. The US issuers initially had this as part of their products but for now, it has been removed.
There are big differences in energy usage across blockchains. Ethereum relies on the Validators ETH Stake as a security guarantee, but bitcoin Miners can only process transactions if they commit computation to the network. Computation makes it expensive for a malicious actor to disrupt the network. For both blockchains, a substantial economic investment is needed by the Software Operators. With Ethereum, the investment is ETH, with bitcoin it is in computation which requires energy.
Gold does not need new functionality in order for it to be considered valuable. Many bitcoin developers believe the same – bitcoin does one thing well and no more, but that is the point. In contrast, Ethereum has a roadmap with releases introducing new functionality every six months.
The success and adoption of blockchains is driven by the software ecosystem. An annual report published by Electric Capital found over 16,000 Ethereum developers, more than any other Blockchain by a very large margin. Bitcoin was found to have only 1,853 developers.
Accounts holding more than USD100 have grown across both blockchains with a sharp uptick in recent months. Ethereum transactions are steadily growing and account for around four times that of bitcoin. If Ethereum “Layer 2” blockchains are included, the transaction count is far higher and growing.
As the growth and adoption of cryptocurrencies continues, we are seeing governments around the world take a wide spectrum of regulatory actions. El Salvador became the first country to adopt bitcoin as a legal tender; they have since been followed by other countries. In contrast, cryptocurrencies are subject to different types of bans. As the assets become more widely adopted and understood, hopefully regulation will follow.
A more mundane risk is the displacement of ETH and BTC as the dominant cryptocurrencies. Given how embedded bitcoin is in the public consciousness, this maybe more of an issue for Ethereum. However, Ethereum is well established as a platform for dApps and has by far the largest ecosystem. This combined with the nature of software enables Ethereum to include the best innovations found in competing platforms.
Cryptocurrencies are software and so there is always the risk of defects. There are however mechanisms in place to reduce this risk, for example Ethereum is run using multiple versions of the software developed by different teams.
On the surface bitcoin and Ether are very similar assets currently with a high degree of price correlation. There are however distinct differences that may, in the longer term, cause a divergence in their price. Ethereum has the potential for a big increase in adoption across a wide variety of sectors whilst the narrative around bitcoin as a store of value and hedge against inflation is growing. Diversification across both assets maybe the best strategy.
