Since their inception, the role of cryptocurrencies in global finance has been a hotly-debated issue. Advocates and detractors have often clashed on the definition, value and regulation of virtual money. Despite the controversy, the onset of the 2020 coronavirus (COVID-19) pandemic gave many cryptos reputations as being viable stores of wealth and modes of transaction. During this uncertain period, Ethereum (ETH) and Bitcoin (BTC) led the mainstream adoption of digital currencies.
During the "crypto winter" of late 2017 through 2019, more than 2,000 cryptocurrencies surrendered approximately 80% of their aggregate market capitalisation. The downturn was attributed to many factors, including negative media coverage, outright fraud and enhanced governmental regulation.
Amid the crypto winter, confidence lagged and the entire asset class's legitimacy came into question. As a result, institutional participation was vastly reduced and coin valuations fell precipitously. Among the big losers were Ethereum and Bitcoin, which surrendered most of their marketshare.
From 1 January 2018 to 1 January 2020, the BTC/USD (-US$6719.31, -48.4%) and ETH/USD (-US$615.00, -82.7%) both posted steep downtrends, consistently failing to find solid ground. As the 2016-2019 rally in American equities and U.S. dollar (USD) dominated the financial landscape, many viewed cryptocurrencies as being nothing more than a waning fad.
Despite the massive losses of the crypto winter, ETH and BTC held their status as cryptocurrency leaders. Eventually, as the COVID-19 contagion spread globally throughout 2020/21, positive sentiment returned to the asset class. In fact, from 1 March 2020 (pre-COVID-19 shutdowns) to 1 March 2021, the BTC/USD (+US$36,736.56, +430.9%) and ETH/USD (+US$1205.91, +552.1%) repeatedly made fresh all-time highs. The new, lofty valuations positioned both as crypto industry leaders and popular vehicles for trading and investment.
What Is Ethereum (ETH)?
In the realm of cryptocurrencies, ETH is a prominent figure boasting a robust capitalisation and market standing. As of March 2021, ETH was valued upwards of US$1800 per coin and held a market cap north of US$209 billion. At the time, ETH held the second-highest per coin value and market cap next to Bitcoin.
According to its creators, Ethereum is officially defined as follows:
"Ethereum is open access to digital money and data-friendly services for everyone, no matter your background or location. It's a community-built technology behind the cryptocurrency ether (ETH)."
In practical terms, Ethereum is an open-source platform that utilises blockchain technology to build and run decentralised digital applications (dapps). Dapps serve a wide variety of purposes and are used to facilitate commerce, money transfers and web development. Ether is the actual cryptocurrency used to conduct transactions on the Ethereum platform, but Ether is commonly referred to as "ETH" or "Ethereum."
Founded in 2013 by 19-year old Vitalik Buterin, Ethereum exists as a global network of independent computers. Each computer is in charge of its own data, which is used to build and run "smart contracts" on the network. Smart contracts are executed automatically, free of third-party intervention, using the decentralised blockchain to ensure security.
Labelled the "world computer," ETH was launched in 2015 as a potential means of decentralising the internet. Through replacing traditional servers with "nodes," the network is viewed by many to be an eventual replacement to traditional internet technology. However, issues regarding accessibility have hampered progress and prompted the launch of Ethereum 2.0.
From its launch, ETH has experienced a massive appreciation in value. Following the US$18 million initial coin offering (ICO) where ETH was sold for US$0.40, the price posted early-2021 all-time highs above US$2000.00.
What Is Bitcoin (BTC)?
Bitcoin is a decentralised, peer-to-peer digital form of currency. Founded in 2009 by a single programmer or group of programmers under the pseudonym "Satoshi Nakamoto," BTC is the benchmark of the cryptocurrency asset class. In March 2021, BTC's market cap exceeded US$1 trillion as prices rose above US$55,000 for the first time.
At its core, BTC is a mode of exchange that uses blockchain technology to facilitate autonomous, secure transactions. As users send and receive BTC, each exchange is recorded in a "block," which acts as a transaction ledger. Every BTC exists as an intricate computer code, which may be stored as files in an online or private wallet. Bitcoins offer users enhanced security as coins are not able to be counterfeited, easily created or copied. In addition, BTC is not directly controlled by any central banking authority or government.
During the late-2020/early-2021 runup in pricing, BTC gained popularity as a potential safe-haven asset. In January 2021, electric car manufacturer Tesla disclosed a US$1.5 billion purchase of BTC, making it among the most public institutional investors to get involved with BTC. Tesla CEO Elon Musk went on the record with touting the company's view toward the digital currency:
"I do at this point think Bitcoin is a good thing, and I am a supporter of Bitcoin."
Tesla's acquisition exposed major shareholders JP Morgan and Goldman Sachs to the performance of BTC, a position each firm previously condemned. Albeit indirectly, Tesla's involvement enhanced institutional participation in the cryptosphere and boosted public sentiment toward the digital currency.
How Are Bitcoin And Ethereum Similar?
Bitcoin and Ethereum share several key attributes which make them popular financial assets. Although unconventional, the two cryptocurrencies feature similar valuation models and creation mechanisms. Whether one is a sophisticated investor, computer programmer, or retail trader, both BTC and ETH offer a collection of benefits.
In the world of cryptocurrencies, coin values are dependent upon a variety of market drivers. Rumours, regulation, fraud and hacking have created a great deal of skepticism toward the asset class. Conversely, mainstream adoption, governmental reception and institutional participation have helped to grow the popularity of BTC and ETH.
One of the primary commonalities between BTC and ETH is that each coin has appreciated over the long-run. While there have been peaks and valleys, the long-term pricing uptrend has attracted value investors from around the globe. From 1 January 2016 to 1 March 2021, BTC and ETH have posted meteoric gains:
- ETH/USD prices rose from US$0.92 to US$1422.47, a gain of 154,616%
- BTC/USD values rallied from US$430.15 to US$56,364.79, a 13,103% return
- For reference, the USD Index (DXY) fell from 98.693 to 90.929, a loss of 7.8%
Past performance is not indicative of future results.
Regardless of the underpinnings, ETH and BTC have historically posted long-run gains. As a result, many investors view both coins as ideal candidates for buy-and-hold strategies, diversification and hedges against currency devaluation. With respect to the entire cryptocurrency asset class, Bitcoin is the gold standard while Ethereum is the silver.
Cryptocurrency mining is the process by which peer-to-peer transactions are publicly confirmed and recorded in the blockchain ledger. Accordingly, "miners" are individuals (referred to as "nodes") who use advanced computing power to solve the intricate math problems needed to facilitate transactions. In return, miners are rewarded with hard cryptocurrencies for organising data into "blocks." ETH and BTC rely on proof-of-work algorithms to function on the blockchain, thus the mining process of each is very similar.
ETH and BTC are mineable cryptocurrencies. Therefore, the creation of new ETH and BTC is dependent upon the mining process. As of early 2021, the reward schedule for each is as follows:
- Ethereum miners are rewarded with 2.00 ETH per block mined
- Bitcoin miners are rewarded with 6.25 BTC per block mined
Over time, cryptocurrency mining has become highly competitive, difficult and resource intensive. However, countless miners engage ETH and BTC 24/7/365, pursuing revenue and incrementally adding to the supply of each coin.
How Are Ethereum and Bitcoin Different?
While Ethereum and Bitcoin have value and are mineable, the two exhibit several key differences. Among the largest are in the areas of basic functionality and supply. Even though both assets are technically cryptocurrencies, these contrasts suggest that the future of each coin may turn out to be very different.
From an operational standpoint, BTC and ETH are distinct cryptocurrencies. The purpose, technological composition and applications of both are unique from one another. Below is a look at the two key functional differences:
- Purpose: The initial purpose of BTC was to function as a decentralised virtual currency free of governmental and central banking intervention. Creators of Ethereum didn't view ether as a potential currency. They saw it as being a means of executing "smart contracts" on the Ethereum network, not necessarily being a tradable asset.
- Technology: Both BTC and ETH rely on proof-of-work algorithms to function on the blockchain. However, ETH uses hashing algorithms that run on Ethash, while BTC uses SHA-256. This discrepancy enables ETH transactions to be conducted faster than those denominated in BTC.
It's important to remember that BTC was developed to be a cryptocurrency that utilises blockchain technology to operate. Conversely, ETH was designed as its own network, using ether to drive the execution of user-programmed dapps and smart contracts.
Despite the fact that Bitcoin and Ethereum are valuable and mineable, the amount of each in circulation is extremely different. As of 2021, there were approximately 18.6 million BTC and 100 million ETH in existence. The variance in supply is a key part of per coin valuations, as the limited stocks of BTC promote the illusion of scarcity in the marketplace.
Below are a few supply-oriented variations worthy of note:
- BTC has a finite maximum supply of 21 million, whereas stocks of ETH are unlimited.
- Roughly 900 BTC and 49,000 ETH are created every day.
- 72 million ETH were generated at launch. BTC was not introduced in mass, with initial supplies dependent upon mining at 50 BTC per block.
Ethereum and Bitcoin are the top two cryptocurrency assets in the world. Utilising blockchain technology to facilitate transactions, each coin is a valid mode of exchange and store of value. Following the dramatic late 2020/early 2021 uptick in pricing, BTC and ETH have gained followings from the financial mainstream as investment vehicles.
However, ETH and BTC are unique assets. While BTC was conceived to be a form of virtual money, Ethereum is intended to be an eventual alternative to the internet. Differences in basic functionality and circulating supply also provide important contrasts between the assets. When coupled with extreme variance in per-coin and market cap values, only time will tell how market participants view BTC and ETH as the future unfolds.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…