By Paul Brody, EY Global Blockchain Leader
If you watch business news television or if you spend much time in airports, you have probably noticed that prices for Bitcoin and Ethereum are now shown routinely alongside stock market indices.
Many people would tend to simplify this as just “cryptocurrencies” – a term that has come to symbolize the summation of the Web3 payment system, which many feel too complex to fully understand.
However, Bitcoin and Ethereum are in fact very different, and if you are investing in crypto or just interested in learning more about the technology and why so many are investing, it’s crucial to understand these differences.
Let’s delve into Bitcoin and Ethereum, how they are different, and why each serve distinct purposes.
Starting with Bitcoin 101
Bitcoin is, first and foremost, a cryptocurrency. The underlying concept behind Bitcoin is to make a better currency by removing politicians and economists, indeed, by removing people from the process of issuing currency.
In traditional financial systems like the U.S. Federal Reserve or the European Central Bank, human beings (economists) oversee setting interest rates and managing the issuance of currency. Their goal is balancing price stability with economic growth or unemployment levels. The Federal Reserve in the United States is specifically tasked with helping to maintain full employment, although good luck getting a room of economists to agree upon the definition of full employment.
The key underlying concept in Bitcoin is that all these central bankers are fallible human beings, many of them with political agendas. As a result, they’ve allowed money to become steadily less valuable over time, eroding people’s savings and the value of their assets with the constant issuing of new currency. This is not a new idea; some variation of this has been around since the United States and most other counties left the gold standard in 1971.
Though few economists think the gold standard was a good idea, the era of high inflation in the 1970s did much to convince people that the gold standard was better. It made it harder for banks to expand the money supply since they needed additional gold and mining that gold took time and cost money.
In effect, Bitcoin is an attempt to develop a kind of digital gold standard. It’s no accident that the process for handling transactions and minting new bitcoins is known as mining.
If you believe that issuing new currency causes inflation and inflation in any form is bad, then Bitcoin is in many ways better than gold.
We don’t know how much gold there is on Earth, and when gold prices go up, we suddenly produce a lot more of it. Bitcoin, by contrast, has a fixed supply, 21 million, and when issuance is ended, thought to happen in about the year 2140, there will be no new coins issued. Between now and then, the rate at which new coins are issued will continue to slow down as well.
Bitcoin’s value depends critically on the assumption that central bankers around the world are too vulnerable to have political influence or fallible thinking to effectively manage currencies over the long run.
As a result, currencies will lose value, sometimes in very chaotic ways, and those decreases in value will be damaging to asset holders and investors. Set aside whether you believe this yourself, the price of Bitcoin depends in large part on how many other people are likely to do so and if they are willing to bet financially on that buy buying and holding bitcoin.
Ethereum (ETH) is A Fundamentally Different Bet
Though built off the original concepts of Bitcoin, instead of acting as a currency, Ethereum’s goal is to operate a “world computer” – a tool for helping people and companies coordinate activities and business processes with each other and without having to appoint a central organizing entity.
Ethereum users pay each other in ETH, the native currency, to complete transaction verification, which requires compute power and data storage. In effect, demand for ETH is based on demand for this global transaction processing power. The more complex the logic in a transaction, the higher the “gas” fee that is needed to be shared with others who help validate and process transactions.
While the supply of ETH is not limited, the process of issuance is subject to community agreement and follows a mathematical formula. Additionally, each time a transaction is completed, some of the ETH used in payment is permanently “burned,” which isn’t as intimidating as it sounds. It just means it is sent to an address from which it cannot be retrieved. As a result, in periods of heavy transaction processing, the total supply of ETH tends to decrease slightly.
So far, hundreds of thousands of smart contracts have been deployed on Ethereum and the ecosystem has grown in capacity and usage from nothing to a global network processing millions of transactions each day. Ethereum’s value depends on its place as the preferred network on which so many different entities can transact with each other using smart contracts and complex logic but without having to yield power to a single, centralized intermediary.
Place Your Bets Accordingly
Bitcoin and Ethereum have thrived together and alongside each other.
Casual observers tend to see them as the same thing: cryptocurrencies. In reality, however, they’re radically different bets on the future of the economy.
Bitcoin buyers see risk and danger in politics and the fallibility of central bankers and want a secure alternative like gold. Ethereum buyers see a world of complex global transactions fueling demand integration and coordination capacity.
So, next time you see those two tickers on the bottom bar, I hope they look different to you.
