Cryptocurrency market and stock market were deemed to be same by many people in 2017. This is not the case because there are multiple differences between stock market and cryptocurrency market. The volatility of cryptocurrencies is much more than stocks. The value of a cryptocurrency can rise or fall even 100x of its initial value. Cryptocurrencies also trade 24/7 unlike stocks. Stocks are held by real companies with revenues and real user base while cryptocurrencies are not real and their prices are based purely on speculations.
If you are a beginner and want to know about how to invest money in cryptocurrency market, one of the major things you need to be aware of is the difference between Bitcoin and Ethereum.
Bitcoin and Ethereum are the two largest cryptocurrencies in the world.
What is Bitcoin?
Bitcoin was launched in year 2008 and is the world’s first virtual currency. Bitcoin offers peer-to-peer decentralised online payment system unlike government issued currencies. Bitcoin has no physical form and is circulated by a process known as mining. In this process, a transaction is rewarded at the rate of 12.5 Bitcoin per block. When 210,000 blocks are completed, the reward is halved. Bitcoins have limited volume every year. Blockchain technology is associated with Bitcoin. Blockchain is a record of all transactions. Blocks keep getting added to blockchain in a linear and chronological order using cryptography. Blockchain serves as a secure record of all transactions which can be accessed by all participants.
What is Ethereum?
Ethereum was launched in the year 2015. It is an open-ended decentralised platform that can be used to build smart contracts. Smart Contracts are digital agreements which can never be deleted. Ethereum also enables development and running of distributed applications. Ethereum also has Turing programming language containing seven different programming languages to develop applications and writing smart contracts. Ether is a cryptographic token running on Ethereum which can be traded as digital currency and used to develop and run applications in Ethereum. Transactions on Ethereum are rewarded at the rate of 5 ethers per block.
Differences between Ethereum and Bitcoin
- Bitcoin is a decentralised peer-to-peer payment system and is a mostly a mean of payment and store of value. Ethereum, on the other hand, is a decentralised platform that is used to write distributed applications and peer-to-peer contracts.
- Bitcoin is a payment alternative to conventional currencies while the function of ether(token of ETH) is to facilitate and monetise Ethereum for developers to build and run distributed applications. Thus, it is not a payment alternative.
- There are only 21 million Bitcoins in existence. 17 million Bitcoins have been mined. Thus, the Bitcoins are limited and their prices are also controlled. Ethereum, on the other hand, is unlimited even though the new coins are created under tight control to prevent inflation from reducing the value of the coins.
- Bitcoin has a Proof of Work blockchain. This blockchain is made of 1 megabyte blocks. Bitcoin blockchain’s rate of processing is 3 transactions per second. The blocks are mined every 10 minutes on an average by SHA-256 hashing. Ethereum blockchain, on the other hand is made of blocks of various sizes. The blockchain’s rate of processing is 25 transactions per second. The blocks are mined every 15 seconds on an average by modified Dagger-Hashimoto algorithm hashing. Ethereum uses Proof of Work blockchain but is likely to switch over to Proof of Stake.
- 12.5 new Bitcoins are created every 10 minutes by mining which translates to about 75 Bitcoins per hour. Ethereum, on the other hand, creates 3 ethers every 15 seconds which translates to 720 ethers per hour.
- Bitcoin uses C++ programming language while Ethereum uses Turing programming language which contains seven different programming languages. Thus, Ethereum system is more flexible and diversified than Bitcoin.
- Bitcoin uses SegWit which makes transactions faster and simpler. It also uses Lightning Network which sets up different payment channels going around blockchain. Ethereum uses Plasma which conveys the smart contracts to the main blockchain after their completion.
- Bitcoin hard forks are Bitcoin cash, Bitcoin Gold, Bitcoin Classic, Litecoin Bitcoin, etc. Ethereum hard forks is Ethereum Classic. Hard forks is a protocol software in the blockchain which makes previously invalid transactions valid and previously valid transactions invalid.
- Bitcoin transaction fee is decided on the basis of timespan and blocks. The transaction fee for smaller number of blocks is more than that for larger number of blocks. Similarly, the transaction fee for a shorter transaction time is more than that for a longer transaction time. In case of Ethereum, the transaction fee is determined by two steps. First the ETH gas price is measured in Szabo. 0.000001 ether equals 1 Szabo. In the second step, this gas price is multiplied by the total ETH gas units purchased in each block in ETH blockchain. This amount is the total transaction fee for the ETH transaction.
Cryptocurrency or Mutual Funds: Where to invest?
If you are confused between mutual funds and cryptocurrencies, then you need to remember the following points.
Crypto currencies are very risky in nature due to extreme volatility. High-risk mutual funds are also safer than crypto currencies.
Mutual funds are governed by laws while cryptocurrencies do not come under legal systems.
Mutual funds are more safe and secure than cryptocurrencies.
Thus, mutual funds investment is better than investing in cryptocurrency market even though there is no dearth of investors wanting to accept the risks in order to reap the benefits of cryptocurrency trading.