Ether Explained - Chapter 6: Ethereum vs. Bitcoin (part 2)

Both Bitcoin and Ethereum are confronted with security issues that the developers still have to work on. With ten years of development time (and few major problems), the Bitcoin network is often described by supporters as the safest blockchain. Users looking for value storage should invest in the Bitcoin network instead of building a new one: Any possible technical improvements that other coins may contain can be added to Bitcoin, but Bitcoin's security cannot be transferred to another cryptocurrency.

The security problem is mainly explained by the lack of a supervisory institution that would ensure the security of Bitcoin transactions and systems. In the past, many Bitcoin holders have lost their virtual money through online theft. Bitcoins must be stored in virtual wallets but the security of Bitcoin wallets has often been a massive problem. Also, Bitcoin exchanges have been subject to cyber attacks and theft, as they are a frequent target of hackers. The best known attack was on Mt.Gox in 2014, at that time the world's largest Bitcoin exchange. 25,000 customers lost around 650,000 Bitcoins and Mt.Gox was declared bankrupt.

Ethereum has been criticized for potential security problems for a number of reasons, including the DAO attack. But it is also criticized for the fact that the software is at an early stage and has only been available for several years. The Ethereum platform had some security problems in the past, but the network has improved and expanded despite these disadvantages. And although bugs were found in the smart contracts, they did not cause any significant problems.

8. Transactions and transaction fees

Since the first transaction with Bitcoin in 2010, more than 440 million transactions have been carried out with Bitcoin. While the Ethereum network has processed over 510 million transactions so far. The highest transactions recorded per day were 490,644 Bitcoin transactions per day and 1,349,890 Ether transactions per day. This indicates that the Blockchain community uses the Ethereum platform more actively.

Bitcoin and Ethereum have a comparative advantage in transaction costs over standard currencies, as transaction fees are significantly lower than the costs of conventional means of payment (e.g. card payments or bank transfers). Because no intermediaries are required, transaction costs can also be reduced significantly. Average fees per transaction for Bitcoin transfers vary between 0% and 1%, while traditional online payment systems charge from 2% to 5% or more. For Ethereum, transaction fees are even lower because costly intermediaries can be replaced with smart contracts. This also makes it very beneficial to invest in ICOs.

Bitcoin and Ethereum also provide faster transaction processing than ordinary online payment systems. The total time to process Bitcoin transactions is between 10 and 60 minutes. Ethereum is even faster because it can process transactions within seconds. Traditional bank transfers (particularly cross-border transactions) often take several days to process. The benefits of lower transaction fees and faster transaction processing than traditional online payment systems make both coins an ideal medium of exchange.

In the Bitcoin network, up to 3-5 transactions per second can be processed, compared to an average of 2,000 transactions per second processed by VISA. The Ethereum network is a bit faster with around 12 transactions per second. Nevertheless, there is a limited transaction capacity compared to traditional payment providers. If they want to become globally accepted currencies in the future, they must be able of processing thousands of transaction per second. Currently, the scalability is a big disadvantage for their technology.

9. Price volatility: crypto vs. fiat currency

On one hand, both Bitcoin and Ether prices show extreme volatility. As a result of these extreme price fluctuations, there might be less suppliers and consumers who accept one of these cryptocurrencies as a global currency and payment system, as they may not be able to correctly communicate the relative prices of goods and services. Such market volatility make Bitcoin and Ether unusable as a unit of account.

On the other hand, due to these fluctuations some traders can speculate on their future price movements in order to make a profit. In addition, they are ideal assets for diversification, as their price movements correlate little with the price fluctuations of traditional asset classes. They have become a new asset class and offer an alternative investment opportunity.

However, it is difficult to compare the volatility of cryptocurrencies, as they have only been in existence for a short time. Bitcoin's volatility seems to be declining over time. One could also observe a trend that cryptocurrencies are more volatile in their earlier days and stabilize in value over time, but they are far more volatile than fiat currencies like EUR and USD.

10. Competition among Bitcoin and Ether

Bitcoin used to dominate the cryptocurrency market with around 90% of the market share, but it dropped to 68%. However, Bitcoin still dominates the cryptocurrency market. Bitcoin has a market capitalization of USD 210 billion. Ethereum is the largest alternative coin with a market share of 8% and a market capitalization of USD 24 billion.

Most people associate Bitcoin with cryptocurrencies. Ethereum is not as well-known as Bitcoin but it is increasingly coming to the fore. Some investors believe that Ethereum is inferior to Bitcoin due to the lower price, which is exactly what Ethereum benefits from. The lower price makes Ethereum more attractive to many investors because there is more room to move upwards. Some claim that it will be quite difficult for Ethereum to catch up with Bitcoin so quickly. However, Bitcoin is not the only competitor. The cryptocurrency market also consists of other rivals such as Bitcoin Cash, Ripple and Litecoin, which can trigger fair competition towards Ether. Others claim that Ethereum can compete with Bitcoin because large enterprises see more potential in Ethereum than in Bitcoin simply because Ethereum is seen as an «upgrade» that closes the gaps that Bitcoin cannot fill.

11. Regulation

Potential government intervention poses a threat to any cryptocurrency. In general, cryptocurrencies create space for lawless events, so that over time the state either enacts laws and regulations or imposes direct prohibitions or restrictions. Thus, some uncertainties could emerge for investors, because future legal bases are uncertain.

Both, Bitcoin and Ether are susceptible to intervention by central authorities such as governments and central banks. Currently, Bitcoin is still illegal in nine countries, e.g. in Macedonia, Vietnam, Bolivia and Saudi Arabia. In many countries, the legal status and taxation of crypto currencies also still uncertain. So far, there is no international consensus on the legal status of crypto currencies, as there are no global laws that regulate them. Each country has a different understanding of cryptocurrencies and regulations are continuously changing.

In June 2018, the SEC determined that Ethereum is not classified as a security. This is considered a milestone for the entire crypto industry because this will ensure that the platform does not fall within the scope of the (strict) regulatory framework required for securities.

The unclear regulatory situation of ICO's also poses special regulatory challenges, which could affect the Ethereum platform. In many countries it is unclear whether ICOs are treated like conventional crowdfunding methods, in some countries ICOs have already been banned or severely restricted.

*As of 6 August 2019