Exploring the Dynamics of Cryptocurrency Markets: A Deep Dive into Bitcoin and Ethereum Trading
People enjoy a good mystery. One of the greatest mysteries of the twenty-first century has emerged from the realm of cryptocurrency: Who Is Satoshi Nakamoto? The person going by the pseudonym Nakamoto claims to be the creator of Bitcoin (BTC), the first cryptocurrency ever established. Before engaging in Bitcoin and Ethereum trading, it’s a good idea to take a look at their history and look more closely under the hood.
Bitcoin was undoubtedly invented by the person or people who went by the name Satoshi Nakamoto, but no one is certain of their identity.
While Vitalik Buterin may not be shrouded in the enigma that surrounds Satoshi Nakamoto, the elusive architect of Bitcoin, he has swiftly ascended to become a luminary in the crypto cosmos. Buterin is one of the masterminds behind Ethereum (ETH), the second most sought-after cryptocurrency. With a staggering market worth exceeding $155 billion, Ethereum reigns supreme as the most formidable altcoin.
Yet, Ethereum’s influence transcends its market prowess. It has illuminated the potential of cryptocurrencies to be more than mere repositories of wealth or transactional tools. Ethereum, the vanguard of altcoins, presents an innovative framework for distributed computing. Harnessing his technological ingenuity, literary and programming acumen, and above all, his philosophical vision for cryptocurrencies, Buterin is spearheading an endeavor to usher both cryptocurrencies and financial markets from obscurity into the transformative realm of blockchain.
A Comparison between Bitcoin and Ethereum
Ether (ETH), the native digital token of the Ethereum network, has risen to the position of the second most popular cryptocurrency, behind Bitcoin (BTC). Ether’s current market capitalization makes it the second-largest cryptocurrency, therefore comparisons to Bitcoin are unavoidable.
There are a few similarities between Ether and Bitcoin that Ethereum and Bitcoin traders may wish to consider. Firstly, they are both virtual currencies that can be bought and traded on internet exchanges and kept in various cryptocurrency wallets. However, there are a few key areas in which they also diverge greatly. While Ethereum is designed to be used for complex smart contract execution and decentralized applications, Bitcoin is meant to be used as a store of wealth and a medium of trade.
The History of Bitcoin
A groundbreaking concept that had been outlined in a white paper by the enigmatic Satoshi Nakamoto was unveiled when Bitcoin was first made public in January 2009. Bitcoin, in contrast to all forms of government-issued money, signals the emergence of a decentralized and safe digital currency. It is digital money made up entirely of balances linked to an encrypted public ledger.
Bitcoin was the most successful of these early attempts to build an online currency, even though it wasn’t the first. Because of this, it is now acknowledged as the precursor of nearly all cryptocurrencies that have been introduced in the past ten years.
Governmental organizations and authorities have grown to accept the concept of a decentralized virtual currency over time. Even though they are not recognized by the government as a store of value or a method of payment, cryptocurrencies have managed to establish a name for themselves and are nevertheless accepted by the financial system in spite of constant examination and debate.
Ethereum’s Early Ascent
Blockchain technology is being used for purposes other than just supporting virtual currencies. The largest and most well-known open-ended decentralized software platform is called Ethereum. It made its debut in July of 2015.
Ethereum makes it possible to create and execute smart contracts and decentralized applications (dApps) free from fraud, outside interference, and control. To achieve this, Ethereum uses a blockchain and its own programming language.
Ethereum’s native cryptographic token, ether (often abbreviated as ETH), supports a plethora of potential applications. 2014 saw Ethereum hold an Ether presale, to which a great deal of interest was expressed. Ether can be used to pay for goods and services, hold it as an investment, trade it as a digital currency on exchanges, and pay transaction fees on the Ethereum network.
Supply Dynamics and Cryptocurrency Mining
The process of creating a cryptocurrency, or mining, differs for ETH and BTC. While Bitcoin mining requires the use of specialized hardware known as application-specific integrated circuits (ASICs), Ethereum mining may be done with regular PCs.
Mining may be a lucrative industry, with profits rising as electricity prices fall. It can be difficult to determine which cryptocurrency is more profitable to mine because it depends on a number of variables, such as equipment costs, electricity expenses, and cryptocurrency prices. Whereas Bitcoin takes roughly ten minutes to generate, Ethereum can be produced in fifteen seconds.
A benefit of Bitcoin is that there is a limit of 21 million coins available. If anything, the sole restriction on Ethereum’s supply is that up to 18,000 ETH can be generated annually. There are six times as many coins in circulation as there were Bitcoins when they were first issued—112 million.
The Evolution of Consensus: From Proof-of-Work to Proof-of-Stake
While both Bitcoin and Ethereum initially relied on proof-of-work consensus, Ethereum is transitioning towards a proof-of-stake consensus algorithm. Proof-of-stake operates based on a transaction validator’s stake in the network. To become validators on Ethereum, entities that verify transactions to ensure the network isn’t being manipulated, users must stake their ETH.
Proof-of-stake consensus algorithms reduce the energy required to reach consensus by attributing mining power to the proportion of validators’ tokens, eliminating the need for miners with specialized computers. A proof-of-stake network is more energy-efficient, has lower entry barriers for validators, and is more resistant to decentralization because becoming a validator is easier.
Bitcoin also exists on the Ethereum blockchain in the form of ERC-20 tokens. To leverage DApps, a tokenized version of Bitcoin was created and launched on Ethereum.
There are several tokenized versions of Bitcoin on the Ethereum network. These are backed by Bitcoin at a 1:1 ratio, meaning that for every ERC-20 token representing Bitcoin in circulation, there is one BTC in custody backing it. Tokenized versions of Bitcoin on Ethereum allow users to continue holding BTC while using decentralized applications. For instance, token holders can lend their BTC to earn interest.
Scaling Solutions: Bitcoin vs Ethereum
The base networks of both Bitcoin and Ethereum face scalability issues. While Bitcoin handles an average of seven transactions per second, the Ethereum network can handle around 30 transactions per second. In comparison, Visa handles around 1,700 transactions per second and claims to be able to scale up to 24,000.
As the number of users on both blockchains grows over time, both Bitcoin and Ethereum are nearing their capacity limitations and require solutions that will help them accommodate more users. Currently, transaction fees on both networks rise when demand for block space exceeds their capacity.
BTC and ETH have different strategies for addressing their scalability issues. Bitcoin has implemented technical improvements such as Segregated Witness (SegWit), an upgrade that “segregates” some data outside of the space available in each block propagated to the network. SegWit allows for more efficient use of the limited 1 MB of space each Bitcoin block has.
As the number of users on both blockchains grows over time, both Bitcoin and Ethereum are nearing their capacity limitations and require solutions that will help them accommodate more users
Furthermore, developers are working on a layer-two scaling solution called the Lightning Network. On the Lightning Network, transactions are fast and fees are minimal because they are sent through payment channels users create.
The Lightning Network’s user-generated payment channels are pre-funded with BTC and could allow most transactions to move from the base blockchain into this layer-two network.
Supporters anticipate that the Lightning Network will be able to handle up to 15 million transactions per second. These would not be settled on the Bitcoin network itself; only transactions opening and closing Lightning Network payment channels would be settled on the base Bitcoin blockchain.
Ethereum is also implementing scaling solutions that will work both on the base Ethereum network and through layer-two networks. Ethereum’s primary strategy for expanding its base blockchain is called Sharding, which would reduce network congestion and increase transactions per second by creating new blockchains called “shards.”