Ether Explained - Chapter 6: Ethereum vs. Bitcoin (part 2)
08 August 2019Reading time: 6 minutes
Vontobel
now offers investors access to the crypto currency «Ether». But what is Ether?
And why has the second best-known crypto currency gained so much popularity in
such a short time? In eight chapters, we want to give you high-quality
knowledge about the exciting topic of «Ether».
7. Security issues and the
risks of cyber attacks
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
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30/05/2023 10:25:23