Bitcoin and Ethereum — how they differ

This lesson explains how Bitcoin and Ethereum differ as the two most liquid assets in crypto, and how to turn that into practical decisions: what to hold long term, how to measure liquidity, and how to size less liquid altcoins. It is for a reader who knows the basics of the market and wants to understand the role of BTC and ETH without the marketing narrative.

What exactly Bitcoin does and what Ethereum does

Bitcoin was created as a system for recording and transferring value: a public transaction ledger, a limited supply of new units, and no central operator able to change history. For a trader, the market consequences matter more: BTC is usually the deepest market in the sector, and its price often sets the tone for all of crypto — in rallies and in sell-offs.

Ethereum is a computing platform. Beyond the ETH unit there is a state machine on which smart contracts run: DeFi protocols, layer 2 networks (L2) and tokenisation applications. That gives ETH a different functional role from BTC, but adds a layer of risk bitcoin does not have: a contract bug, an excessively broad token approval, or phishing signed with your own key. An overview of those vectors is in the lesson Security and scams.

Practical consequence: buying ETH is not the same as the safety of every application in the ecosystem. The price of ETH and the risk of a specific protocol are two separate positions in your risk ledger.

Supply, halving and “digital gold” — what is a protocol fact

“Digital gold” and “DeFi ultra-gas” are marketing shorthand. What is a protocol fact is that new bitcoins enter circulation as a reward for a mined block, and roughly every four years that reward halves. This mechanism is called the halving and follows from rules written in the code, not from a board decision.

Two distinctions follow:

• The halving is a supply event, not a price forecast. It limits the rate at which supply grows, but says nothing about how much capital will enter the market in the coming months.
• A limited supply is not a fixed supply in the short term. Price is still set by orders, not by a historical chart.

The protocol details and the ways to read data from the network are described in the lesson On-chain: the basics — if you want to verify claims at the source rather than from a thread on a social platform.

Ethereum: ETH, gas and L2 layers

ETH has two functions in this ecosystem: it is a market asset and the fuel for network fees. Every operation on the base network costs gas, and its level depends on network load. That is why a DeFi user looks at the cost of the transaction, not only at the price of ETH.

L2 layers move part of the work off the base network and settle the result in a batch, which makes simple operations cheaper. That does not remove contract risk or the risk of bridges between networks — those are additional technical layers you do not control. For a trading plan the conclusion is simple: keep experiments on separate keys and funds, far from long-term cold storage.

How to measure liquidity: spread and depth

On large platforms BTC and ETH usually have the narrowest spreads in crypto. That does not guarantee a profit — it lowers the execution cost, which on thin alts can eat up a strategy’s entire edge.

A measurement protocol you can repeat on your own account:

1. Read the best orders from the book: the bid (highest buy offer) and the ask (lowest sell offer) at the same moment.
2. Calculate the absolute and relative spread with the formulas:

   absolute spread = ask - bid
   mid = (ask + bid) / 2
   relative spread (%) = (ask - bid) / mid x 100

3. Calculate the cost of a full round turn (entry and exit at market price):

   round-trip cost (%) ≈ relative spread + 2 x fee

4. Measure depth. Check how much notional a market order needs to move the price by about 0.1%. That number depends on the time of day and the exchange, so check with your broker and repeat the measurement during the hours you actually trade.
5. Repeat the measurement for an altcoin and write both results side by side. The difference can be several dozen times over.

Worked example with illustrative numbers: bid 100.00, ask 100.05, fee 0.05% per side.

Both rows illustrate the arithmetic, not market data. The mechanism is constant: on a thin market the return to your entry price alone costs several times more than on a liquid one. Spread this across your planned notional before deciding a setup “looks good” — full cost accounting is in round-trip cost and slippage.

Metrics you can calculate yourself

Many numbers circulate around BTC and ETH. Know the definitions of the most-quoted ones, because without them you cannot tell a measurement from an opinion.

You can calculate each metric yourself from public data, but always confirm the methodology at the source — two services can report different values under the same name. Remember too that metrics describe the state of the network, not the future price.

BTC, ETH and alts: beta, correlation and size

Alts usually have a higher beta relative to BTC: in risk-off episodes they fall harder, and in rebounds they rise faster. This is an observation about many market periods, not a rule for every candle — there are weeks when an alt moves independently of BTC.

For position management, three rules:

• A core in a liquid market. BTC and ETH as the base of your exposure, with the lowest entry and exit cost.
• Alts with a smaller size. With higher volatility and a wider spread, the same risk means a smaller position. Calculate through R-multiple, not through “how much I want to earn”.
• Correlation is not diversification. Three alts correlated with BTC behave in a sell-off like one larger position — see portfolio risk and correlations.

Separate the goals too: cold storage for the long horizon and a trading account are two separate portfolios, operationally as well. Mixing them ends in selling the “investment” in a panic or in holding a perp with funding. The whole risk framework is described in the lesson Crypto without myths, and the cost of holding contracts in Spot vs perpetual futures.

When this market says “do not trade”

1. You cannot state the spread and fee for the instrument you are buying. Without those two numbers you do not know the cost of entering the trade.
2. You cannot explain in one sentence what the token does, beyond the fact that it has been rising lately. No thesis means no invalidation level.
3. You keep experimental tokens on the same keys as your BTC and ETH cold storage. One signed contract can put the whole portfolio at risk.
4. You calculate size on an alt exactly as on BTC. With different liquidity and different volatility, the same amount means a different risk.

Common mistakes when choosing between BTC, ETH and alts

• Buying an altcoin purely on a potential percentage return, without checking liquidity and the project’s history.
• Treating correlation with BTC as a fixed rule. The relationship changes over time and depends on the measurement window.
• Ignoring the spread difference when planning position size on thin markets.
• Confusing function with narrative. “Digital gold” and “DeFi ultra-gas” are shorthand, not an entry checklist — on a trading account you still need invalidation, size and a stop-loss.
• Keeping DeFi experiments in a wallet with long-term cold storage.

Exercise: comparison table

Pick BTC, ETH and one alt with clearly lower liquidity on the same exchange, in the spot version. Fill in the table at one moment, ideally during the hours you usually trade.

Finally, write one sentence about size: given that round-trip cost and that volatility, does this alt deserve the same position size as BTC? The goal: three completed rows and one decision about position size — with no obligation to open a position.

Common questions

Is Ethereum simply a more expensive Bitcoin?

No. Bitcoin is primarily a layer for recording and transferring value, while ETH is the fuel of a platform on which smart contracts run. The risks of a DeFi user — a contract bug, a bridge between networks, a phishing signature — go beyond the price of ETH.

Should I hold alts in cold storage like BTC?

You can, if you understand the contract and the project risk. The rule that does not change: keep DeFi experiments away from your main cold storage, on separate keys and with a separate risk budget.

How should I treat the correlation of alts with Bitcoin?

As an observation about higher volatility, not as a fixed rule. The result depends on the measurement window you choose and on the market period. In practice, a size calculated on the real volatility and liquidity of the instrument matters more than the slogan about 'altcoin season'.

Why measure spread and depth if I look at the chart anyway?

Because the chart shows price, not the cost of entry and exit. Two traders can open an identical position at the same level and get a different result simply because one trades a market with a 0.05% spread and the other a market with a 1.5% spread. With a repeatable strategy that difference compounds over a month and can exceed the whole edge of the system — which is why spread and depth are measured before the size decision, not after a loss.