As cryptocurrencies gain popularity, central banks around the world are growing concerned about the potential impact on traditional currencies. Individuals now have the option to use currencies that operate beyond the control of any government or public entity, facilitating global transactions with unprecedented freedom.

The growing trend towards electronic payments, along with the increasing popularity of cryptocurrencies, has led central banks to consider creating their own digital forms of money, like the digital euro.

Often, central banks promote their digital currencies as preferable alternatives to cryptocurrencies, especially stablecoins.

Given this context, it becomes essential to examine the fundamental differences between cryptocurrencies and central bank digital currencies (CBDCs).

This article will focus on comparing Bitcoin, the most popular cryptocurrency, with the digital euro, which has been introduced on a previous article.

Decentralization vs Centralization

While any Payment Service Provider (PSP) can onboard users on digital euro system and develop its own app to interact with it, the issuance and transaction settlements of the digital euro are strictly under the purview of the European Central Bank (ECB). This exclusive power of the ECB to authorize and manage the digital euro points to its centralized framework. The ECB alone has the authority to shape the trajectory and policies of the digital euro.

In contrast, Bitcoin operates on a fundamentally decentralized network. Control and information are not concentrated within any single entity. Instead, the network is maintained by a consensus among its participants, with every node following the same rules. Nodes are incentivized to adhere to these rules through rewards, making it counterproductive to attempt deceit or manipulation.

The evolution of Bitcoin is guided by Bitcoin Improvement Proposals (BIPs), which are submitted by members of the Bitcoin community. This process embodies a more democratic approach, as it allows for open participation and debate among all stakeholders in the network.

Through BIPs, Bitcoin can adapt and evolve in response to the needs and consensus of its user base, contrasting sharply with the top-down governance model of the digital euro.

Digital Euro Account vs Bitcoin Adresses

To use the digital euro, individuals are required to create an account with a PSP. This pseudonymized account is stored on a repository managed by Eurosystem.

Individuals have the option to connect their digital euro account with multiple PSPs, yet a non-business individual is limited to possessing just one digital euro account.

Consequently, all transactions conducted by the person are processed through this single pseudonymized account, and the ECB has the capability to trace the account back to its owner.

In contrast, creating a Bitcoin account involves generating a 256-bit number through a random process, such as flipping a coin 256 times. Essentially, this number serves as a private key, which is then used to derive a public key. The public key is used to create Bitcoin addresses that receive funds.

By 2024, the prevalent use of Hierarchical Deterministic (HD) wallets allows for the generation of a new address for each transaction, significantly enhancing privacy by making it challenging to associate transactions with a single identity. This is because addresses generated from the same HD wallet do not obviously appear to be connected.

However, when sending Bitcoin, the process involves using the private key to authorize the transfer of funds previously received at one or multiple addresses, which then serve as the “input” for the new transaction. This action links the addresses involved in the transaction, indicating their control by the same entity.

Supply Mechanism

Bitcoin’s total supply is capped at 21 million coins, categorizing it as a deflationary asset. This cap is intended to prevent inflation and emulate the scarcity of valuable resources like gold.

In contrast, the Digital Euro lacks a fixed supply limit. The ECB governs its issuance, with the authority to adjust the supply in response to economic requirements and the aims of monetary policy. This capability to increase the quantity of digital euros as needed could potentially contribute to inflationary effects.

Purpose and Use

Bitcoin was first introduced as an alternative to traditional currencies. With time, it has also become an investment asset, often referred to as “digital gold.”

Digital euro is designed to complement cash, facilitating digital transactions.

Privacy

Bitcoin transactions offer pseudonymity, as users interact through addresses composed of random numbers and letters. However, all transactions are stored on a public ledger, making them traceable and, under certain conditions, linkable to specific individuals. This traceability becomes particularly relevant if an address can be connected to personal information, allowing for identification through sophisticated analysis.

The Digital Euro, on the other hand, is designed to safeguard privacy in transactions, but will incorporate mechanisms to prevent illegal activities, such as money laundering and terrorism financing.

A key distinction lies in the control over privacy.

With the Digital Euro, the European Central Bank (ECB) retains the ability to uncover the identities behind transactions.

In contrast, Bitcoin gives users the potential to maintain their anonymity indefinitely, provided they manage their addresses and transaction links carefully.

Accessibility

As of 2024, Bitcoin, along with other cryptocurrencies, remains challenging for the average person to use regularly. Despite my grandmother’s proficiency with her computer, setting up a Bitcoin account and engaging in daily Bitcoin transactions would be an unrealistic expectation for her.

The challenge isn’t limited to those unfamiliar with technology; even for those with technical expertise, managing transactions is more complicated than using traditional banking services or cash.

In contrast, the Digital Euro is designed for easy integration into the current financial system, making it readily accessible to a broad audience, including the elderly and individuals with disabilities. Its user-friendly approach aims to eliminate the barriers associated with digital currency transactions.

Valuation

Bitcoin valuation is highly volatile and determined by the market demand and supply. Its price fluctuates based on factors such as investor sentiment, market speculation, regulatory news, and technological developments within the cryptocurrency space.

The scarcity of Bitcoin, capped at 21 million coins, along with its growing acceptance as a form of payment and investment, contributes to its price volatility.

The digital euro, on the other hand, is pegged to the value of the physical euro. As a central bank digital currency, the digital euro’s value is backed and regulated by the European Central Bank.

Conclusion

The key distinctions between Bitcoin and the digital euro lie in their supply mechanisms, geographical usage, accessibility, privacy, and centralization.

Bitcoin’s deflationary nature contrasts with the potentially inflationary approach of the digital euro.

While Bitcoin operates globally, the digital euro is tailored for the eurozone.

Accessibility favors the digital euro, designed for universal use, unlike Bitcoin’s more complex accessibility.

Privacy and centralization mark the biggest contrasts. The digital euro, despite being pseudonymous, allows for transaction tracing to individuals, unlike Bitcoin, where users can maintain anonymity through unlinked addresses.

Lastly, the ECB’s control over the digital euro denotes centralization, in stark contrast to Bitcoin’s decentralized, democratic model.