Bitcoin vs. Ethereum: What’s the Difference?

Cryptocurrency is one of the buzziest investments of the past several years. The asset class went mainstream initially because of Bitcoin’s rapid rise, and as this market evolves it has continued to attract attention because of the massive volatility in the space, regulatory considerations, and emerging cryptocurrencies for different uses.

Bitcoin was the original crypto, and it remains No. 1 based on market capitalization by a significant margin. Consumers can use it to pay for goods and services at some merchants, and investors trade it like a stock.

The No. 2 crypto by market cap, Ethereum, is smaller than Bitcoin but much larger than the thousands of other cryptocurrencies in the field. Like Bitcoin, Ethereum is a digital currency that boasts high daily trading volume, and it runs on decentralized blockchain technology. But Ethereum offers additional features like smart contracts and is popular for buying non-fungible tokens (NFTs). Here’s how the cryptocurrencies Bitcoin and Ethereum are the same—and how they’re different.

What is Bitcoin and how did it emerge? 

Bitcoin became the first real crypto in 2009, created by an unidentified person or group using the alias Satoshi Nakamoto, Bitcoin began garnering mainstream interest around 2017 and ultimately charted a path for thousands of other digital assets.

The Bitcoin network is partly a response to the financial crisis and Great Recession of 2008. The traditional system is built on centralized authorities like governments and banks backing currencies, validating transactions, recording balances, and creating new money. And 2008 showed that the traditional system could fail.

So Bitcoin was built on the opposite philosophy: a decentralized financial system spread across thousands of computers around the world, with no central authority. Instead, computers on the network update with copies of the latest version of the Bitcoin network, so it would be nearly impossible for any single entity to shut it down.

Like most cryptos, Bitcoin (aka BTC) leverages blockchain technology, which is a public ledger that relies on complex cryptography to record every transaction. Anyone can look at these entries, and verified transactions cannot be altered.

Bitcoin uses proof of work (PoW), a consensus protocol that’s used to create, or mine, new tokens by requiring computers to solve complex math puzzles. It essentially means people can’t copy and paste tokens, confirming every transaction and new token is neither a duplicate nor a forgery. This process is leveraged to verify transactions, with multiple computers repeating the verification to reach consensus.

Bitcoin has surged in value during the past few years, topping $1 trillion in market cap for a few months in 2021. It’s also the crypto with the most mainstream appeal. For example, electronic-payments company PayPal lets customers buy Bitcoin via Venmo, electric-carmaker Tesla has bought Bitcoin, and big banks like Morgan Stanley are giving some of their customers access to Bitcoin investment funds.

What is Ethereum and how did it emerge? 

Ethereum

is a community-run network that powers its crypto, called Ether (ETH), and decentralized applications (DApps). Russian-Canadian programmer Vitalik Buterin created the system as a platform for developers to build their apps with more freedom, compared to Apple and Google taking a large cut off the top for purchases made on their app stores. 

Buterin and seven co-founders called it “the world's programmable blockchain,” through which users can send Ether and other cryptocurrencies. Its platform also includes a marketplace of financial services, games, and apps that “can't steal your data or censor you,” according to the Ethereum website.

The Ethereum network also launched the concept of smart contracts: programs that execute automatically, without human intervention or an intermediary, when agreed-upon conditions are met. This makes transactions and programs faster and cheaper, and they can be used for decentralized finance (DeFi), apps, and games in addition to enterprise contexts like supply-chain processes.

Like Bitcoin, Ether soared to all-time highs in 2021—partly because of its wide use to buy NFTs in the form of digital art, trading cards, and other collectibles. In March 2021, a piece by digital artist Beeple sold for a record-setting $69.3 million worth of Ether. Yet the crypto lost almost half its value from its 2021 peak to early 2022, highlighting the extreme volatility in this space.

How Bitcoin and Ethereum are similar

BTC and ETH share several features, particularly their underlying technology and core philosophies. Both leverage the blockchain and prize the transparency and anonymity it provides, as users are identified not by name but by the ID numbers of their digital wallets.

Both cryptos were born with the spirit of autonomy, as well: Bitcoin was in part a response to the 2008 financial crisis, while Ethereum is an alternative to major tech companies’ app development platforms.

Additionally, both Ethereum and Bitcoin were initially built on the proof of work consensus protocol.

How Bitcoin and Ethereum are different

The No. 1 and 2 cryptos differ in several key ways, as they were developed for different reasons—and aren’t designed to be competitors. 

• Purpose.

  Bitcoin was created primarily as an alternative currency to fiat currencies, such as the dollar and yen, that are backed by a government and typically involve intermediaries. Though Ether can also be used as a store of value and the network can power financial transactions, it was really built to give app developers more freedom, allowing them to create on its marketplace of apps—an alternative to the Apple and Google app stores that take a sizable cut off the top for purchases on its platform.

• Blockchain.

  The Bitcoin blockchain was built to trade only Bitcoin. The Ethereum blockchain, by contrast, is programmable and lets users trade all types of cryptocurrencies without having to visit other cryptocurrency exchanges.

• Consensus protocol.

  Bitcoin still runs on the  proof of work consensus protocol. But Ethereum is changing: The community has long planned to change the algorithm underlying its blockchain, as PoW requires a lot of computational power and electricity. So Ether is switching to a newer protocol called proof of stake (PoS), which lets users validate the transactions on the network in exchange for a reward that’s paid in newly minted crypto. It’s done through a mechanism called a stake pool, or a server node that can hold the combined crypto of many users. A recent estimate says PoS could cut Ethereum’s energy consumption by 99.95%.

• Circulation.

  Bitcoin has a scarcity principle baked in, as the amount of Bitcoin that will ever be in circulation is capped at 21 million. That limit is getting close: As of May 2022, more than 19 million Bitcoin were already in existence. For Ether, there’s no limit on the amount that can be created.

The bottom line

Bitcoin and Ethereum are the largest cryptos by a wide margin. Both run on blockchain technology, which is a decentralized system spread across thousands of computers that relies on complex cryptography to record every transaction. The ledger is public, and users are identified only by their crypto wallet ID numbers. The pair of cryptocurrencies share several features, as well as the core philosophies of autonomy, transparency, security, and anonymity, but they also differ.

The first “real” cryptocurrency was Bitcoin, and it has attracted widespread investor and consumer interest. It topped $1 trillion in market cap for a few months in 2021, and some merchants accept it as payment for goods and services. Its blockchain was built to trade only Bitcoin and runs on a proof of work consensus protocol.

‍Ethereum is a community-run network for trading Ether (ETH) and other cryptocurrencies, and it also offers a platform of decentralized applications to give app developers and users more freedom compared to other app stores. It’s called “the world's programmable blockchain,” and it also launched the concept of smart contracts that execute automatically when agreed-upon conditions are met. Ether, which is switching to a proof of stake protocol, is also the crypto of choice for buying NFTs like digital art pieces.