Table of Contents
With the highest market caps among cryptocurrencies, Bitcoin and Ethereum are considered the two heavyweights of the crypto space. Even though they’re both built on blockchain technology, they were designed with different purposes in mind. Ethereum is a blockchain platform designed to support smart contracts and decentralized apps. Bitcoin, conversely, is a digital asset designed to enable peer-to-peer money transfers.
Ethereum and Bitcoin have some clear differences not only in how and why they were created, but also in the ways they can be used. If you plan on being involved in any capacity in the crypto space, it’s important to understand their roles in the crypto ecosystem.
Key Points
• Ethereum’s native cryptocurrency is known as Ether, or ETH.
• Bitcoin has a fixed supply with a hard cap of 21 million coins.
• Bitcoin operates on a proof-of-work system, while Ethereum uses a proof-of-stake system.
• The Ethereum blockchain allows for the creation and deployment of smart contracts.
• Bitcoin is a decentralized digital asset used primarily as a medium of exchange.
Key Differences at a Glance
Bitcoin and Ethereum are both structured as decentralized blockchain networks, but they’re different in several ways, including in their purposes, supply caps, and consensus mechanisms. Here’s a rundown of some of the key differentiators between Ethereum vs Bitcoin:
| Bitcoin | Ethereum | |
|---|---|---|
| Main purpose |
• Digital medium of exchange, and alternative to fiat currency |
• Platform supporting smart contracts and decentralized applications. |
| Supply cap |
• 21 million coins |
• None |
| Consensus mechanism |
• Proof-of-work (mining) |
• Proof-of-stake (staking) |
| Founder and founding date |
• Satoshi Nakamoto in January 2009 |
• Vitalik Buterin in July 2015 |
| Ticker symbol |
• BTC |
• ETH (Ether, the network’s native cryptocurrency) |
The Main Difference: “Digital Gold” vs “Digital Oil”
Bitcoin and Ethereum were created with different goals and use cases. Remember that Bitcoin, or BTC, is used as a decentralized digital payment system and representation of value, while Ethereum functions as a programmable platform for developing decentralized apps. Some have likened their comparison to that of “digital gold” vs. “digital oil.”
Bitcoin’s Goal: Be a Decentralized Payment System
Bitcoin is the native coin for the Bitcoin network and functions primarily as a transfer of value across the blockchain. Bitcoin was designed to be simple, secure, and scarce. Because of its fixed cap of 21 million coins, it has a limited supply, which may (theoretically) help to drive demand over time and regulate its price amid inflation.
This has prompted some to call Bitcoin “digital gold,” since gold can also be viewed as an inflation hedge due to its scarcity. It’s important to note, however, that cryptocurrency prices tend to be extremely volatile, and Bitcoin’s price history demonstrates that it is no exception. In this way, Bitcoin may be considered more of a speculative asset.
Ethereum’s Goal: Power a New Digital Economy
While Bitcoin provides an alternative to fiat currency for the crypto space, Ethereum provides a programmable platform that allows others to create smart contracts and develop decentralized applications that can run autonomously on blockchains.
In other words, Ethereum can be used to develop new technologies and services in the crypto space. Because of this, it’s sometimes referred to as the “digital fuel” of the cryptosphere, helping to power its growth and expansion.
To further the metaphor, Ethereum additionally uses “gas fees” on its network, which are paid with Ether (ETH), its native cryptocurrency. Ethereum users spend ETH to complete transactions and to access and use applications.
Crypto is
back at SoFi.
SoFi Crypto is the first and only national chartered bank where retail customers can buy, sell, and hold 25+ cryptocurrencies.
Comparing the Core Technology
Getting a little deeper into the technical differences between Bitcoin and Ethereum could help further your understanding of each cryptocurrency.
Supply Limit
Scarcity is a chief factor that helps drive value. In short: The scarcer something is, generally, the more valuable it is.
In relation to Bitcoin and Ethereum, it’s somewhat difficult to determine if the principle holds. Bitcoin has a hard cap of 21 million coins, which means that when the last Bitcoin is mined (which will be sometime in the next century), no more will ever be created. So, theoretically, the price of Bitcoin could rise as the production of new Bitcoin slows over time and eventually halts.
Ethereum, however, has no hard cap on the supply of ETH that could be created. While its supply isn’t fixed, it leverages a burn mechanism to help regulate its supply. Most simply, a portion of every transaction fee, paid in Ether, is permanently removed from circulation. The balance between the creation and burning of Ether could play a role in Ethereum’s price.
How They Are Secured
As mentioned above, Bitcoin and Ethereum have different consensus mechanisms: Bitcoin uses a proof-of-work system, and Ethereum has a proof-of-stake system.
Bitcoin’s proof-of-work system relies on crypto mining, which is energy-intensive, and involves using computers to solve cryptographic puzzles in order to validate data on the blockchain. Miners who solve the puzzles and verify blocks are rewarded with new BTC.
Similarly, Ethereum’s proof-of-stake system involves participants pledging, or “staking” their ETH to the system to validate and secure data. Participants are rewarded with ETH for doing so.
While both systems have the same goal in mind — securing and validating the blockchain — they do it in different ways.
Smart Contracts
A key feature of the Ethereum blockchain is the ability to create and deploy smart contracts. Smart contracts are self-executing pieces of code, which function similarly to an “if/then” command. They automate tasks, executing specific commands when certain conditions are met.
Ethereum uses what is basically a decentralized computer processor, called the Ethereum Virtual Machine (EVM), to execute smart contracts, which effectively makes it programmable. Developers can use Ethereum to create decentralized applications, or dApps, that run on blockchain networks.
What Can You Actually Do With Them?
You may be wondering how you can actually use Bitcoin or Ethereum. The use-cases for each are a bit different.
Bitcoin’s Main Use Cases
As a digital currency, Bitcoin’s primary use-cases involve things you may do with other types of money, like U.S. dollars. This may include sending Bitcoin to other people, using it to make payments or transactions, or storing (holding) it in an account. In addition, Bitcoin may be bought or sold and also facilitates direct, international money transfers and micropayments.
Ethereum’s Main Use Cases
Ethereum’s main use cases stem from its smart contract functionality, which provides a foundation for dApps, decentralized finance (DeFi) projects, the creation of non-fungible tokens (NFTs), decentralized gaming platforms, and more.
Which One Is a Better to Hold?
If you’re considering whether buying or holding Bitcoin or Ethereum may be right for you, there are a few things to think about.
The Case for Bitcoin
Bitcoin may be appealing to those interested in the decentralized blockchain technology it’s built upon, which makes it possible for individuals to transfer cryptocurrencies directly, with no middleman. Bitcoin, again, is used to represent value and be a medium of exchange. It’s also possible — but never guaranteed — that it can be used as a hedge against inflation, meaning that the rise in its price over time may surpass the rate of inflation.
The Case for Ethereum
Ethereum may be preferable to those who are looking to stake a claim in the evolution of cryptocurrency, particularly programmable blockchain and Web3 infrastructure. Ethereum is a framework that helps fuel the creation of peer-to-peer financial services (or DeFi services), as well as other potential decentralized systems, from health-related data applications to tracking goods in supply chain management.
Understanding the Different Risk Profiles
Whether you choose Bitcoin, Ethereum, or another cryptocurrency (or both!), you’ll need to be aware of the risks associated with crypto assets. Specifically, cryptocurrencies are extremely volatile — there’s no guarantee that any cryptocurrency will retain or increase in value, and it’s possible you could lose all of your money in a cryptocurrency.
In addition, holdings are not protected by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC). While the blockchain technology is broadly considered to be secure in of itself, it’s important to be aware that the crypto space is still vulnerable to instances of fraud and scams.
The Takeaway
Bitcoin and Ethereum are different types of cryptocurrencies. Bitcoin is a digital asset designed to facilitate peer-to-peer transactions, while Ethereum was built to help facilitate the creation of decentralized applications.
Both have associated upsides and downsides, and come with a high level of risk. It’s important to weigh that alongside your overall strategies and goals when determining whether to purchase cryptocurrency.
SoFi Crypto is back. SoFi members can now buy, sell, and hold cryptocurrencies on a platform with the safeguards of a bank. Access 25+ cryptocurrencies, such as Bitcoin, Ethereum, and Solana, with the first national chartered bank to offer crypto trading. Now you can manage your banking, investing, borrowing, and crypto all in one place, giving you more control over your money.
FAQs
Why do people use Ethereum instead of Bitcoin?
Ethereum is a platform that can be used to create smart contracts and develop decentralized applications (dApps). The Ethereum network is powered by its native, in-network cryptocurrency, ETH, which may be additionally traded on exchanges and platforms. Bitcoin, conversely, is a digital medium of exchange, which may be used to make peer-to-peer transactions. The two were created for different purposes, and an individual may choose one that best aligns with their goals.
Can Ethereum ever beat Bitcoin?
Ethereum may not ever “beat” Bitcoin in any meaningful way, since they are two different things: Ethereum is a blockchain network, while Bitcoin is a digital currency. That said, it’s theoretically possible that Ethereum’s market cap (or ETH’s market cap, more specifically) could overtake Bitcoin at some point.
Should I spend $100 on Bitcoin or Ethereum?
You should spend your money in a way that meshes with your broader financial goals and strategy. While Bitcoin or Ethereum may be appealing for different reasons, whether for their role in the evolution of blockchain technology or as the leading cryptocurrencies by market cap, their prices are highly volatile, meaning they are considered high risk assets.
About the author
Samuel Becker
Sam Becker is a freelance writer and journalist based near New York City. He is a native of the Pacific Northwest, and a graduate of Washington State University, and his work has appeared in and on Fortune, CNBC, Time, and more. Read full bio.
Photo credit: iStock/Moon Safari
CRYPTOCURRENCY AND OTHER DIGITAL ASSETS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.
All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.
SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
This article is not intended to be legal advice. Please consult an attorney for advice.
SOCRYP-Q425-009