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There are real world assets, such as homes or precious metals, and then there are “real-world assets” in the crypto space. Real-world assets as they relate to the crypto and Web3 world are assets that exist in the physical, real world, but that have also been tokenized. In other words, those real-world assets have been granted representation in the crypto ecosystem through a process of tokenization.

Thinking of assets that can exist both in the physical and digital worlds can be a bit confusing. However, the concept of asset tokenization, or RWA tokenization, isn’t all that different from other types of assets you may be more familiar with. In some ways, it’s similar to how a stock represents a slice of ownership in a company.

What Does “Real World Asset” (RWA) Mean in Crypto?

Real-world assets, or RWAs, in the the context of crypto, blockchain, and Web3, refer to the idea that a physical asset in the real world can be represented by a digital token, which can then be traded or held on a blockchain network. Since a blockchain-based network is inherently decentralized — meaning it doesn’t need to be processed through a central authority — it can allow for rapid digital peer-to-peer transactions and potentially broaden access to assets that have traditionally been further out of reach.

How RWA Tokenization Works: A Simple Analogy

While nobody is taking a machine and turning, say, your house into a digital token, what they are doing is creating a token that represents ownership of the house. Theoretically, the digital token that represents ownership of your home could be bought or sold on a blockchain network.

To put it another way, the deed (the document that proves ownership of the home) has been digitized and tokenized so that it can be easily transferred through a blockchain transaction. However, it’s important to note that a deed is just one example of a type of real-world asset that could potentially be tokenized.

Other physical assets that could be tokenized include artwork, bottles of wine, dinosaur fossils, ownership documents related to vehicles — you name it. Tokenization may also extend to intangible assets, such as intellectual property, and, importantly, could potentially be used with financial instruments, such as stocks, bonds, and even private equity shares.

What Are Some Examples of Real World Assets Being Tokenized?

The basic idea behind tokenization is that the process could help smooth out transactions of physical assets or documents, and also, create a record of ownership and transaction history on the blockchain.

With that in mind, there are, as noted, several types of real world assets that could, potentially, be tokenized. Here are some examples.

Tokenized Real Estate

We previously discussed the tokenization of a home.

The possibilities also stretch beyond residential real estate property, and into the commercial sphere as well. In effect, ownership of property could be digitized on the blockchain and traded, and perhaps even fractional shares could be traded, too. That could mean, for real estate investors, that they’re trading tokenized shares of real estate investment trusts or properties themselves much in the same way they might transact other cryptocurrencies.

Tokenized Private Credit and Loans

Tokenizing credit or loans could allow for lenders to bypass traditional financial institutions that lend out money. The potential upsides include more liquidity, efficiency, and transparency, but doing so could also introduce risk into the system. Most lenders have established lending practices to weed out risky borrowers, for example.

Tokenized Treasury Bills (T-Bills) and Bonds

Treasuries, or T-Bills and other types of bonds, could also be tokenized. These are already traded on exchanges — much in the same way that stocks are — but could also possibly be tokenized and traded via blockchain transactions. Even stocks could be, and are, tokenized, though it may not necessarily represent legal ownership of the stock, but rather, offer exposure to stock prices instead.

Other Tokenized Assets

Also, as mentioned previously, there are myriad other types of assets that could be tokenized and traded. Artwork, such as rare paintings that are high in value, could be tokenized. Baseball cards, stegosaurus skeletons, rare Ferraris, Phish tour T-shirts – there really isn’t much of a limit that could, potentially, be digitized and traded on a blockchain network.

What Are the Benefits of RWA Tokenization?

There are some primary benefits that RWA tokenization could bring into the crypto space. These include liquidity, the potential for fractional ownership, and increased transparency into ownership records and transactions.

Unlocking Liquidity for Traditionally Illiquid Assets

Illiquid assets, such as real estate, antiques, and art, can be difficult to trade. Take a stegosaurus skeleton, for example. It has value, but not everyone is interested in owning it. Even those who have an interest in dino-ownership might have a difficult time facilitating the transfer. Tokenization could be a way to help solve that by allowing ownership to be represented by a digital token that could be easily bought and sold through the blockchain.

Allowing for Fractional Ownership

Additionally, tokenization could allow for fractional ownership. Many assets may already have several owners — for example, a commercial building may be owned by a group of people rather than an individual — but there isn’t really an easy way to split up ownership of a bottle of expensive wine. By tokenizing a bottle of wine, fractional ownership becomes simpler and easier. Nearly any high-value asset could potentially be split into smaller digital shares that could be bought, sold, or held.

Increasing Transparency and Efficiency

Trading tokens on a blockchain network — itself a type of distributed ledger — could help increase the transparency and efficiency of transactions. Since there’s not necessarily the need for intermediaries or middlemen when it comes to blockchain transactions, buying and selling tokens could potentially be done more quickly and cheaply than through traditional methods.

Furthermore, the security features of blockchain could help with record-keeping related to token ownership. That includes the decentralized nature of blockchains, the cryptography implemented as well, in addition to the types of consensus mechanisms used to keep blockchains secure.

What Challenges and Risks Do RWAs Face?

Tokenized RWAs may have some clear upsides, but there are risks and challenges associated with them, too.

Navigating Regulatory Uncertainty

Regulation, as it relates to RWAs (and the wider crypto space, too), is still evolving. That’s something that anyone looking at buying, selling, or otherwise participating in RWAtransactions should be aware of. In the United States, regulation is shared by federal and state agencies, including, but not limited to, the Securities and Exchange Commission (SEC, Commodity Futures Trading Commission (CFTC), the Federal Reserve, and the Department of the Treasury,. Things are continuing to evolve, however, and it will be important to know what regulation changes are or could be in the mix if you own any RWAs.

Overcoming Technical Hurdles and Oracle Reliance

Oracles, which bridge off-blockchain sources of data with blockchains themselves, are very important when it comes to RWAs. RWA tokens are affixed to physical, off-chain assets, so the whole system of tokenizing assets is dependent in a large way on oracles.

However, blockchain oracles can still face technical challenges and risks, such as maintaining the integrity of the off-chain and on-chain data or being potential targets for hackers, as well as the fact that some oracle systems are centralized, which can lead to a single point of failure.

Ensuring Accurate Asset Valuation

Finally, it can be tricky to accurately value an asset that’s being tokenized. For instance, how do you value, for instance, a stegosaurus skeleton? There may not be a good or accurate way to do it, so when it comes to tokenizing that skeleton, valuing the tokens themselves can also be difficult.

How to Buy, Sell and Hold RWA Tokens

For those interested in buying or selling RWA tokens, there are many online exchanges and marketplaces that facilitate RWA transactions. You can even check out whether a platform you use for trading other types of assets (stocks, other cryptocurrencies) supports or allows for RWA token sales. TWA tokens are held in a crypto wallet, either by a custodian, or by its owner directly.

The Future of Tokenized Assets in Finance

It’s difficult to say what the future holds for tokenized assets in the financial space, but the ball has been set in motion, and it’s perhaps likely that tokenization will continue to grow in the years ahead. This, of course, assumes that large institutions will buy in and invest in RWA infrastructure, and that the technology enabling tokenization and RWA trading also keeps up.

The Takeaway

Real-world assets, or RWAs, are digitized tokens that represent ownership of real, physical assets. Those assets can include all sorts of things, such as real estate or baseball cards, as well as financial assets like bonds. The idea behind tokenization itself is that it allows those assets to be more easily traded or transferred, and in some cases, creates opportunities for fractional ownership.

RWAs are growing and evolving along with the broader crypto space, so it’s possible that their adoption will increase in the years ahead. With that said, it’s important that potential buyers and sellers consider the risks that can accompany these relatively new assets.

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.

Learn more about crypto trading with SoFi.

FAQ

How is tokenization different from securitization?

Tokenization is not exactly the same as securitization — the conversion of an asset into tradable securities — as a security itself could be tokenized. Instead, tokenization refers to the creation of a digital token that reflects ownership of a specific asset that can then be bought or sold. Securitization creates tradable assets, whereas tokenization creates digital tokens, each using different technical infrastructures to facilitate trading.

What is the largest category of RWAs today?

As of November 2025, the largest RWAs in terms of market cap include tokenized precious metals, such as silver and gold, and tokenized stocks (including Nvidia, Apple, Alphabet, Microsoft, and Amazon).

Are RWAs considered securities?

It depends on the individual RWA, but in some cases, yes, RWAs are classified as securities by regulators. Generally, the classification depends on the underlying physical asset.

What blockchains are used for RWA tokenization?

Blockchains that are often used for RWA tokenization include Ethereum, Solana, Polygon, Avalanche, and Base, among others.

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Photo credit: iStock/kupicoo

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.

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A crypto wallet is a digital tool that lets you access, manage, and control your cryptocurrency. There are several different types of wallets — online accounts, mobile apps, and hardware devices — each offering different levels of convenience and security.

It’s important to know that despite the name, a crypto wallet doesn’t actually “store” your coins. Instead, it holds the vital information you need to interact with the blockchain, specifically your private keys and public addresses.

For anyone new to the digital asset space, understanding how digital wallets work is essential. Below, we break down what a crypto wallet really is, the pros and cons of different wallet types, and how to confidently set one up and start using it.

What Is a Crypto Wallet?

You might assume that a crypto wallet is simply a digital version of a physical wallet that holds cash or cards. In reality, it works very differently.

The Important Part: It Doesn’t Store Your Crypto, It Stores Your Keys

A crypto wallet doesn’t hold any actual cryptocurrency. Instead, it stores a private key — a randomized code that gives you access to your crypto, which resides on the blockchain.

Your private key proves ownership of your assets and allows you to send and spend your coins. Your private key is also used to generate a public key and a crypto address, which you share to receive crypto from others.

If someone gains access to your private key, they can control and transfer your crypto. This is why it’s important to keep your private keys secure and never share them with anyone.

Your “Seed Phrase” Is the Master Key to All Your Funds

When you first set up your own crypto wallet, it generates a seed phrase — typically a list of 12 to 24 random words. Also known as a secret recovery phrase, this phase acts as the master key to your private keys and wallet. If your wallet becomes unusable or inaccessible — say, your hardware device gets lost or your software wallet is a laptop that no longer runs — you can use your seed phrase to restore access to your funds on a new wallet.

While that acts as an essential safeguard, keep in mind that if someone else gets hold of your seed phrase, they can import your wallet on their own device and instantly take control of your crypto. It’s important that you never share your seed phrase and store it safely offline.

Why You May Need a Crypto Wallet

Many cryptocurrency exchanges and other crypto platforms offer custodial wallets, which store your private keys for you. This provides a simple and convenient way to access your crypto — you just log into your account. However, some crypto users opt to set up a personal (self-custody) wallet off an exchange or platform. Here’s why:

To Fully Control Your Digital Assets

Many users keep their crypto on the exchange or platform where they bought it, which is simple and convenient. The potential downside of this arrangement is that the third party group holds and manages the wallet on your behalf. This means your access to funds ultimately depends on that platform’s systems, policies, and uptime.

Setting up your own private wallet, on the other hand, gives you self-custody. In other words, you have complete control over your assets. A self-custody wallet also allows you to connect directly with decentralized applications (dApps), including decentralized finance (DeFi) platforms for lending, crypto staking, and more.

To Reduce the Risks of Using an Exchange

When you keep your crypto keys on an exchange, you’re trusting that platform to keep your assets secure. If the exchange is hacked, mismanages funds, or goes bankrupt, you could lose some or all of your holdings. While some exchanges offer limited private insurance, crypto holdings are not insured by government programs like the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC).

By moving your crypto into a personal wallet, you may minimize exchange-related risks. That said, it’s important to remember that simply engaging in crypto is highly risky and speculative, and that you could lose all the money you use to buy these assets, regardless of how you choose to store your keys.

Recommended: How Will the Genius Act Impact Stablecoin and Bitcoin?

Decision #1: Deciding Between Hot Wallets vs. Cold Wallets

If you decide to get a wallet, your first major choice is between a hot wallet and a cold wallet. Each has its own benefits and drawbacks, depending on how you plan to use your crypto.

Hot Wallets (Software)

Hot wallets are digital wallets that remain connected to the internet. Common examples include:

•  Mobile wallets: Smartphone apps designed for storing and managing crypto on the go.

•  Desktop wallets: Software installed directly on your computer.

•  Web wallets: Wallets accessed through your browser, typically hosted by a third-party provider.

Advantages:

•  Convenience: Hot wallets offer fast, easy access to your cryptocurrency for regular transactions, such as spending, buying, or selling.

•  Multi-device access: You can usually access your holdings from anywhere with an internet connection using various devices.

•  User-friendly: Most hot wallets are free to download and feature intuitive interfaces, making them well-suited for beginners.

Disadvantages:

•  Potential vulnerability to hacks: Because they’re generally always online, hot wallets may be susceptible to hacking and malware.

•  Custodial risks: Some hot wallets are custodial meaning a third party controls your private keys. If the provider is hacked or goes out of business, your funds may be lost.

•  Device dependence: If your device (phone or computer) is compromised, your wallet could be too.

Cold Wallets (Hardware)

Cold wallets are offline devices that store your private keys without any internet connection. The most common type is a hardware wallet, a small physical device (often resembling a thumb drive) that connects to your computer or mobile device via USB or Bluetooth. It’s important to know, however, that some hardware wallets are not necessarily cold wallets, since they may connect to certain software or apps. Another type is a paper wallet, which is simply a printed copy of your public and private keys.

Advantages:

•  Heightened security: Because they’re stored offline, cold wallets can offer protection from online hacking attempts, making them preferred by many crypto users for security.

•  Full ownership and control: Noncustodial wallets give you complete control of your private keys and funds.

•  Enhanced verification: Many hardware wallets require manual confirmation on the device itself to sign a transaction, adding an extra layer of security.

Disadvantages:

•  Less convenient: You need to connect your wallet to a device every time you want to access your funds or perform transactions, which isn’t ideal for frequent transactions.

•  Upfront cost: Unlike hot wallets which are often free, hardware wallets can cost anywhere from $50 to over $300.

•  Risk of physical loss or damage: If the device or paper wallet is lost, stolen, or damaged — and you don’t have your seed phrase — you could lose access to your crypto permanently.

Decision #2: Who Holds Your Keys?

The second major decision is whether you or someone else controls your private keys. This distinction divides wallets into two main types: custodial and noncustodial.

Custodial Wallets

A custodial wallet is one where a third party — like an exchange, or more traditional trading platform, or a dedicated wallet service provider — holds your private keys on your behalf. In this setup, the service provider is responsible for the security and management of your assets, allowing you to rely on their infrastructure and protection measures.

Advantages:

•  Convenience: Custodial wallets are typically easy to set up and offer intuitive, beginner-friendly interfaces.

•  Built-in support: You usually have access to customer service to help with issues like lost passwords or transaction errors.

•  Less personal responsibility: You don’t need to manage or secure your own private keys and seed phrases.

Disadvantages:

•  Lack of control: Because a third party manages your private keys, you don’t have full control over your digital assets.

•  May be vulnerable to hacks: Crypto exchanges can be targets for hackers. If your wallet is being held on the platform’s server (in a hot wallet) and their systems are compromised, your funds could be at risk.

•  Provider insolvency: If your wallet provider goes bankrupt, your assets may become part of their bankruptcy estate, leaving you as an unsecured creditor with limited recovery options.

Noncustodial Wallets

A noncustodial wallet gives you full control over your holdings without relying on a third party. This means you are responsible for managing your own keys and safeguarding your assets. Noncustodial wallets can be hot (software-based) or cold (hardware-based).

Advantages:

•  Total control: Only you hold the private keys, meaning you’re not dependent on a third party to access or transfer your funds.

•  Potentially enhanced security: If your funds are being kept on a centralized server, moving them to a private wallet may help protect them from exchange hacks and platform failure. (Note that many exchanges, as well as banking and trading platforms that offer crypto services, will keep a portion of your cryptocurrency in offline cold storage, which significantly reduces the risk of online theft and hacking.) Because funds aren’t stored on centralized servers, they may have greater protection from exchange hacks and platform failures.

•  More advanced features: Many noncustodial wallets are built to connect seamlessly with various decentralized applications (dApps), including non-fungible token (NFT) marketplaces and blockchain games.

Disadvantages:

•  Total responsibility: If you lose your seed phrase or misplace your device, there’s no recovery option.

•  No customer support: There’s typically no official help for technical issues or transaction errors. Users must rely on community forums or troubleshoot themselves.

•  Steeper learning curve: Noncustodial wallets require a basic understanding of blockchain technology, key management, and security best practices, which can be challenging for beginners.

How to Use Your Wallet to Send and Receive Crypto

Once you’ve set up your crypto wallet, you can use it to send and receive digital assets. While the exact steps vary depending on the wallet, here’s a general guide to help you get started.

How to Safely Receive Crypto Into Your Wallet

To receive crypto, you’ll typically need to share your wallet address — a unique string of characters representing your wallet on the blockchain. Here’s how to find it:

1.   Open your wallet: Log in to your wallet application on your phone or computer.

2.   Choose an asset: Select the specific cryptocurrency (like Bitcoin or Ethereum) you want to receive.

3.   Find the “Receive” option: Look for a button or menu item labeled Receive or Deposit

4.   Get the address: Your wallet address may be displayed at this point, either as an alphanumeric string or a QR code. You can copy the address, send the QR code as an image, or let someone scan the QR code directly.

5.   Verify the transaction: Ask the sender for the transaction ID so you can track and confirm the transfer yourself using a blockchain explorer.

How to Securely Send Crypto From Your Wallet

To send crypto, you’ll typically need to:

1.   Open your wallet and select “Send”: Log in to your wallet and choose the Send or Withdraw option.

2.   Select the cryptocurrency: Choose which digital asset you want to send from your available balance.

3.   Enter the recipient’s address: Paste or scan the recipient’s public wallet address. Always double-check for accuracy — even a single incorrect character can result in permanent loss of funds.

4.   Enter the amount: Specify the amount of crypto you want to send. Many wallets let you enter the amount in either crypto units or a fiat currency.

5.   Review the details: Double-check the recipient’s address, amount, and the network being used. Some networks require a memo or destination tag — make sure to include it if needed.

6.   Confirm the transaction: Once everything looks correct, confirm the transaction. You may be asked to enter a password or PIN, or approve the action through two-factor authentication for added security.

Your Essential Wallet Security Checklist

Your crypto’s safety also depends on how well you protect your wallet. Follow these golden rules to help safeguard your digital assets.

Rule #1: Record and Store Your Seed Phrase Securely Offline

Your seed phrase is the universal key to your crypto wallet. If it’s compromised, your funds can be stolen instantly — and there’s no way to recover them. To keep it safe:

•  Use durable materials: You could write your seed phrase on paper and store it in a safe place, but paper is vulnerable to fire, water, and wear. For long-term protection, consider using a specialized metal format designed to withstand extreme conditions.

•  Choose a secure location: Avoid obvious hiding spots like a desk drawer or under your keyboard. Instead, use a safe or a safety deposit box.

•  Create multiple copies: Make two or three copies and store them in separate secure locations to protect against loss or damage.

•  Never store or share it digitally: Your seed phrase should never touch an internet-connected device. Avoid taking photos, uploading it to the cloud, or sending it via email or text — all of which can be compromised by hackers or malware.

Rule #2: Consider a Cold Storage (Hardware) Wallet for Any Significant Amount of Crypto

If you hold a substantial amount of crypto, you may consider a noncustodial cold (hardware) wallet. This method offers strong protection against online threats such as hacking and malware by keeping your private keys completely offline. That said, many banking and brokerage platforms that offer crypto services keep a portion of their customers’ cryptocurrency in secure, offline cold storage. This practice significantly reduces the risk of online theft and hacking.

If you’re using noncustodial wallets, a good rule of thumb is to only keep the crypto you plan to use in the near term in your hot wallet. Once you’ve completed your transaction, transfer your funds back into cold storage.

Rule #3: Beware of Phishing Scams and Fake Wallet Apps

As crypto’s popularity grows, so do scams designed to trick users into revealing private keys or sending funds to fraudulent wallets. Common crypto scams include phishing emails (with links to fake websites) and counterfeit wallet apps that mimic legitimate ones.

To protect yourself:

•  Never share your private keys or seed phrase. No legitimate support team, app, or exchange will ever ask for this information.

•  Be cautious of unsolicited emails or messages. Don’t click on links in emails or texts. To verify an issue, go directly to the official cryptocurrency platform by typing its URL into your browser.

•  Only download apps from official sources. Get wallet apps from verified websites or trusted app stores. Check the developer’s information, reviews, and ratings before installing.

Rule #4: Enable Two-Factor Authentication (2FA) Wherever Possible

If your wallet or exchange supports two-factor authentication (2FA), you’ll want to turn it on. 2FA adds a critical extra layer of security — typically requiring a unique one-time code from your phone in addition to your password. In some cases, services will use fingerprint, facial recognition, or other biometric data as the second factor.

Even if someone obtains your password, they can’t access your account without the second authentication factor. It’s one of the simplest and most effective ways to prevent unauthorized access.

The Takeaway

A crypto wallet is the essential tool for accessing and managing your digital assets, but it’s important to remember that it stores your private keys, not the crypto itself. Whether you choose a convenient hot wallet and a highly secure cold (hardware) wallet will depend on your needs. Just keep in mind that for significant holdings, a cold hardware wallet is generally considered the gold standard for security. Whatever type of wallet you choose, be sure to safeguard your seed phrase and be vigilant against scams to protect your 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.

Learn more about crypto trading with SoFi.

FAQ

Can you convert a crypto wallet to cash?

Yes, you can convert your crypto wallet’s assets into cash typically by selling or liquidating your cryptocurrency on a crypto platform that supports fiat (government-backed) currency withdrawals. Once you sell your crypto for your local currency, you can transfer the funds to your bank account. Peer-to-peer (P2P) marketplaces and crypto ATMs are also options for cashing out. However, be mindful of transaction fees, withdrawal limits, and potential tax implications when converting crypto to fiat currency.

How do you get a crypto wallet?

To get a crypto wallet, you first need to decide on the type of wallet that suits your needs, such as a software wallet, hardware wallet, or platform-hosted wallet. Then, depending on the type, you will either download an app, purchase a physical device, or create an account with a platform. A critical step for many wallets is to securely back up your recovery phrase, which is used to regain access to your funds if you lose your device or password.

What happens if I lose my private key or seed phrase?

If you lose your private key, you lose access to your funds unless you have the seed phrase to regenerate it. If you lose both your private key and seed phrase, you will permanently lose access to your cryptocurrency because there is no way to recover your funds. If you only lose your private key, you can recover your wallet by using the seed phrase on a new device to restore access to your private keys and funds.

Are hardware wallets safer?

Cold hardware wallets are generally considered safer than software or online wallets because they store your private keys offline, away from potential hackers or malware. Since the device only connects to the internet when you make a transaction, it can reduce exposure to cyber threats. However, users must still protect the wallet’s seed (aka, recovery) phrase and keep the device physically secure.

Can I recover my funds if my custodial wallet provider goes out of business?

It depends. Assets related to cryptocurrency are not insured by either the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC). If a crypto exchange or wallet provider fails, your crypto holdings are likely to become property of the bankruptcy estate, making you a general unsecured creditor, which means you will probably lose most or all of your funds.

However, if the exchange’s user agreement explicitly states that it keeps customer assets separate from company funds, you may have a better chance of recovery. In that scenario, your holdings may be considered your property, not the company’s, which could lead to them being returned to you.

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Photo credit: iStock/momcilog

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

This article is not intended to be legal advice. Please consult an attorney for advice.

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Blockchain technology is, essentially, a decentralized ledger that is distributed across a network of computers. It links blocks of data together in a chain (a blockchain) that forms a broader database of information. That network of information — the blockchain network — is shared across all of the participants who, in turn, validate new blocks of data, thereby maintaining and securing the overall blockchain.

Blockchain technology has many potential uses and applications, but is perhaps most well-known as being the backbone of cryptocurrencies and decentralized finance systems, projects, and operations. That, however, may not be the only potential use-case for blockchain tech.

What Is Blockchain and Who Created It?

Blockchain is a distributed, decentralized chain of information, linked together in a ledger format that effectively creates a blockchain network. Information, often transaction data as it relates to cryptocurrencies, is grouped and stored in blocks, which are connected and form a secure, transparent chain. The idea behind that format or architecture is that the data will be transparent and virtually tamper-proof since it’s distributed across a network.

So, if one participant on the network or blockchain were to change the data in a block, the other participants’ would notice the change, flag it, and restore the original entry.

Blockchain technology originated with the release of Bitcoin in January 2009, as it was the underlying technology designed to allow for peer-to-peer transactions without third-party involvement.

The Origins of Blockchain and Satoshi Nakamoto’s Breakthrough

A white paper about Bitcoin and blockchain technology was first released in 2008 by an entity known as Satoshi Nakamoto. Nothing concrete is known about Satoshi Nakamoto — whether it’s a single person, a group of people, a company, or anything else. It remains one of the most pervasive mysteries in the tech and financial spaces.

Nakamoto’s identity aside, the first functional blockchain network was developed and introduced with the launch of Bitcoin in 2009. Since then, all other cryptocurrencies, and numerous decentralized finance (DeFi) projects have likewise been released on other blockchain networks, or variations of the original.

A Step-by-Step Look at a Crypto Transaction

With the foundational concepts of blockchain in mind, here’s a step-by-step look at how a hypothetical crypto transaction could occur on a blockchain network, keeping in mind that the details will vary depending on the cryptocurrency and type of transaction involved.

Step 1: You Send Crypto to a Friend

You decide to send some crypto to a friend. You’ll both need crypto wallets to be able to send and receive the crypto, and you’ll want to share your public keys (and know your friends’, too), or crypto address, so that you know where to send it. Basically, you need the bare infrastructure in place in order to transact.

Step 2: The Transaction Is Broadcast to a Global Network of Computers

You execute the transaction, using your personal crypto wallet, an exchange, or other platform. A message is broadcast to the blockchain network that you are sending X amount of crypto to Y wallet, all of which is publicly viewable.

Step 3: The Network Verifies and Adds Your Transaction to a “Block”

The information about your transaction is grouped together with data from other transactions and stored in a “block.” That block of transactions is verified using a cryptography-based consensus mechanism, such as staking or mining. Once the block is verified, the information is recorded on the blockchain.

Step 4: The Block Is Permanently Chained to the Ledger, Finalizing the Payment

The validated block then becomes a permanent part of the blockchain, forming an immutable chain of information, and your friend receives the transaction.

Why Blockchain Is a Breakthrough for Digital Money

There are several reasons that some people consider digital assets, and blockchain, which powers it and works as their backbone, to be a breakthrough in the digital financial space. Here are some of them.

It’s Secure and Unchangeable

While not impervious to security issues, blockchain is widely regarded as secure. The blockchain itself creates a permanent record that cannot be altered (at least not without the broader network raising red flags), which could help to reduce instances of fraud, and double-spending.

It’s Transparent

As noted, one of the benefits of blockchains is that they’re transparent, allowing just about anyone to review the information and data stored on them. That means it’s possible to trace the transaction history of a specific user alias or public wallet address, or even a specific crypto token or coin. This can happen, too, somewhat anonymously, without revealing the actual names of participants.

It Removes the Middleman

Blockchain technology and the consensus mechanisms they use make it possible for cryptocurrency transactions to occur without needing a middleman. Blockchain enables peer-to-peer crypto transactions, meaning that a third party or single central authority isn’t required for cryptocurrencies to be transferred.

How Different Cryptocurrencies Use Blockchain

While functional blockchain technology was introduced alongside Bitcoin, Bitcoin is not the only cryptocurrency that uses it. In fact, they all do, and they may use blockchain in different ways.

For Digital Money and Secure Payments

Certain crypto projects, particularly those in the financial space, may use blockchain to facilitate secure payments and transactions using cryptocurrencies. Bitcoin may fit in this bucket, as could others that need automated record-keeping abilities, and more. Blockchain may also prove to be more efficient than other money transfer systems.

For Running Apps and Smart Contracts

Other projects may utilize blockchain for the running and deployment of applications and smart contracts. These applications may have a variety of uses, but are based on a blockchain network. Smart contracts essentially consist of self-executing code that kicks in when predefined conditions are met, helping automate certain tasks. For example, tokens may be created and managed through conditions specified in smart contracts.

For Proving Ownership of Digital Items

Blockchain, as a store of data and information, can also be used to help prove ownership of digital items. That’s the concept behind non-fungible tokens, or NFTs, which serve as a digital deed or proof of ownership for certain things.

For Creating Digital Dollars

Blockchain can also be used to power the creation and distribution of stablecoins, which are a form of cryptocurrency that are “pegged” to real-world assets, such as the U.S. dollar. That helps them maintain a relatively stable value, and could facilitate their use for real-world transactions, much like actual fiat currency.

Where Else Is Blockchain Used Beside Crypto?

Aside from the general finance space, there are many other potential use-cases for crypto and blockchain technology. Here are some examples.

Supply Chain Management

One potential use-case for blockchain is in supply chain management, in which organizations could use it to track goods. It’s possible this could help flag inefficiencies in supply chains or create better records that are more easily accessible, and potentially, be used in a wide variety of industries or settings.

Voting Systems

Given that blockchain is a transparent and relatively secure technology, there may be some potential uses for voting systems, which need to record and secure data. It’s important to remember, though, that blockchain may be secure, but it’s not impervious to the actions of bad-faith actors, so it’s not necessarily a foolproof option.

Digital Identity

As noted, blockchain may help create ways to prove digital ownership, and that could extend to giving individuals or entities more control over their digital identity or digital identification tokens.

What Are Blockchain’s Biggest Challenges in Crypto?

While there are many potential upsides to blockchains, there are still some lingering questions and challenges to be addressed. As it relates to the crypto space, here are some of those challenges.

The “Blockchain Trilemma”

Perhaps the highest-level issue blockchains are contending with is what’s known as the “blockchain trilemma,” which refers to the simultaneous balancing of speed, security, and decentralization. Blockchains need computing power and participants to secure and facilitate transactions or data validation, and generally, balancing all three is difficult for blockchain network creators. As such, one is typically sacrificed.

It’s similar to the old adage in the dining industry: Fresh, fast, and good. Pick two!

High Transaction Fees (“Gas Fees”) on Busy Networks

Blockchain networks get busy, and the rules of supply and demand apply. When a network is processing a lot of transactions, fees for validating those transactions increase. These are typically called “gas fees” or usage fees, and they can become higher than many participants would like during busy stretches.

The Environmental Debate Around Energy Consumption

There is also an ongoing debate about the environmental impact of crypto, specifically crypto mining. Blockchain is in the mix, too, since it powers those crypto networks. In short, mining requires a lot of resources, notably, electricity. Generating that electricity may lead to pollution. Thus, the debate about blockchain, energy consumption, and improving efficiency continues.

What’s Next for Blockchain Technology?

Blockchain is fairly ubiquitous, and its adoption and usage will likely grow in the future. That said, here are some things to watch out for.

Solving the Challenges of Speed and Energy Use

As discussed, there are some issues to iron out as it relates to energy use on blockchain networks, and latency, or network congestion problems. There may not be easy solutions to those problems, but they are on peoples’ minds, especially when these issues end up impacting the effectiveness of the blockchain network itself.

The Growth of Interconnected Blockchains

It’s also possible that we’ll continue to see the growth of interconnected blockchains, which basically means that different blockchain networks will start to work in concert or more closely together, rather than remain siloed. For instance, bridges may allow blockchains housing certain DeFi applications to interact with other blockchains to share data or information and increase efficiency — in a very broad sense. That growth will likely come as demand for these systems, by different companies or organizations working in various industries.

The Takeaway

Blockchain technology utilizes cryptography to create and validate blocks of data, linking them together to form a distributed ledger. That ledger is powered by crypto participants far and wide, who together help to secure and maintain the crypto network. Blockchain has many uses and potential uses, but many people may know it as the technology that powers the crypto space.

Though blockchain has big potential, there are still issues and challenges that the technology faces, such as slow transaction speeds or energy usage. As the technology becomes more pervasive, however, it’s possible that its list of use-cases could continue to expand.

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.

Learn more about crypto trading with SoFi.

FAQ

How does a blockchain ensure data cannot be altered?

Blockchains’ participants validate data by solving puzzles and cementing the information in blocks. If those blocks are altered by a user or participant, the distributed nature of the ledger allows for the other participants to notice and flag the discrepancy. It’s not a completely unalterable system, but there are safeguards built into it.

What are consensus mechanisms and why are they important?

Consensus mechanisms are a sort of code of conduct among a blockchain’s users, with the two most popular being proof-of-work (PoW) and proof-of-stake (PoS) systems. Those systems allow and help participants validate data and information on a blockchain by either mining (a PoW system) or staking (a PoS system).

How secure is blockchain technology?

The blockchain technology itself is widely considered to be secure, largely due to the distributed nature of the networks, which means there’s no single point of failure, and because the information on the blockchain, once verified, is largely immutable. That said, the software and services that interact with a blockchain could be more vulnerable to hacks and acts of fraud.

How is blockchain regulated?

Decentralized blockchains aren’t regulated in the U.S. by a single federal law or agency as of late 2025. At the federal level, the SEC, FinCEN, the IRS and CFTC oversee blockchain, and blockchain transactions, and cryptocurrencies to various degrees. Many, if not most states have specific regulations related to blockchain, too. There may be some regulations related to blockchain in some parts of the world, such as the EU.

What is the difference between a public and private blockchain?

Some blockchains are public and some are private. Public blockchains are open and available to almost anyone to use or view transactions, while the information on private blockchains may be gated off from the public, and restricted to specific individuals or organizations. Some privacy cryptocurrencies, however, may be challenged by Know Your Customer (KYC) or similar laws, which are designed to help prevent criminal activities, such as money laundering.

How do blockchain nodes maintain the ledger?

Nodes work within a blockchain network’s consensus mechanism to validate and confirm data in the blocks. Nodes themselves are computers or groups of computers that pledge their resources and computing power for validation purposes.

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About the author

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Photo credit: iStock/Delmaine Donson

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.

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Bitcoin and Solana are two major pillars of the cryptocurrency space, yet they serve very different purposes. Bitcoin is the first-established and most well-known cryptocurrency, primarily serving as a digital medium of exchange. Solana, on the other hand, is a high-performance blockchain platform designed to power fast, low-cost decentralized applications. Solana’s native cryptocurrency is SOL.

Bitcoin and Solana were designed with different goals, priorities, and philosophies. Here’s a closer look at how they compare and what each project aims to achieve.

Key Differences at a Glance

Bitcoin and Solana were created with distinct goals, leading to major differences in design, technology, and use cases.

	Bitcoin	Solana
Main purpose	•   Digital asset and alternative to fiat currency	•   High-speed platform for dApps, DeFi, and NFTs
Cost	•   Higher fees, especially during network congestion	•   Very low transaction fees (fractions of a cent)
Consensus model	•   Proof-of-work (mining)	•   Hybrid proof-of-stake + proof-of-history
Smart contracts	•   Limited capabilities	•   Full smart contract platform with large ecosystem
Speed	•   ~7 transactions per second	•   Up to 65,000 transactions per second

The Core Difference: A Medium of Exchange vs a High-Speed Computer

While both Bitcoin and Solana use blockchain technology, they serve fundamentally different needs.

Bitcoin was built to function as a digital asset that operates independently of any central bank or government. Today, it remains the best-known type of cryptocurrency and enables peer-to-peer online transactions.

Solana, by contrast, aims to function as a hyper-efficient global computer capable of powering apps, games, financial tools, and more. Where Bitcoin values decentralization and simplicity, Solana is known for its performance and scalability.

Bitcoin’s Goal Is to Be the Most Secure Digital Asset

Launched in 2009, Bitcoin is a form of digital payment built on blockchain technology. As a refresher, a blockchain is a decentralized digital ledger that stores transactional data in blocks linked together to form a chain. Instead of a central authority, the data is shared and verified across a network of participants (called nodes) through a consensus mechanism, making it highly resistant to tampering and fraud.

Bitcoin uses a proof-of-work (PoW) consensus mechanism in which miners compete to solve complex mathematical puzzles to validate transactions and create new blocks. This process is energy-intensive but makes it extremely difficult to attack, contributing to Bitcoin’s reputation as the most secure blockchain.

Solana’s Goal Is to Be the Fastest Platform for Apps and DeFi

Launched in 2020, Solana was built to support decentralized applications (dApps) and smart contracts (self-executing digital agreements stored on a blockchain) at a massive scale. Its design emphasizes speed, low transaction costs, and scalability.

Solana uses an innovative system called proof-of-history (PoH) — a cryptographic time-stamping mechanism that records the order of events before they’re validated through proof-of-stake (PoS). This hybrid model dramatically increases efficiency, enabling rapid process and high transaction capacity.

Solana’s ecosystem has grown rapidly, including major decentralized finance (DeFi) applications, NFT Marketplaces, on-chain gaming, and emerging decentralized social networks. The project is known for experimenting with new technologies to push blockchain performance forward.

Comparing the 3 Biggest Technical Trade-Offs

When looking at Bitcoin vs. Solana, most differences fall into three areas: speed, decentralization, and programmability.

1. Speed and Transaction Costs

Speed and affordability are defining features of Solana. Traditional blockchains struggle with throughput (the number of actions that can be completed within a given time frame), but Solana’s architecture — including parallel transaction processing (via a system called Seaslevel) and PoH — helps it avoid congestion.

By contrast, Bitcoin intentionally prioritizes decentralization and stability over speed. While Solana can process thousands of transactions per second (TPS), Bitcoin averages around 7 TPS.

Bitcoins transaction fees also run higher, particularly during periods of high congestion. While fees vary, Bitcoin’s average transaction fee is about $2.50, compared to around $0.00025 on Solana.

2. Security and Decentralization

Bitcoin is widely considered the most secure and decentralized blockchain. Its massive network of miners — spread across the world — make it highly resistant to attacks.

Solana, while seen as secure, is more centralized due to higher hardware requirements for validators, which limits participation. The network has also experienced several well-known periods of downtime in the past, though reliability has improved significantly in recent years.

3. Smart Contracts and Ecosystem

A major difference between Bitcoin and Solana is programmability:

•   Solana supports advanced smart contracts, enabling developers to build dApps, DeFi tools, NFT marketplaces, and more.

•   Bitcoin does not natively support complex smart contracts. While more advanced applications are being developed on sidechains and second-layer networks, Bitcoin’s core design intentionally prioritizes simplicity and stability over programmability.

Things to Consider Before Buying Bitcoin or Solana (SOL)

Whether to buy Bitcoin or SOL depends on your goals, risk tolerance, and what you believe the future of each network holds.

Buying Bitcoin

People buy Bitcoin for several reasons:

•   It’s a scarce digital commodity (Bitcoin’s supply is permanently capped at 21 million coins).

•   It has the longest and one of the strongest security track records in crypto.

•   Institutional adoption continues to grow.

However, Bitcoin’s price is notoriously unstable, often moving by 5% (and sometimes significantly more) in a single day. Its value is largely driven by supply, demand, and market sentiment — not cash flows or fundamentals. And like other cryptocurrencies, Bitcoin is not insured by the FDIC or SPIC.

Buying Solana (SOL)

SOL’s price is tied closely to the growth and health of the Solana ecosystem rather than acting as a standalone digital asset.

Reasons people by SOL include:

•   Solana’s high performance and low transaction costs

•   A rapidly expanding ecosystem

•   Potential for price appreciation as more apps are built

Still, buyers should consider its significant risks, including historical network outages, greater centralization, strong competition from other smart contract platforms, and high price volatility. Like Bitcoin, SOL is not FDIC- or SPIC-insured.

A Look at Their Different Risk Profiles and Market Performance

Both Bitcoin and Solana share broad crypto-related risks, such as:

•   Evolving regulation

•   Market volatility

•   Security threats like crypto scams and exchange hacks

•   Irreversible transactions

•   Limited consumer protections

That said, their risk profiles differ:

•   Bitcoin is generally seen as lower risk due to its long history, record of strong security, and widespread adoption.

•   Solana tends to be considered higher risk due to its technological complexity, faster pace of development, and past reliability issues. SOL’s price is nearly twice as volatile as Bitcoin’s.

Whether to choose Bitcoin or Solana largely depends on your financial situation and reasons for buying cryptocurrency. Either way, you don’t want to buy Bitcoin or SOL with any money you can’t afford to lose.

The Takeaway

Bitcoin and Solana are both influential crypto projects, but they were built for fundamentally different purposes. Bitcoin serves primarily as a digital unit of exchange. Solana is a high-performance blockchain optimized for fast, low-cost transactions and complex decentralized applications.

As with any cryptocurrency, it’s important to research Bitcoin or SOL and consider their potential role in your portfolio before purchasing them, as both carry significant price volatility and risk. Buying either — or both — should be approached with caution and a clear understanding of your financial goals.

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.

Learn more about crypto trading with SoFi.

FAQ

What makes Solana’s network faster than Bitcoin?

Solana’s architecture is fundamentally different from Bitcoin’s. Bitcoin uses the proof-of-work (PoW) consensus mechanism that relies on miners solving complex puzzles. Solana, by contrast, employs a hybrid consensus model combining proof-of-stake (PoS) with a novel technology called proof-of-history (PoH). PoH creates a cryptographically verified record of the timing of events, allowing validators to process transactions and agree on the state of the ledger faster and more efficiently than Bitcoin’s PoW system.

How do transaction fees compare between Bitcoin and Solana?

Bitcoin transaction fees tend to be significantly higher than those on the Solana network, especially during periods of high network congestion. The average transaction fee on Bitcoin is around $2.50, compared to roughly $0.00025 on Solana.

Is Bitcoin or Solana more energy-efficient?

Solana is significantly more energy-efficient than Bitcoin. Bitcoin relies on the proof-of-work (PoW) consensus mechanism, which requires immense computational power and high energy consumption by miners to secure the network and validate transactions. Solana, on the other hand, utilizes a hybrid model of proof-of-stake (PoS) and proof-of-history (PoH). This design eliminates the need for energy-intensive mining competition, allowing the network to process transactions and maintain security with a much smaller environmental footprint compared to Bitcoin.

Will Solana’s market cap overtake Bitcoin’s?

The possibility of Solana’s market cap overtaking Bitcoin’s is highly speculative and unlikely in the near term. Bitcoin, as the first and most established cryptocurrency, benefits from its fixed supply and widespread institutional adoption, giving it a significant market advantage. While Solana has experienced growth due to its high performance and thriving ecosystem of dApps and NFTs, its market cap remains a small fraction of Bitcoin’s. Solana also faces intense competition from other smart contract platforms like Ethereum and must overcome past issues with network reliability, which pose challenges to its stability and potential growth.

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About the author

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Photo credit: iStock/Delmaine Donson

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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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 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.

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.

Learn more about crypto trading with SoFi.

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.

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About the author

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Photo credit: iStock/Moon Safari

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.

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