Bitcoin vs. Ethereum: What’s the Difference?

Bitcoin vs. Ethereum: An Overview 

Ether (ETH), the cryptocurrency of the Ethereum network, is the second most popular digital token after bitcoin (BTC). As the second-largest cryptocurrency by market capitalization (market cap), comparisons between Ether and bitcoin are only natural.

Ether and bitcoin are similar in many ways: Each is a digital currency traded via online exchanges and stored in various types of cryptocurrency wallets. Both of these tokens are decentralized, meaning that they are not issued or regulated by a central bank or other authority. Both make use of the distributed ledger technology known as blockchain.

However, there are also many crucial distinctions between the two most popular cryptocurrencies by market cap. Below, we’ll take a closer look at the similarities and differences between bitcoin and ether.

Bitcoin Basics

Bitcoin was launched in January 2009. It introduced a novel idea set out in a white paper by the mysterious Satoshi Nakamoto—bitcoin offers the promise of an online currency that is secured without any central authority, unlike government-issued currencies. There are no physical bitcoins, only balances associated with a cryptographically secured public ledger.

Although bitcoin was not the first attempt at an online currency of this type, it was the most successful in its early efforts, and it has come to be known as a predecessor in some way to virtually all cryptocurrencies that have been developed over the past decade.

Over the years, the concept of a virtual, decentralized currency has gained acceptance among regulators and government bodies. Although it isn’t a formally recognized medium of payment or store of value, cryptocurrency has managed to carve out a niche for itself and continues to co-exist with the financial system despite being regularly scrutinized and debated.

Ethereum Basics

Blockchain technology is being used to create applications that go beyond just enabling a digital currency. Launched in July 2015, Ethereum is the largest and most well-established, open-ended decentralized software platform.

Ethereum enables the deployment of smart contracts and decentralized applications (dApps) to be built and run without any downtime, fraud, control, or interference from a third party. Ethereum comes complete with its own programming language that runs on a blockchain, enabling developers to build and run distributed applications.

The potential applications of Ethereum are wide-ranging and are powered by its native cryptographic token, ether (commonly abbreviated as ETH). In 2014, Ethereum launched a presale for ether, which received an overwhelming response. Ether is like the fuel for running commands on the Ethereum platform and is used by developers to build and run applications on the platform.

Ether is used mainly for two purposes: It is traded as a digital currency on exchanges in the same fashion as other cryptocurrencies, and it is used on the Ethereum network to run applications. According to Ethereum, “people all over the world use ETH to make payments, as a store of value, or as collateral.”

Key Differences

While both the Bitcoin and Ethereum networks are powered by the principle of distributed ledgers and cryptography, the two differ technically in many ways. For example, transactions on the Ethereum network may contain executable code, while data affixed to Bitcoin network transactions are generally only for keeping notes. Other differences include block time (an ether transaction is confirmed in seconds, compared to minutes for bitcoin) and the algorithms on which they run: SHA-256 for Bitcoin and Ethash for Ethereum. 

Both Bitcoin and Ethereum currently use a consensus protocol called proof of work (PoW), which allows the nodes of the respective networks to agree on the state of all information recorded on their blockchains and prevent certain types of economic attacks on the networks. In 2022, Ethereum will be moving to a different system called proof of stake (PoS) as part of its Eth2 upgrade, a set of interconnected upgrades that will make Ethereum more scalable, secure, and sustainable. A major criticism of proof of work is that it is highly energy intensive because of the computational power required. Proof of stake substitutes computational power with staking—making it less energy intensive—and replaces miners with validators, who stake their cryptocurrency holdings to activate the ability to create new blocks.

More importantly, though, the Bitcoin and Ethereum networks are different with respect to their overall aims. While bitcoin was created as an alternative to national currencies and thus aspires to be a medium of exchange and a store of value, Ethereum was intended as a platform to facilitate immutable, programmatic contracts and applications via its own currency. 

BTC and ETH are both digital currencies, but the primary purpose of ether is not to establish itself as an alternative monetary system but rather to facilitate and monetize the operation of the Ethereum smart contract and dApp platform.

Ethereum is another use case for a blockchain that supports the Bitcoin network and theoretically should not really compete with Bitcoin. However, the popularity of ether has pushed it into competition with all cryptocurrencies, especially from the perspective of traders. For most of its history since the mid-2015 launch, ether has been close behind bitcoin on rankings of the top cryptocurrencies by market cap.

The Ethereum ecocystem is growing by leaps and bounds, thanks to the surging popularity of its dApps in areas such as finance (decentralized finance, or DeFi apps), arts and collectibles (non-fungible tokens, or NFTs), gaming, and technology. This has enabled ETH to surge 510% in 2021 (as of Nov. 29, 2021), compared with a 93% gain for BTC. As a result, while ETH’s market cap was only about one-tenth of BTC’s in January 2020, ETH’s market cap of $528 billion was about one-half that of BTC’s $1.08 trillion as of November 2021.