Bitcoin vs Ethereum: Key Differences Explained

As the cryptocurrency space continues its expansion into the mainstream, Bitcoin and Ethereum have emerged as two dominant players. Both offer unique features, value propositions and ideological approaches towards investment, which have helped them attain significant popularity among investors. 

In this article, we will explore the key differences between Bitcoin and Ethereum, including their consensus mechanisms and technical aspects, their similarities and how your outlook on investment can decide on which asset to purchase.

The differences between Bitcoin and Ethereum have always been a key talking point, but in recent years, certain aspects of both blockchains have both brought them closer together and pushed them further apart in many ways.

One of the biggest technical differences is in the consensus mechanisms used by the Bitcoin and Ethereum blockchains.

Bitcoin operates on a consensus mechanism known as Proof of Work (PoW). Miners use computational power to solve complex mathematical puzzles and validate transactions on the blockchain. This process ensures the security and immutability of the Bitcoin network.

Previously, the Ethereum blockchain used to operate using a Proof of Work (PoW) consensus mechanism. However, in 2022, the Ethereum blockchain underwent a process called “The Merge” and transitioned to a Proof of Stake (PoS) consensus mechanism with the Ethereum 2.0 upgrade. PoS relies on validators who hold and “stake” their cryptocurrency to validate transactions and create new blocks, offering a more energy-efficient approach compared to PoW.

Another technical difference extends to their overall use cases. Bitcoin was primarily designed as a digital currency and a store of value and serves as a decentralised alternative to traditional fiat currencies, enabling peer-to-peer transactions and potential hedge against inflation. Bitcoin is often considered to be a form of “digital gold” and a longer-term investment asset.

Ethereum, on the other hand, has enabled the creation of decentralised applications (DApps) and smart contracts. This has facilitated the rise of various decentralised financial alternatives, including decentralised finance (DeFi), non-fungible tokens (NFTs), and tokenised digital assets.

Despite ranking first and second by market capitalisation, Ethereum and Bitcoin differ greatly in price. 

Bitcoin was the first cryptocurrency and remains the most well-known and widely adopted. It has experienced significant price appreciation over the years and has attracted institutional investors and mainstream attention. The price of Bitcoin is perhaps most well defined by its finite, limited supply of 21 million coins, which has helped it create scarcity (which drives the higher price point of Bitcoin) and as a store of value.

Ethereum has also witnessed substantial growth and has become the second-largest cryptocurrency by market capitalisation. However, due to its larger market supply (120m), it commands a lower price point compared to Bitcoin, and due to its use in paying transaction fees on the blockchain, it’s purchased and traded far more than Bitcoin on the blockchain.

Alongside the technical differences listed above, security on the two blockchains differs depending on their popularity and “on-chain” blockchain usage.

As both PoS and PoW offer different levels of security, it’s worth mentioning. PoS is seen as having better blockchain security than Bitcoin as the decentralised nature makes network attacks and hacks almost impossible. PoW blockchains (albeit with vast amounts of capital and succinct knowledge) can be compromised by a 51% attack.

Another aspect to consider is that the Ethereum blockchain is used far more often for DeFi, NFTs and other platforms – meaning that scams are more prevalent on the Ethereum blockchain over Bitcoin due to its popularity and market audience. The bitcoin blockchain is most commonly used to send the asset in a decentralised manner, which makes it more likely to be compromised at the user level by phishing and social engineering attacks.

Despite their differences, Bitcoin and Ethereum do share some common ground when it comes to how their blockchains work and key differences.

The latest has come from the emergence of BRC-20 tokens on the Bitcoin blockchain, which enables users of both Bitcoin and Ethereum blockchains to purchase NFTs on the blockchain. This has opened the door for things like NFTs to be used on the previously unavailable network. 

Both Bitcoin and Ethereum suffer from price volatility despite their high market caps and can also be affected by the same “FUD” (Fear, uncertainty and doubt). This is due to their dominance in the markets, with the two being the highest-ranking assets by market cap. This means that they can be affected by global events or news in similar spaces, although suffer less than lower-ranked market caps thanks to their status.

Both Bitcoin and Ethereum are classified as cryptocurrencies, or digital assets, despite their differences. As cryptocurrencies, they can be traded on centralised and decentralised exchanges, and also “bridged” to each other’s blockchains by wrapping the tokens. This means that Bitcoin can be used on-chain on the Ethereum blockchain as a wrapped token called “WBTC”.

Additionally, despite their different consensus methods of Proof of Work and Proof of Stake, both assets are used for miner fees on their respective blockchains. Ethereum gas fees tend to be higher than those on the Bitcoin blockchain as it’s used more and can suffer from higher demand in peak times. However, Bitcoin can also experience higher-than-usual fees when demand on the blockchain during peak times is high.

The question is best answered based on your investment strategy.

Bitcoin is best used for a longer-term strategy, as it’s known as a store of value and ideologically suitable for the long term. For advocates of freedom and decentralisation, this asset represents a better, more decentralised form of money that cannot be controlled by a government or centralised authority.

Additionally, despite its high price point, it can still be purchased in smaller increments – known as satoshis or sats – which makes it more accessible for investors with smaller portfolios.

Ethereum would be a better asset for those that actively interact with the space through decentralised finance platforms and investing in NFTs. The asset has a smaller price point and can be used on the Ethereum blockchain to pay for fees, meaning that investors are likely to purchase the asset more often and use it on a short-term basis.

Making a prediction for Bitcoin is difficult as there’s a number of factors that can affect its price. It can however be predicted that the asset will continue to remain popular with those wanting to decentralise and diversify their portfolios into alternative asset classes.

It fulfils a role as a viable store of value within the crypto space and also offers decentralisation thanks to its use of blockchain activity and how affordable and open it is to send Bitcoin to anybody, anywhere.

Much like Bitcoin, making a prediction for Ethereum can be difficult due to a number of factors.  It can be predicted that Ethereum will continue to remain popular with investors looking for shorter-term exposure and those wanting to use it to pay for gas fees. It fulfils an important role as the leading utility token within the crypto space and also offers global decentralisation thanks to its consensus mechanism.

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not digital asset or cryptocurrency trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.