What is the Difference Between Bitcoin and Ethereum?

Bitcoin and Ethereum dominate the crypto sector, accounting for over 70% of the market cap. While they are both decentralized cryptocurrencies built on blockchain technology and seen as stores of value, they differ in several important ways.

The Purposes of Bitcoin and Ethereum

Bitcoin was the first cryptocurrency, developed in 2009 in response to the Global Financial Crisis. It was designed as a digital peer-to-peer alternative to fiat currencies at a time when trust in the financial system had plummeted. Today, Bitcoin’s primary uses are as an investment vehicle and, paradoxically, a speculative asset.

Ethereum was designed from the ground up as a platform for embedding self-executing smart contracts and decentralized apps (dapps) on the blockchain. Dapp categories include decentralized finance (DeFi), non-fungible tokens (NFTs), and online gaming. Ethereum’s native currency, known as ether, is a major digital asset, second only to Bitcoin.

Bitcoin v. Ethereum: Technology

Bitcoin’s code emphasizes security and scarcity. The Bitcoin blockchain has one purpose: Securely and transparently recording every transaction. Bitcoin founder Satoshi Nakamoto hard-wired the Bitcoin protocol to cap the total number of bitcoins at 21 million coins and to decrease the annual amount of new bitcoins generated at regular intervals to promote scarcity and support Bitcoin prices.

Ethereum emphasizes innovation with a blockchain capable of holding and running programs instead of simply being a ledger. Bitcoin eschews such functionality in favor of security. Anyone can write smart contracts into the Ethereum blockchain even if they have no programming experience. This vulnerability allows hackers to exploit improperly coded contracts or dapps to steal ether.

Bitcoin V. Ethereum: Consensus Mechanisms

Bitcoin and most other cryptocurrencies use a Proof of Work (PoW) consensus mechanism to maintain the blockchain and “mine” new coins. PoW coins are notorious for the vast amount of power they consume around the clock. Bitcoin mining consumes 20 gigawatt hours of energy daily. Its annual energy consumption is 176 terawatt hours—more than the annual energy consumption of Egypt (168 TWH), Poland (158 TWH), or global gold mining (131 TWH).

Ethereum moved from a PoW consensus mechanism to Proof of Stake (PoS) in 2022. This cut total energy consumption by Ethereum miners by more than 99%. In 2024, Ethereum's annual energy consumption was 0.0026 terawatt hours, compared to 21 TWH when it used a PoW mechanism. In comparison, video gaming in the US consumes an estimated 34 TWH, which is 13,000x more than Ethereum mining.

Proof of Work v. Proof of Stake

The main expense of Bitcoin mining is the large number of specialized ASIC computers needed to have a realistic chance of earning a reward. Proof of Work coins pit miners against one another to be the first one to correctly solve a cryptographic puzzle for the opportunity to write the next block of transactions and earn a reward of newly created coins.

In order to compete against million-dollar mining farms, ordinary people will band together in mining pools to share the workload of mining in a bid for a fraction of the reward for being the winning miner.

Ethereum is the most prominent Proof of Stake crypto coin. Instead of purchasing multiple specialized computers, a PoS validator has to submit a “stake” of a certain number of coins for the right to write the next block. A validator is chosen at random to solve the next block of transactions which is then confirmed by other participants.

Proof of Stake drastically reduces power consumption and can be done with a typical mid-range computer with uninterrupted internet access.

For Ethereum, a validator must submit 32 ETH (worth $80,000 at a price of $2,500) to be locked up as collateral to ensure good behavior. Ordinary people will pool their Ether to reach the 32 ETH threshold, much like people pool their computing power to mine bitcoins.

Bitcoin v. Ethereum: Transaction Speed

Transaction speed is the time it takes for a transaction to enter the queue, be processed into a block, and be written to the blockchain. Bitcoin processes transactions at a rate between two and seven per second, leading to a block being added to the blockchain in approximately 10 minutes. The Bitcoin algorithm automatically adjusts the difficulty of the cryptographic puzzles that need to be solved to write a block to maintain this speed.

Ethereum processes transactions at a rate of between 15 and 30 per second. Transactions can vary widely in size, depending on whether it is a simple transfer of ether from one wallet to the other or a smart contract.

Transactions are bundled into 1 MB blocks every 12 seconds, called a “slot.” In periods of slow demand, there may not be enough pending transactions to fill a slot every 12 seconds. Slots are bundled into “epochs” of 32 blocks, which are all written to the blockchain at the same time. One epoch is written every 6.4 minutes.

Bitcoin v. Ethereum: Congestion

Congestion is a problem that plagues both Bitcoin and Ethereum. It happens when transaction volume grows faster than the validation system can process them. This results in longer wait times to have a transaction written to the blockchain and increased transaction expenses as users outbid one another to move their transactions to the head of the queue.

Severe congestion can delay the processing of your transaction from hours to days, encouraging users to pay much higher processing fees. High transaction fees can reduce congestion by encouraging some users to delay submitting transactions until costs go down.

Ethereum has more factors that affect network congestion than Bitcoin. Thousands of altcoins have been built on top of the Ethereum blockchain. The added workload caused by these altcoins on top of millions of dapps and smart contracts running on the blockchain at any particular time can lead to severe congestion.

Dealing with this congestion was a major impetus for implementing a consensus layer overlaying the original Ethereum blockchain. This layer handles transaction authentication and validation before passing the new block to the original layer to be added to the blockchain.

Bitcoin v. Ethereum: Investment Demand

Bitcoin has proven to be the most popular cryptocurrency among investors. The introduction of spot Bitcoin ETFs in January 2024 sparked a powerful rally as demand soared. The introduction of spot Ethereum ETFs in July 2024 was met with more muted demand. This difference in investor demand is grounded in the foundation of each coin. Bitcoin was devised as a store of value, while Ethereum was designed to be a foundation for the next evolution of online functionality (often called Web 3.0).

Bitcoin and Ethereum are the two largest players in the crypto space, but that doesn’t mean they are the only options for the active crypto investor. Verified Investing’s Smart Money: crypto trading alerts service has one of the highest success rates in the industry.