Understanding Bitcoin

Launched in 2009 by an anonymous person or group known as Satoshi Nakamoto, Bitcoin (BTC) was the first-ever cryptocurrency, and it remains the most widely known and used today. Bitcoin was designed as a digital alternative to traditional currencies, aiming to provide a decentralized method of transferring value.

Bitcoin transactions are verified by a network of nodes through cryptography and recorded on a public ledger called a blockchain.

Read more: What is Bitcoin?

Understanding Ethereum

Ethereum (ETH) was proposed in late 2013 and brought to life in 2015 by Vitalik Buterin. While it is a cryptocurrency, Ethereum's primary purpose extends beyond the simple transfer of value. Instead, Ethereum is designed to be a platform that allows peer-to-peer contracts and applications to be built and run without any control, permission, or interference from third parties. These applications, known as decentralized applications or DApps, are powered by Ethereum's own cryptographic token, Ether (ETH).

In other words, Ethereum is a programmable blockchain that allows developers to use the blockchain's infrastructure to build their own projects, something that is not possible with Bitcoin.

Read more: What is Ethereum?

Bitcoin vs. Ethereum: Key Differences

Purpose

The most significant difference between Bitcoin and Ethereum comes down to their purposes. Bitcoin was created as an alternative to traditional money, aiming to be a decentralized and digital cash system.

On the other hand, Ethereum is not just a cryptocurrency. It's an open-source platform for creating and implementing smart contracts and decentralized applications (DApps). The Ethereum blockchain doesn't just verify and record transactions; it also hosts DApps and smart contracts that can interact directly without the need for a middleman.

Read more: What’s a DApp?

Technology

Bitcoin and Ethereum use different types of blockchain technology. Bitcoin uses a consensus mechanism called Proof-of-Work (PoW), where miners solve complex mathematical problems to validate transactions and add them to the blockchain. This process requires a considerable amount of computational power and energy.

Read more: What is Bitcoin mining?

Ethereum, on the other hand, started with PoW but has transitioned to a method called Proof-of-Stake (PoS) with its Ethereum 2.0 upgrade. In PoS, validators are chosen to create a new block based on the amount of cryptocurrency they hold and are willing to 'stake' as collateral. It's a more energy-efficient method than PoW.

Read more: What is Ethereum 2.0?

Scalability

Bitcoin's Proof-of-Work consensus mechanism is not very scalable. This means that the network can only handle a limited number of transactions per second, a maximum of around 7 per second. Ethereum's Proof-of-Stake consensus mechanism is more scalable, it can process up to 30 transactions per second, but it also faces scalability issues. However, Ethereum is actively addressing these scalability issues through upgrades such as transitioning to PoS and an upcoming upgrade called sharding.

Supply

The supply of a cryptocurrency refers to the total number of coins that have been, and can ever be, created. Bitcoin has a capped supply of 21 million coins.

In contrast, Ethereum has no maximum supply limit, which means that theoretically, an unlimited number of Ether can be created. However, in practice the inflation rate of Ether is low to negative. You can track Ethereum’s current inflation rate at ultrasound.money.

Use cases

Bitcoin's primary use case is as a digital money. Many see it as 'digital gold' - a store of value and a hedge against traditional financial market volatility. It's primarily used as a digital currency or a store of value.

Read more: How does Bitcoin compare to other asset classes?

Ethereum, however, has broader use cases due to its built-in smart contract functionality. Smart contracts are essentially decentralized programs. This functionality makes Ethereum the backbone of the Decentralized Finance (DeFi) movement, which aims to recreate traditional financial systems without traditional finance’s need for trusted third parties.

Ethereum is also the platform of choice for most non-fungible tokens (NFTs), which are unique digital assets that can represent ownership or proof of authenticity for everything from digital art to virtual real estate. Other applications include Decentralized Autonomous Organizations (DAOs), supply chain management, and many more.

Price

The price action of Bitcoin and Ethereum has been subject to volatility, like most cryptoassets. Bitcoin has usually been the primary driver of the crypto market, given its larger market cap and widespread use. When Bitcoin's price rises, it often pulls up the price of other cryptocurrencies, including Ethereum, and vice versa. Bitcoin’s price action is influenced by a number of factors which include: supply and demand, market sentiment, regulatory news and events, and economic events.

Ethereum's price, while impacted in large part by Bitcoin’s, is also influenced by factors unique to Ethereum, such as updates to its platform, its usage in DeFi, and demand for blockspace. Ethereum’s price, in turn, influences the price of smaller cryptoassets especially those that use Ethereum’s blockspace, such as DeFi, NFT, and DAO projects.

Table

Here is a table summarizing the key differences between Bitcoin and Ethereum:

	Bitcoin	Ethereum
Purpose	Store of value, medium of exchange	Platform for decentralized applications
Technology	Proof-of-Work	Proof-of-Stake
Transactions	7 transactions per second	30 transactions per second
Supply	21 million limit	Unlimited
Use cases	Digital money	DeFi, NFTs, DAOs
Price	Leads entire crypto market	Follows Bitcoin, leads DeFi, NFTs, DAOs