Bitcoin vs. Ethereum: What’s the Difference?

Ether vs. Bitcoin: What's the Difference?

Bitcoin was the first cryptocurrency ever invented, while Ether is a digital currency built on the Ethereum blockchain platform.

In addition to their name recognition and status as the two most popular digital currencies in the world, Bitcoin and Ether are the largest cryptocurrencies by market capitalization, meaning their total outstanding value for all currency in circulation is larger than all other digital currencies.

Though Bitcoin and Ether are both decentralized digital currencies that use blockchain technology, Ether is built on the Ethereum platform and Ether transactions are processed differently from Bitcoin transactions.

How Does Bitcoin Work?

Developed in 2009, Bitcoin uses blockchain technology to facilitate anonymous transfers of Bitcoin from person to person.

Blockchain technology works by grouping together information (known as "blocks"), then adding these blocks to a public ledger, known as the blockchain. Since the blockchain is decentralized, these transactions are processed by computers all around the world and a record of all transfers can be reviewed by anyone.

Though this may seem complicated, the blockchain can be understood simply if compared to a database or ledger (like the one that tracks your bank account). Once a transaction is recorded on the blockchain, the information is permanently stored, cannot be deleted and is viewable by anyone—putting control in the hands of the network, and not a centralized power like a bank or government.

How Does Ether Work?

In order to understand how Ether works, it's critical to understand the platform on which it's built: Ethereum. Ethereum is a decentralized software platform that uses blockchain technology like Bitcoin does—but with expanded capabilities.

The Ethereum platform uses blockchain technology to support multiple utilities, like the development of applications and programs, as well as powering cryptocurrencies including Ether. The platform does this through what are called "smart contracts," which are essentially programs that can be stored and run on the Ethereum platform.

While the name Ethereum is sometimes mistakenly or casually used to describe the cryptocurrency itself, Ether is the native and primary cryptocurrency built on the Ethereum platform. Ether is also the currency that fuels aspects of the platform. When transactions occur, the "miners" who run the computer programs around the world that power the network, are paid in Ether.

Should I Buy Cryptocurrency?

The volatile nature of cryptocurrency value means some investors have made massive amounts of money buying, selling and trading it. But a lot of money has been lost in the pursuit of cryptocurrency riches too. Like any investment, you should only buy cryptocurrency if you've fully researched it and understand the risks involved. Cryptocurrency markets are very different from conventional securities markets, like the New York Stock Exchange. Similarly, payments with cryptocurrencies do not offer the same protections as those with a debit or credit card, making it difficult to get recourse should you encounter fraud.

Since cryptocurrency markets are minimally regulated and not formally backed by any governments, opinions are mixed on whether they are reliable alternatives to conventional investments or cash. Though agencies like the Federal Trade Commission are aware of cryptocurrencies like Bitcoin and Ether, they advise consumers to learn the differences between digital and fiat currencies (government-issued paper money) and keep this in mind as they decide whether to purchase cryptocurrencies.

How to Buy Bitcoin and Ether

There are several ways to purchase Bitcoin and Ether, and the method you choose will depend on what you want to do with your digital currency. Currently, there are two main reasons to own cryptocurrency.

First, you may want to purchase and own crypto as an investment vehicle. Cryptocurrency prices are always changing, and many are rushing to purchase digital currencies to profit from the price growth over time (though there is no guarantee their value will rise). The other reason one may purchase digital currencies is to use them to make purchases in everyday life. Cryptocurrencies still haven't been widely adopted as a payment method, but many businesses have begun accepting certain digital currencies in addition to fiat currency as a form of payment.

Primarily, digital currencies are purchased via online exchange platforms, and the currencies are then stored in a digital wallet. The purchase transaction record is stored on the blockchain, but your digital wallets store your public and private keys, which are used to buy and sell digital currencies.

Some of the popular online exchanges are Binance, Coinbase, Gemini and Kraken, through which you can use your bank account, debit card or (in certain instances) a credit card to purchase cryptocurrency. Once your cryptocurrency has been deposited into your digital wallet, you will then be able to use your public and private keys to transfer it and even make purchases from businesses that accept crypto as a form of payment.

Some mainstream investment brokerages and online applications also allow users to purchase crypto through their platforms. Companies like Robinhood, CashApp, PayPal and Venmo all allow limited buying and selling of certain digital currencies—mainly Bitcoin and Ether, along with some other alternative coins.

However, one caveat to buying crypto through these mainstream investment apps is that since you're using an intermediary, you typically won't have access to a public and private key and won't be able to use the currency for purchases. This option is more for someone looking to invest in a digital currency for appreciation purposes, rather than for using the digital currency as a form of tangible payment.

Will Buying Cryptocurrency Impact Your Credit?

Buying and selling cryptocurrency has no impact on your credit. Credit reports store information that primarily has to do with your history of borrowing and repaying debt, and information about your investments is never stored in your credit file.

Though buying digital currencies won't directly impact your credit, it's always wise to fully consider your personal financial situation before investing or converting cash into something that could lose value.

Always be sure to have a robust emergency fund you could tap into if you were to come on hard times and need extra cash to cover essentials or bills. Putting all your money into crypto can also increase the risk that you'll miss payments, or pay late, which can impact your credit. To better protect yourself from credit score harm, make sure you always have enough cash on hand to fully cover your obligations every month.

If you want to check to see what's in your credit history, free credit reports from all three major consumer bureaus (Experian, TransUnion and Equifax) can be had through AnnualCreditReport.com. You can also get a free copy of your Experian credit report and FICO Scores from Experian.