Written by Matt Hougan, Chief Investment Officer at Bitwise
Compiled by Luffy, Foresight News
According to Bloomberg ETF analysts, a spot Ethereum ETP (Note: ETP is the abbreviation of Exchange-Traded Product Exchange-Traded Product, ETF is a type of ETP) may be launched as early as July 2. This means that many investors will soon face a new choice: whether to increase ETH exposure in addition to their favorite Bitcoin ETP.
I think the answer for most people is a simple “yes.”
I’m going to list three reasons to invest in ETH, and why you might want to stick with just Bitcoin.
Reason 1: Diversified Investment
One of the first things you learn as an investor is diversification. Don't just own one stock, own a basket of stocks. Don't just own one bond, own a portfolio.
The most compelling reason is humility. As John Maynard Keynes famously said, “It is better to be vaguely right than precisely wrong.”
The future is hard to predict. Ask the investors who bought AOL or Pets.com during the dot-com bubble. They made the right bet—the Internet would grow!—but got the details wrong.
Cryptocurrency is a disruptive new technology. It can do amazing things, like move money at the speed of the internet. But today, even for experts, it's hard to know exactly how cryptocurrency will change the world.
So unless you have a very specific view, all you should do is embrace the market.
Today, the market cap of ETH, the native token of the Ethereum blockchain, is about $420 billion. That’s about a third of Bitcoin’s $1.3 trillion. So at a minimum, you should have 75% in Bitcoin and 25% in ETH.
Reason 2: Bitcoin and Ethereum target different use cases
The second reason is equally important: Bitcoin and Ethereum are two completely different things.
Bitcoin is a new type of money. Every design choice in the Bitcoin ecosystem is designed to make it the best form of money ever created.
For example, Bitcoin’s supply is strictly limited to 21 million. This helps create a reliable monetary commodity. In contrast, other crypto assets (including ETH) have continued to increase in issuance, which can support other forms of network participation.
Another example: The Bitcoin blockchain rarely undergoes large-scale software upgrades. This reduces the likelihood of developers introducing bugs. If you are building a new type of currency, security is critical.
In contrast, Ethereum undergoes major upgrades on a regular basis. This is because Ethereum’s primary function is to make money programmable. It is a technology platform for decentralized applications. In other words, its strength lies in its versatility.
For example, you could digitize dollars on Ethereum and allow them to be transferred at the speed of light (we call this “stablecoins”). Or you could digitize securities and allow them to be settled almost instantly (we call this “tokenization”). Or you could digitize the role of financial intermediaries and attempt to disrupt a large part of the traditional financial ecosystem (we call this “decentralized finance” or “smart contracts”).
Again, it’s still early days for the cryptocurrency revolution. So it’s hard to know exactly which applications will work in the long term. Adding ETH to your portfolio simply gives you a broader view of what public blockchains can do.
Reason 3: Historical analysis shows you should invest in ETH
The third and final reason to add Ethereum to your cryptocurrency “basket” is “math”.
Historically, holding ETH can improve your absolute and risk-adjusted returns compared to just holding BTC.
The following table examines the market performance of a traditional portfolio of 60% stocks and 40% bonds versus a portfolio holding 5% cryptocurrencies over the past four years. Cryptocurrency investments are divided into two scenarios: 1. Only Bitcoin; 2. A combination of 75% BTC and 25% ETH.
Past performance is no guarantee of future returns, but the table illustrates two points:
Allocating cryptocurrencies significantly improves the absolute and risk-adjusted returns of the portfolio;
Holding both BTC and ETH has higher absolute and risk-adjusted returns than holding only BTC.
Due to the advantage of diversification, the overall return rate is higher, but the maximum drawdown is smaller.
Data statistics are from May 31, 2020 to May 31, 2024; Source: Bitwise Asset Management, Bloomberg
Of course, you will find that in the short term, adding ETH to a cryptocurrency portfolio will reduce overall returns. For example, BTC has outperformed ETH since January 1, 2023. This is because BTC tends to outperform ETH in the early stages of a cryptocurrency cycle, which is not necessarily the case when evaluated over a more complete cycle time period.
Exceptions: What investors should only hold Bitcoin
However, I think that for a certain group of investors, it is also correct to just hold Bitcoin.
If you invest in cryptocurrencies primarily because you are concerned about the devaluation of fiat currencies (including the U.S. dollar), or because you are concerned about debt, deficits, and inflation, then you should stick with Bitcoin.
Although some people disagree, I think Bitcoin has a good chance of becoming the dominant new form of "money" to emerge in the cryptocurrency space. It has a huge head start, and market size is a critical attribute of money. Moreover, its design, community, and ethos are all geared toward achieving this goal, while other crypto assets are optimizing for different goals.
This does not mean that I am bearish on other crypto assets such as ETH. On the contrary, I believe that Ethereum and other networks should be oriented towards other design goals, such as becoming a platform for stablecoins, decentralized finance, and other applications.
My point is this: if you want to invest broadly in the cryptocurrency and blockchain space, you should own multiple crypto assets. If you just want to invest in a new form of digital currency, buy Bitcoin.
in conclusion
The reasons to focus cryptocurrency investments on Bitcoin are quite strong. It is the most mature, most regulated, and most promising crypto asset, and it targets the largest target market. It is also the most decentralized and subject to the least government interference. As I discussed above, for those who want to use cryptocurrency for specific currency investments, it is wise to invest only in Bitcoin.
But many investors just want to invest in "cryptocurrency" and "public chain" without a specific view of the future. For these investors, the launch of Ethereum spot ETF will provide them with an opportunity to expand their cryptocurrency investment, which I think is of great significance.
