Bitwise Chief Investment Officer: Three Reasons Investors Should Allocate to ETH

Author: Matt Hougan, Chief Investment Officer of Bitwise

Compiled by: Luffy, Foresight News

According to Bloomberg ETF analysts, a spot Ethereum ETP (Note: ETP stands for Exchange-Traded Product, and ETF is a type of ETP) could launch as early as July 2. This means many investors will soon face a new choice: whether to add exposure to ETH beyond their favorite Bitcoin ETP.

I think the answer for most people is simple: "Yes."

I will outline three reasons to invest in ETH, as well as reasons you might stick to investing only in Bitcoin.

Reason One: Diversification

As an investor, one of the first things you should learn is diversification. Don’t just hold one stock; hold a basket of stocks. Don’t just hold one bond; hold 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 investors who bought AOL or Pets.com during the internet bubble; they bet on the right direction—the internet would grow!—but the details of their choices were wrong.

Cryptocurrency is a disruptive new technology. It can do many amazing things, such as transferring funds at internet speed. But today, even for experts, it is difficult to know exactly how cryptocurrency will change the world.

Therefore, unless you have a very specific viewpoint, what you should do is simply "embrace the market."

Today, the market capitalization of Ethereum's native token, ETH, is about $420 billion. This is roughly one-third of Bitcoin's $1.3 trillion. Therefore, at the very least, you should allocate 75% to Bitcoin and 25% to ETH.

Reason Two: Bitcoin and Ethereum Serve Different Use Cases

The second reason is equally important: Bitcoin and Ethereum are two entirely different things.

Bitcoin is a new form of currency. Every design choice in the Bitcoin ecosystem is aimed at making it the best form of currency ever.

For example, Bitcoin's supply is strictly limited to 21 million. This helps create a reliable monetary commodity. In contrast, the issuance of other crypto assets (including ETH) continues to increase, supporting other forms of network participation.

Another example: the Bitcoin blockchain rarely undergoes large-scale software upgrades. This reduces the likelihood of developers introducing errors. If you are building a new form of currency, security is paramount.

In contrast, Ethereum undergoes significant upgrades regularly. This is because Ethereum's primary function is to make currency programmable. It is a technological platform for decentralized applications. In other words, its strength lies in its versatility.

For instance, you can digitize dollars on Ethereum and allow them to transfer at the speed of light (we call this "stablecoins"). Or you can digitize securities and allow them to settle almost instantly (we call this "tokenization"). Or you can 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, the cryptocurrency revolution is still in its early stages. Therefore, it is difficult to know exactly which applications will work in the long term. Adding ETH to your portfolio simply gives you a broader understanding of what public blockchains can do.

Reason Three: Historical Analysis Suggests You Should Invest in ETH

The third and final reason to add Ethereum to your cryptocurrency "basket" is "the math."

Historically, holding ETH alongside BTC has improved your absolute returns and risk-adjusted returns compared to holding only BTC.

The table below examines the market performance of a traditional portfolio of 60% stocks and 40% bonds versus a portfolio with 5% cryptocurrency investments, where the cryptocurrency investments are divided into two scenarios: 1. holding only Bitcoin; 2. a 75% BTC and 25% ETH combination.

Past performance is not indicative of future returns, but the table illustrates two points:

• Allocating cryptocurrency significantly increases the absolute returns and risk-adjusted returns of the portfolio;
• Holding both BTC and ETH provides higher absolute returns and risk-adjusted returns than holding only BTC.

Due to the advantages of diversification, the overall return 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 your cryptocurrency portfolio may reduce overall returns. For example, since January 1, 2023, BTC has outperformed ETH. This is because, in the early stages of the cryptocurrency cycle, BTC often performs better than ETH, which may not hold true when assessed over a more complete cycle.

Exception: What Type of Investor Should Only Hold Bitcoin

However, I believe it is correct for a specific group of investors to hold only Bitcoin.

If you are investing in cryptocurrency primarily due to concerns about the devaluation of fiat currencies (including the dollar), or due to worries about debt, deficits, and inflation, then you should stick with Bitcoin.

While some may disagree, I believe Bitcoin is likely to become the dominant new "currency" form that emerges in the cryptocurrency space. It has a significant first-mover advantage, and market size is a crucial attribute of currency. Furthermore, its design, community, and ethos are all geared towards achieving this goal, while other crypto assets are optimized for different objectives.

This does not mean I am bearish on ETH or other crypto assets. On the contrary, I believe Ethereum and other networks should aim for other design goals, such as becoming platforms for stablecoins, decentralized finance, and other applications.

My point is: if you want to invest broadly in cryptocurrency and blockchain, you should hold a variety of crypto assets. If you just want to invest in a new form of digital currency, then buy Bitcoin.

Conclusion

The reasons for focusing cryptocurrency investments on Bitcoin are quite compelling. It is the most mature, heavily regulated, and potentially valuable crypto asset, and it targets the largest addressable market. It is also the most decentralized and least subject to government intervention. As I discussed above, for those looking to make specific currency investments with cryptocurrency, it makes sense to invest only in Bitcoin.

But many investors simply want to invest in "cryptocurrency" and "public chains," without a specific view of the future. For these investors, the launch of a spot Ethereum ETF will provide an opportunity to expand their cryptocurrency investments, which I believe is significant.