Three Reasons To Add ETH to Your Portfolio

Spot Ethereum ETPs could be launching soon. Here are three reasons to add ETH exposure—and one to keep it Bitcoin-only.

Spot Ethereum ETPs could launch as soon as July 2, according to Bloomberg’s ETF analysts. That means many investors will soon need to decide whether to add ETH exposure alongside their favorite Bitcoin ETP.

I’d argue that the answer for most people is simple: “Yes.”

Here are three reasons why, along with one reason you might stick to being Bitcoin-only. As always, the usual disclosures apply: None of the following is intended as investment advice, and you should consult your financial and tax professionals before making investment decisions. 

Reason #1: Diversification 

One of the first things you’re taught as an investor is to diversify. Don’t own one stock; own a basket. Don’t own one bond; own a portfolio.

The most powerful reason for this is humility. As the quote popularized by John Meynard Keynes goes, “It is better to be roughly right than exactly wrong.”

It is very hard to predict the future with precision. Ask any investor from the dot-com boom who bought AOL or Pets.com. They got the overall bet right—the internet is going to be big!—but the specifics wrong. Sad!

Crypto is a new and disruptive technology. It can do amazing things, like move money at the speed of the internet. But even today, and even for experts, it is very hard to know exactly how crypto will change the world.

As a result, unless you have a very specific view (more on this later), the default should be to simply “own the market.”

Today, the market cap for ETH, the crypto asset that powers the Ethereum blockchain, is about $420 billion. That’s about one-third the size of Bitcoin’s $1.3 trillion. The starting place should therefore be about 75% Bitcoin and 25% ETH.

Reason #2: Bitcoin and Ethereum Target Different Use Cases

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

Bitcoin is a new form of money. Every design choice the Bitcoin ecosystem makes is designed to make Bitcoin the best form of money that has ever existed.

For instance, Bitcoin’s supply is strictly capped at 21 million. That helps create a reliable monetary good. By comparison, other crypto assets (including ETH) have continual issuance, which can support other forms of network participation.

Another example: The Bitcoin blockchain rarely goes through large software upgrades. This reduces the likelihood that developers will introduce a bug. If you’re building a new form of money, security is paramount.

By comparison, Ethereum regularly goes through major upgrades. That’s because Ethereum’s primary function is making money programmable. It’s a technological platform for new applications that rely on public blockchains. In other words, its strength lies in its versatility.

You can, for instance, digitize dollars on Ethereum and allow them to move at the speed of light (we call these “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 try to disrupt huge chunks of the legacy financial ecosystem (we call this “decentralized finance” or “smart contracts”).

Again, it is early in the crypto revolution. That makes it difficult to know exactly which applications will matter over the long term. Adding ETH to your Bitcoin simply gives you broader exposure to what public blockchains can do.

Reason #3: Historical Analysis Says You Should

The third and final reason to add Ethereum to your crypto sleeve is “math.”

Adding ETH to a portfolio over a full crypto market cycle has historically boosted both your absolute and risk-adjusted returns compared to adding BTC only.

The table below looks at the impact a 5% allocation to crypto has had on a traditional portfolio of 60% stocks and 40% bonds over the past four years, using both a Bitcoin-only and a split 75% BTC/25% ETH strategy.¹

Past performance is no guarantee of future returns, but the table makes two clear points:

1. Allocating to crypto in general significantly increased the portfolio’s absolute and risk-adjusted returns; and

2. Adding ETH to the BTC dialed things up, with higher absolute returns and higher risk-adjusted returns.

You even get a smaller maximum drawdown despite the higher overall returns, thanks to the benefits of diversification.

Portfolio Metrics

Period between May 31, 2020 and May 31, 2024 (assuming quarterly rebalancing)

Source: Bitwise Asset Management with data from Bloomberg.

Note: Traditional Portfolio consists of 60% equities (represented by the FTSE Global All Cap Index) and 40% bonds (represented by the Bloomberg US Aggregate Bond Float Adjusted Index). It is not possible to invest directly in an index. Past performance does not predict or guarantee future results. Nothing contained herein is intended to predict the performance of any investment. There can be no assurance that actual outcomes will match the assumptions or that actual returns will match any expected returns. Historical performance of sample portfolios has been generated and maximized with the benefit of hindsight. The returns do not represent the returns of an actual account and do not include the fees and expenses associated with buying, selling and holding funds or crypto assets. Performance information is provided for informational purposes only.

Of course, you can find shorter time periods when adding ETH to the crypto sleeve lowered overall returns. Since January 1, 2023, for instance, BTC has outperformed ETH 300% to 198%. But BTC often outperforms ETH in the early stage of crypto cycles. It is best to evaluate things over a fuller time period.

Counterpoint: Why Some Folks Should Stay Bitcoin-Only

As mentioned, I think being Bitcoin-only can make sense for certain investors.

If you are investing in crypto primarily because you are concerned with the degradation of fiat currencies (including the U.S. dollar), or because you are worried about debt, deficits, and inflation, then you should stick with Bitcoin. 

While some observers disagree, I think it’s very likely that Bitcoin will become the dominant new form of “money” that emerges in crypto. It has a large lead, and money is a market where size matters. Also, as discussed, its design, community, and ethos is oriented towards succeeding at this goal, while other crypto assets are optimizing for different things.

This does not mean I’m bearish on other crypto assets like ETH. Rather, I think Ethereum and other networks are oriented toward other design goals, like being platforms for stablecoins, decentralized finance, and other applications.

My view, in a word: If you want to make a broad bet on crypto and public blockchains, you should own multiple crypto assets. If you want to make a specific bet on a new form of digital money, buy Bitcoin.

Conclusion: For Many Investors, It Makes Sense To Hit the “Easy” Button

There are good arguments for focusing your crypto investment in Bitcoin. It is the most established crypto asset with the strongest regulatory footing, and it’s going after the largest addressable market. It is also the most decentralized and least subject to government interference. As I discussed above, for people who want to make a specific monetary bet using crypto, it makes sense to be Bitcoin-only.

But many investors just want to allocate to “crypto” and “public blockchains,” and do not have a specific view on the future. For those investors, the potential launch of a spot Ethereum ETF will offer an opportunity to broaden their bet on crypto—and I’d argue that makes a lot of sense.

Notes

(1) Crypto has historically moved in a four-year cycle, so we use that as the base increment for most full-cycle analyses.

Risks and Important Information

No Advice on Investment; Risk of Loss: Prior to making any investment decision, each investor must undertake its own independent examination and investigation, including the merits and risks involved in an investment, and must base its investment decision—including a determination whether the investment would be a suitable investment for the investor—on such examination and investigation.

Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but they do not have legal tender status. Crypto assets are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies, stocks, or bonds.

Trading in crypto assets comes with significant risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks and risk of losing principal or all of your investment. In addition, crypto asset markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

Crypto asset trading requires knowledge of crypto asset markets. In attempting to profit through crypto asset trading, you must compete with traders worldwide. You should have appropriate knowledge and experience before engaging in substantial crypto asset trading. Crypto asset trading can lead to large and immediate financial losses. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price.

The opinions expressed represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events, or a guarantee of future results, and are subject to further discussion, completion and amendment. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.