With spot Ethereum ETFs set to launch in the U.S., should current Bitcoin ETF holders consider diversifying their crypto investments by adding ETH? In a Twitter thread on Thursday, Bitwise CIO Matt Hougan offered three compelling reasons why this might be a good idea.
Why Bitcoin Holders Should Buy Ethereum
Firstly, Hougan cited diversification. Predicting the future of cryptocurrencies is challenging, so holding stakes in both top assets can provide investors with peace of mind if one asset falls out of favor or eclipses the other over time.
“Ask any investor from the dot-com boom who bought AOL or Pets.com,” Hougan remarked. “They got the big picture right— the Internet would thrive!— but missed on the specifics. Ouch!” According to the thread, Bitcoin’s market cap accounts for 55% of the entire crypto market, per TradingView, while Ethereum represents 18.6%.
Three reasons to add ETH to your portfolio, and one important reason to stay BTC-only.
A thread.
— Matt Hougan (@Matt_Hougan) June 20, 2024
Although ETH has generally performed in line with Bitcoin over the past five years, its dominance relative to Bitcoin has gradually declined since the merge in September 2022. However, the ETH/BTC ratio saw a modest increase following the approval of U.S. spot ETFs last month.
Secondly, Hougan highlighted the fundamentally different natures of Bitcoin and Ethereum, which complicate the choice between them. While Bitcoin is optimized to be “better money,” Ethereum is designed for “programmable money,” enabling blockchain applications like stablecoins and DeFi.
He explained, “Adding some ETH to your predominantly BTC portfolio broadens your exposure to all the potential of public blockchains.”
BTC and ETH Work Best Together
Reason to Add ETH #1: Diversification
It is very hard to predict the future with precision. Ask any investor from the dot-com boom who bought AOL or https://t.co/bp0iLTQYpi. They got the overall bet right—the internet is going to be big!—but the specifics wrong. Sad!
— Matt Hougan (@Matt_Hougan) June 20, 2024
Lastly, Hougan noted that the historical performance of both assets suggests they perform best when balanced together in a portfolio.
For example, a traditional 60/40 portfolio with a 5% crypto allocation had higher cumulative returns over the past four years when weighted 70/30 between BTC and ETH (56.32%) compared to being fully allocated to BTC (54.49%).
Interestingly, it also experienced a lower “maximum drawdown” than an all-BTC portfolio during that period, dropping just 25.19% at its worst compared to 25.35%. However, Hougan acknowledged a primary reason some investors might prefer to stick with BTC exclusively.
“There is a strong possibility that Bitcoin could become the dominant form of ‘money’ in the crypto space,” Hougan said, citing its community-driven approach and current leadership position in the market. “Money is a vast market. There is plenty of room for BTC to thrive if it succeeds,” he added.
