Bitwise CIO: Three Reasons Investors Should Allocate to ETH
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Bitwise CIO: Three Reasons Investors Should Allocate to ETH
Holding both BTC and ETH delivers higher absolute returns and risk-adjusted returns compared to holding BTC alone.
Navigating Web3 tides with focused insightsAuthor: Matt Hougan, Chief Investment Officer at Bitwise
Translation: Luffy, Foresight News
According to Bloomberg ETF analysts, spot Ethereum ETPs (note: ETP stands for Exchange-Traded Product, with ETF being one type of ETP) could launch as early as July 2. This means many investors will soon face a new decision: whether to add ETH exposure alongside their preferred Bitcoin ETP.
I suspect most people’s answer is simple: “Yes.”
Below, I’ll outline three reasons to invest in ETH—and one reason you might stick with Bitcoin only.
Reason One: Diversification
As an investor, one of the first principles you learn is diversification. Don’t hold just one stock—hold a basket. Don’t hold just one bond—hold a portfolio.
The most compelling reason for this is humility. As John Maynard Keynes famously said, “It is better to be roughly right than precisely wrong.”
The future is hard to predict. Ask investors who bought AOL or Pets.com during the dot-com bubble—they bet on the right trend (the internet would grow!), but got the details wrong.
Cryptocurrency is a disruptive new technology capable of incredible things, like transferring money at internet speed. Yet even experts today can’t say exactly how crypto will reshape the world.
Therefore, unless you have a very specific conviction, the best thing to do is simply “own the market.”
Today, Ethereum’s native token ETH has a market cap of about $420 billion—roughly one-third of Bitcoin’s $1.3 trillion. At a minimum, that suggests a portfolio allocation of 75% Bitcoin and 25% ETH.
Reason Two: Bitcoin and Ethereum Serve Different Use Cases
The second reason is equally important: Bitcoin and Ethereum are fundamentally different.
Bitcoin is a new form of money. Every design choice in the Bitcoin ecosystem aims to make it the best form of money ever created.
For example, Bitcoin’s supply is strictly capped at 21 million, helping create a reliable monetary commodity. In contrast, other crypto assets—including ETH—have ongoing issuance to support broader network participation.
Another example: Bitcoin rarely undergoes major software upgrades. This reduces the risk of introducing bugs—critical when building a new form of money.
By comparison, Ethereum regularly implements major upgrades because its primary function is programmable money. It’s a technical platform for decentralized applications—in short, its strength lies in versatility.
For instance, you can digitize U.S. dollars on Ethereum and enable near-instant transfers (what we call “stablecoins”). You can tokenize securities for near-instant settlement (“tokenization”), or digitize financial intermediaries to disrupt large parts of traditional finance (“decentralized finance” or “smart contracts”).
Again, the crypto revolution is still in its early stages. It’s hard to know which applications will succeed long-term. Adding ETH to your portfolio gives you broader exposure to what public blockchains can achieve.
Reason Three: Historical Data Supports Investing in ETH
The third and final reason to include Ethereum in your crypto “basket” is mathematics.
Historically, holding both BTC and ETH has delivered higher absolute returns and better risk-adjusted returns compared to holding BTC alone.
The table below compares the performance over the past four years of a traditional 60% stocks / 40% bonds portfolio with a version allocating 5% to crypto, under two scenarios: 1) crypto allocation in Bitcoin only; 2) crypto allocation split 75% BTC / 25% ETH.
Past performance does not guarantee future results, but the data shows two key points:
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Adding crypto significantly boosts both absolute and risk-adjusted portfolio returns;
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Holding both BTC and ETH delivers higher absolute and risk-adjusted returns than holding BTC alone.
Thanks to diversification benefits, overall returns are higher while maximum drawdown is lower.
Data from May 31, 2020 to May 31, 2024. Source: Bitwise Asset Management, Bloomberg
Of course, there are periods when adding ETH reduces overall crypto portfolio returns in the short term. For example, since January 1, 2023, BTC has outperformed ETH. That’s typical in the early phase of a crypto cycle—BTC often leads—but doesn’t necessarily hold over full-cycle timeframes.
Exception: Who Should Hold Only Bitcoin?
Still, I believe there’s one group of investors for whom holding only Bitcoin makes sense.
If your primary motivation for investing in crypto is concern over fiat currency (including the U.S. dollar) devaluation, debt, deficits, or inflation, then sticking with Bitcoin is appropriate.
While some may disagree, I believe Bitcoin is likely to emerge as the dominant new “money” within crypto. It has massive first-mover advantage, and scale is a critical attribute for money. Moreover, its design, community, and ethos are all aligned toward that goal, while other crypto assets optimize for different objectives.
This doesn’t mean I’m bearish on other assets like ETH. On the contrary, I believe Ethereum and other networks should serve different purposes—such as platforms for stablecoins, DeFi, and other applications.
My view: If you want broad exposure to crypto and blockchain, you should hold multiple crypto assets. But if you’re solely interested in a new form of digital money, then buy Bitcoin.
Conclusion
There’s a strong case for focusing crypto investments on Bitcoin. It’s the most mature, regulated, and scalable crypto asset, targeting the largest potential market. It’s also the most decentralized and least susceptible to government interference. As I’ve noted, for investors seeking a specific monetary play in crypto, holding only Bitcoin is sound.
But many investors simply want exposure to “crypto” and “public blockchains” without strong views on the future. For them, the launch of spot Ethereum ETFs offers a meaningful opportunity to broaden their crypto holdings—and I believe that matters.
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