Matthew Hougan, the Chief Investment Officer (CIO) at Bitwise Asset Management, has offered insights into why Ethereum could be a valuable addition to an investor’s portfolio. In a recent post, Hougan outlined three reasons to consider adding ETH to a portfolio, as well as a reason to stick with a Bitcoin-only portfolio.
Hougan emphasizes that his comments should not be taken as investment advice. However, he believes that the imminent launch of spot Ethereum ETFs in the United States presents a good opportunity for investors to include the second-largest cryptocurrency in their wallets.
So why should one consider ETH for their portfolio? According to Hougan, it boils down to diversification, the different use cases of Bitcoin and Ethereum, and historical analysis. Let’s explore these three reasons in more detail.
Regarding diversification, Hougan draws a parallel between the current crypto market and the dot-com boom. He highlights the difficulty of predicting the future accurately and refers to investors who correctly identified the potential of the internet but made incorrect specific bets on companies like AOL or Pets.com. In the emerging crypto market, owning a diversified portfolio that includes 75% BTC and 25% ETH could be a sensible starting point.
The second reason Hougan presents is the distinct use cases of Bitcoin and Ethereum. While Bitcoin is considered the best form of money ever created, Ethereum focuses on programmable money. It is the foundation for applications such as stablecoins and decentralized finance (DeFi). While it is challenging to predict which applications will thrive, having exposure to both BTC and ETH could prove beneficial for a portfolio.
Lastly, Hougan highlights the historical analysis. He states that adding ETH to a portfolio over a complete crypto market cycle has historically resulted in higher absolute and risk-adjusted returns compared to adding only BTC. By incorporating ETH into a portfolio, investors can potentially increase their cumulative and annualized returns while also experiencing lower maximum drawdown.
Hougan supports his argument with an example portfolio performance analysis. Comparing a traditional 60/40 portfolio with a 100% BTC allocation to one that includes 5% ETH, the latter demonstrates higher cumulative returns (56.32% vs. 31.47%) and annualized returns (11.79% vs. 7.06%). Additionally, the portfolio with ETH shows a lower maximum drawdown, indicating a more stable investment.
In conclusion, Hougan suggests that for those looking to make a broad bet on crypto and public blockchains, owning multiple crypto assets is advisable. However, if the goal is to make a specific bet on a new form of digital money, Bitcoin should be the focus.