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Should You Add Ethereum To Your Bitcoin Portfolio?

To coin a phrase, there’s really no need to pick one winner when you can pick two.

5 June 2024

Ethereum is the second biggest cryptocurrency in terms of market capitalisation. Technically, “Ethereum” is the name of the network, while the coin of that network is called Ether (ETH), but so many people refer to it using the former, perhaps due to it sounding rather cool or futuristic.

When we talk about price performance, Ethereum (ETH) is now priced above US$2500 at the time of writing, from a measly US60 cents as its initial price in 2015. That’s an increase of more than 4000 times, making it one of the best performing assets of all time. Meanwhile, Bitcoin became 250 times more expensive in the same time range.

What would adding ETH do to your Bitcoin-only portfolio? Is Ethereum a far superior crypto asset due to its historical performance?

Ethereum’s value

Bitcoin and Ethereum are solutions to two different problems. For Bitcoin, there was a need to freely and privately send and receive monetary value without the restrictions imposed by banks. 

In 2015, Ethereum was released as a blockchain network that does this, and more. Ethereum acts like a decentralised cloud computer, rather than just a ledger like for Bitcoin. Developers can deploy programmes on Ethereum, and can be confident that no matter what, the programmes cannot be modified, deleted or censored. 

Users can run those programmes, knowing how they work (all code is open for auditing) and be confident they’ll work as originally programmed. This is a huge contrast to the way software is built and run by private companies. 

The ‘burning’ balance

The Bitcoin network issues new Bitcoin roughly every 10 minutes until all 21 million Bitcoins have been released. Ethereum has no such limit, but has a dynamic supply, meaning sometimes there can be more or less ETH in circulation, depending on network usage.

Ethereum balances its supply by a mechanism known as “burning”. Whenever an action occurs on Ethereum, users pay a fee to validators (those who would process transactions), but part of that fee is removed from circulation. Validators also receive a constant amount of newly issued ETH as a reward for processing transactions.

When Ethereum gets busy, more ETH is burned than issued, resulting in a net decrease in the supply of ETH. You can track the live supply of ETH at any time by visiting ultrasound.money. You can find that ETH’s supply “peaked” at 120.5 million and has decreased since late 2022. If this trend continues, effectively Ethereum has reached its maximum supply while Bitcoin is nearly there at 93 per cent. 

More energy efficient

Ethereum used to require a large quantity of energy to run, like Bitcoin. That was the case until 2022, when the network switched over to the current way, which uses validators and the fee burning system.

Bitcoin makes it so that it is expensive in terms of energy for an attacker to corrupt its blockchain. By comparison, Ethereum makes it literally economically expensive for attackers to do so; each validator must deposit 32 ETH (more than NZ$150,000) to become a validator. 

The deposit is used to guarantee they will operate according to the protocol, and not try to corrupt Ethereum’s blockchain. Otherwise, the network will detect fishy business and seize some ETH from the validator’s deposit — a punishment known as “slashing”.

Portfolio diversity

Many investors believe we’re still early and that the crypto market hasn’t matured as well as the stock market. One of the reasons is that Ethereum and Bitcoin are still highly correlated. When Bitcoin increases in value, so does Ethereum, and vice versa.

In a more mature crypto market, these two crypto assets may not be as strongly correlated because they offer different approaches to the centralised finance problem from the start and have different pricing factors. 

Regardless, many crypto investors still take the risk and add a considerable amount of Ethereum to their otherwise Bitcoin-only portfolio. The reason comes down to the very first facts that we’ve discussed: Ethereum is more volatile, but offers more reward compared with Bitcoin.

Ethereum is no longer in its infancy, and the decentralised computer software that gives the coin its value has proven itself to be versatile and robust. However, it’s also constantly upgrading and improving to become more useful to more people in the future.

Can Ethereum become more valuable than Bitcoin? No-one knows. But there’s really no need to pick only one winner when you can pick two.

Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.

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