Matthew Hougan, Chief Investment Officer (CIO) at Bitwise Asset Management, has shared insights on why adding Ethereum (ETH) to an investor’s portfolio could be beneficial.

Hougan highlighted three primary reasons to consider ETH, while also providing a rationale for sticking to a Bitcoin-only portfolio. He emphasized that his comments are not investment advice but noted the potential impact of the upcoming launch of spot Ethereum ETFs in the US, suggesting it might be a favorable time to consider ETH.

Why Consider ETH for Your Portfolio?

According to Hougan, the reasons boil down to diversification, distinct use cases for Bitcoin and Ethereum, and historical performance analysis.

Diversification

Hougan compares today’s crypto market to the dot-com boom, highlighting the difficulty in predicting the future with precision. He notes that owning a diversified portfolio might be a wise approach. A proposed default allocation could be 75% Bitcoin and 25% ETH, reflecting Ethereum’s significant market cap, which is about one-third of Bitcoin’s.

“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.”

Different Use Cases

Bitcoin and Ethereum serve different purposes. Bitcoin is often viewed as the best form of money that has ever existed, while Ethereum aims to make money programmable. This programmability supports various applications like stablecoins and decentralized finance (DeFi). Broader exposure to both BTC and ETH can provide a balanced approach to a portfolio.

“Ethereum’s primary function is making money programmable. It’s a technological platform for new applications that rely on public blockchains, like stablecoins and DeFi.”

Historical Performance

Hougan points out that adding ETH to a portfolio has historically enhanced both absolute and risk-adjusted returns compared to a Bitcoin-only portfolio.

“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.”

A Sample Portfolio

Analyzing a sample portfolio from May 31, 2020, to May 31, 2024, Hougan illustrates the potential benefits of including ETH. A traditional 60/40 portfolio had a cumulative return of 31.47% with an annualized return of 7.06%. Adding 5% Bitcoin increased the cumulative returns to 54.49% and annualized returns to 11.46%. Including ETH further boosted cumulative returns to 56.32% and annualized returns to 11.79%, while also showing a lower maximum drawdown.

“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.”

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