Crypto

Looking to diversify your crypto portfolio? Ethereum might be a better buy than Bitcoin | The Motley Fool

Signs of a global economic slowdown are everywhere these days. In mid-January, the World Bank warned that there was likely to be one this year, driven by weaker growth in the United States, Europe and China. As such, the threat of a recession should be a priority for anyone considering investing in crypto this year.

While it may not be possible to protect your crypto portfolio from recession, there are steps you can take to make it more resilient. Invest in Ethereum (ETH 1.81%) might be the best way to achieve this goal.

Bitcoin loses its luster

But wait, you’re probably wondering: isn’t it Bitcoin (BTC 0.84%) the best crypto to hold during an economic downturn? This may have been the belief before 2022, but as events of the past year have shown, Bitcoin is not the recession protection we once believed.

On the one hand, Bitcoin can no longer claim to be uncorrelated with the broader market. The conventional wisdom had been that it would continue to rise in value, regardless of what stocks or other assets might do. But in 2022, it fell like all other risky assets as macroeconomic headwinds intensified.

For 2022, Bitcoin is down almost 65%. This disastrous performance prompted a reassessment of the entire “Bitcoin is digital gold” investment thesis. The whole point of buying gold is to have a reliable store of value. If Bitcoin can’t hold its value during tough times, it’s hard to prove it’s digital gold.

While Ethereum was also down more than 65% in 2022, the story is quite different if you only consider the last six months of the year. This time period covers the months leading up to The Merge, as well as the three months following. Something seems to have clicked with investors as they realized just how valuable Ethereum could become. Since June 30, Ethereum is up over 45%, while Bitcoin – even with its January rally – is only up 8%. Even if you only consider year-to-date gains, Ethereum still has the edge.

Benefits of diversification

One of the reasons why Ethereum has overtaken Bitcoin recently could be due to its huge diversification benefits. Although Bitcoin can only be used for online payments, Ethereum has a much broader set of possible use cases. For example, it became the first blockchain for decentralized finance (DeFi) applications. Ethereum is also the market leader when it comes to non-fungible tokens (NFT). Since 2015, the number of uses individuals and businesses have found for Ethereum has exploded. There are now metaverse worlds built on Ethereum, blockchain games built on Ethereum, and new decentralized applications that run on Ethereum.

Image source: Getty Images.

Moreover, its blockchain is increasingly integrated into the technology stacks of the world’s largest companies. Financial institutions on Wall Street are now using Ethereum’s blockchain technology for new payment mechanisms. Consumer-facing brands are embracing Web3 solutions built on the Ethereum blockchain. The Enterprise Ethereum Alliance now has over 200 member organizations actively working to integrate its blockchain in creative yet practical ways, such as tracking shipments and deliveries globally.

All of this integration with the real world should make Ethereum much more resilient to the vagaries of the economy. You can think of Ethereum as a well-diversified conglomerate, with its hands in just about every niche in the blockchain and crypto world. NFTs might not thrive during a recession, for example, but if DeFi does, it will support the value of the token.

Staking Rewards

An additional factor in Ethereum’s favor is the ability for token holders to earn passive income through staking. On popular cryptocurrency exchanges, you can now earn an annual return of almost 4% by staking your Ethereum. That might not seem like a lot, but it does provide an added benefit to holding the tokens. On the other hand, since Bitcoin is a proof-of-work cryptocurrency, it does not offer the possibility of earning staking rewards. If you are buying and holding crypto for the long term, staking Ethereum could be an effective way to increase your returns.

Time to buy Ethereum?

That said, Ethereum might not be able to diversify all the risk of a difficult macroeconomic situation. Some analysts predict that the price of Ethereum could fall below the psychologically important level of $1,000 in 2023, which would represent a drop of more than 33% from its recent price of around $1,500. As with all cryptocurrencies, there is always downside risk and volatility.

However, I can’t think of a better way to diversify your crypto portfolio right now than by investing in Ethereum. You have access to all the diversity of the Ethereum ecosystem, combined with the diversification it offers across a full range of economic activities and industries. Even if the United States and the world avoid a recession this year, I am bullish in the short and long term on Ethereum.

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