Why Ethereum and Bitcoin are Very Different Investments

Those new to crypto, like the institutional investors who are buying into bitcoin’s recent “digital gold” narrative, may now be looking around for the next big thing.

With the long-awaited arrival of phase 0 of the Ethereum 2.0 upgrade launching on December 1, that could be the network’s native, ether (ETH) ticket. But analysts say ether should be judged on its own merits and not as a replacement for bitcoin.

“I’ve always thought this digital asset space is huge – and it’s not just bitcoin – because there will be different applications for different things,” Raoul Pal, CEO and co-founder of financial media group Real Vision, said at Real Vision documentary “Ethereum – An Investigation,” released on November 30. “I think about both [bitcoin and ether] as a very nice combined asset allocation. ”

For Pal, an early bitcoin investor, the logic seems even more credible these days: As the price of bitcoin hits a new peak, the number one cryptocurrency by market capitalization is now more expensive and so potentially a riskier bet for new investors.

Investors can be expected to look for a new opportunity in crypto at affordable prices. Given that ether is trading about 59% below its all-time high of $ 1,432.88, it’s tempting to believe there’s a deal to be found. What’s more, the Ethereum 2.0 upgrade to increase the scalability, security, and energy efficiency of the network has generated a lot of hype.

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However, for the time being at least, analysts and traders who spoke to CoinDesk do not believe that ether will replace the FOMO over bitcoin.

“For institutional investors, they buy BTC for the digital gold narrative,” Ryan Watkins, senior research analyst at Messari, told CoinDesk. “ETH is not in that conversation yet.”

Ether “benefits from overflows and is likely to get more talk about it from crypto-natives,” Vishal Shah, founder of Alpha5 derivatives exchange, told CoinDesk. “For those who don’t intervene, [it is] hard to see that bitcoin is not the only ramp. “

A weakening correlation between bitcoin and ether

Some analysts say that as more institutions pour money into bitcoin and push its price up, ether and other cryptocurrencies will gradually disconnect from bitcoin.

Indeed, while bitcoin this week has always logged a high price, ether is not even near its highest ever of $ 1,448.18. Data from CoinDesk shows that the 90-day correlation coefficient between the prices of the two highest cryptocurrencies, while still strong, has steadily weakened since the summer from as high as 0.93 to nearly 0.7 at the beginning of December.

Source: CoinDesk Research

“The thing about correlation is that it can disappear at any time,” Ashwath Balakrishnan, a research analyst at digital asset research firm Delphi Digital, told CoinDesk. “In that case, you want to understand the core fundamentals of what you have because if you hold ether as a proxy [to your] bitcoin exposure, a [when] prices disconnect, you are now exposed to something very different. “

Bitcoin has been used by many investors this year as a hedge against a fall in the purchasing power of US dollars. Ether is considered the “world’s computer,” a currency that seeks to build an ecosystem of decentralized applications.

The close historical correlation between bitcoin and other cryptocurrencies may be due to how small the digital asset ecosystem is in relation to the global economy. Total crypto asset market capitalization is estimated at $ 562 billion, just 1.7% of the S&P 500 stock index’s combined market cap of $ 32.2 trillion. With almost all crypto assets built on different fundamentals, non-bitcoin cryptocurrencies can be trending with bitcoin prices just because the nascent market is still so small and isolated.

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Correlation data do not tell the whole story. Prices can move in parallel but the extent to which that happens is another matter. When the explosive decentralized finance (DeFi) boom hit the market this summer, the price of ether rose to its peak in more than two years because most DeFi projects were built on the Ethereum blockchain. At the time, bitcoin was struggling to break a similar two-year record.

What Ethereum 2.0 could mean for investors

The market will have to wait to see what kind of real impact the ongoing Ethereum upgrade could have on its native currency because the final stage of the process is expected to be completed in 2023. But a major fundamental upgrade to the network which is the basis for the ether to lead its price to move on its own fundamentals, instead of just following the price of bitcoin.

“The heart of ETH 2.0, which makes the whole system possible, is ether,” according to a report by Messari. “ETH will not only be Ethereum’s native repository of value and fuel asset for transactions, but will also be Ethereum’s ultimate source of security from its role in the [proof-of-stake] system. ”

Thus, while bitcoin can be considered as somewhere between a value store and a commodity on the “asset upper class triangle,” ether could eventually become the first asset to be a combination of the three asset classes: capital assets, commodities and stores of value.

“When the price of ether starts to be driven by its own catalysts, holding it as a proxy for BTC exposure will not work as expected,” added Balakrishnan.