Bitcoin and Ethereum: what to invest in?

The days when bitcoin was the only viable option for investors to get into the world of cryptocurrencies are long gone.

Ethereum, the second largest currency, hit an all-time high as interest in so-called altcoins continues to grow. The capitalization of Dogecoin, a coin-meme that was created as a joke, is almost $90 billion.

All in all, CoinGecko is currently tracking over 7,000 coins with the most incredible names (some of which are even edible, such as PancakeSwap).

Most people are better off starting with the two leading cryptocurrencies, bitcoin and ether. Both coins would be relatively good investments in 2021, with Bitcoin roughly doubling and Ether more than quadrupling compared to the S&P 500's 11% gain.

So what do you need to know before deciding where to invest your money?

Ethereum
Ethereum is a token created on the world's most popular blockchain, Ethereum, which is used to verify and record transactions.

Companies such as Microsoft Corp. are using this technology to create their own blockchain developments. Ethereum has also led to the explosion of non-fungible tokens, the latest trend in the digital art world.

“Ether is a blockchain platform that functions like an Apple store or an Android app store,” said Pat Lavecchia, CEO of U.S. digital securities trading platform Oasis Pro Markets. “Bitcoin is a resource like gold, or a store of value.”

Unlike Bitcoin, which has many of its core features built into the architecture (such as a limited supply), the Ethereum platform continues to evolve. It is currently in the process of being upgraded, which should improve the efficiency of the network, and even introduce changes that will reduce the supply. The price could jump as attractiveness grows and restrictions on the amount of available ethers expand.

“Investors often view Ethereum as a growth investment, betting on the further development of the decentralized ecosystem built on Ethereum,” said Phil Bonello, director of research at Grayscale Investments, which leads funds that provide tools for both cryptocurrencies. “Sometimes they see ether as a way to get access to all the development that is being done on Ethereum.”

bitcoin
While bitcoin’s dominance has eased a bit this year – according to CoinGecko, bitcoin now accounts for about 46% of the total cryptocurrency market capitalization, compared to around 70% at the beginning of the year – it is still the largest coin to date.

According to CoinGecko, its market capitalization exceeds $1 trillion, compared to $380 billion for Ethereum.

Larger corporations prefer bitcoin. Tesla Inc. and MicroStrategy Inc. buy the largest cryptocurrency, not ether. When Paul Tudor Jones or Ray Dalio talk about cryptocurrency, they mean bitcoin.

This also affects volatility. Cornerstone Macro strategists have studied the possible dynamics of Bitcoin and Ethereum in a downturn. According to strategist Benson Durham, with the Bloomberg Galaxy cryptocurrency index falling by about 20%, the risk of Ether decline is noticeably higher than that of its larger counterpart.

“In the event of a similar rally (also 20%), you don’t really achieve a concomitant rise in ether versus bitcoin,” Durham added. “Therefore, the advantage is on the side of bitcoin.”

Ethereum and Bitcoin (or neither)
As far as volatility is concerned, any person involved in cryptocurrencies should calmly accept price fluctuations, which can be quite significant even for leading cryptocurrencies. Also periodically there are problems associated with hacking or bankruptcy of exchanges.

Cryptocurrencies could be affected by tightening regulations or even the prospect of their adoption. In addition, prices may collapse; some market experts warn of a potential bubble.

Most traditional financial advisors are opposed to investing more than 5% of their total portfolio in cryptocurrencies, and warn clients that they must be prepared to lose their invested funds. However, for those who want to enter the cryptocurrency space, the rationale for buying both coins lies in the age-old search for diversification and hedging tools.

“When deciding whether cryptoassets will help reduce portfolio volatility along with traditional assets, one should consider building a small basket rather than just buying one bitcoin, given the opportunities for diversification among the digital coins themselves,” Cornerstone analysts wrote in a recent report.