As for cryptos, while it’s hard to know where prices will end up over the short to medium-term, not all of them have been impacted in the same way. This is evident by comparing the one-year price performances of the two with the largest market cap, namely Bitcoin and Ethereum. For this purpose, instead of looking at individual companies, I analyze the performance of the Grayscale Bitcoin Trust (GBTC) and the Grayscale Ethereum Trust (ETHE).
Here, the Ethereum trust has been outperforming its Bitcoin peer by nearly 50%.
Source: Trading View
With assets under management of $23 Billion, GBTC tracks the Bitcoin (BTC) market price and charges fees of 2%. As for ETHE, it covers Ethereum (ETH), exhibits $7.5 billion of assets and carries 2.5% of fees. Both are investment vehicles which have attained the status of an SEC reporting company, with one of their advantages being ability to provide investors with exposure to BTC or ETH in the form of securities while avoiding the challenges of buying, storing, and safekeeping cryptocurrencies directly.
Coming back to the difference in price actions, this needs to be understood in the context of their individual uses, but, first, I bring some clarifications as to the concept.
Analyzing the cryptocurrency concept
Although the concept of the cryptocurrency shines with its allure, it remains obscure for many people until they hear about its aptitude at providing sky-high gains, and, conversely, also suffering from vertiginous drops. For this matter, there is also a lot of publicity around crypto being a Ponzi scheme, which is far from the truth.
Had this been true, reputable institutions would not have invested their money in digital coins. Moreover, in contrast with Ponzi schemes that require a constant flow of new money to survive, Bitcoin and Ether have not only survived several crashes but there are other new coins that are minted every single day.
Pursuing further, those who have put their money into Bitcoin in mid-2021 and before are still up, despite all the latest volatility. Still, people primarily invest in cryptocurrency due to its high-growth feature and thus its ability to multiply the value of their financial assets in terms of dollars rapidly. This said, Bitcoin still has to strike the right balance between a means of payment and a financial asset. This virtual currency is above all a potentially profitable investment.
Gauging the marketplace, Bitcoin remains very popular with retail investors who, in addition to the ETF or trust formulae, can buy it from dedicated cryptocurrency platforms or mainstream brokers, just like the purchase of shares on the stock exchange. Looking further, FinTechs like PayPal (NASDAQ:PYPL) also offer services like crypto wallets.
Scanning the corporate space, Bitcoin has been adopted by some financial institutions for boosting up their balance sheets. Aware that the risk factor is inseparable from Bitcoin as evidenced by the current volatility, these institutions including Tesla (NASDAQ:TSLA) have not sold their crypto assets. Others like MicroStrategy (NASDAQ:MSTR) have even bought the dip. This shows a high level of trust.
Now, the crypto market is a large one, and, as shown in Coinmarketcap, there are hundreds of coins, with those boasting the ten largest market cap listed below.
As for Ethereum, it is used for a variety of innovative applications in finance, gaming, Non Fungible Tokens (NFTs), and supply chain management.
The investment case for Ethereum
With its ability to be used in smart contracts, Ethereum enables decentralized apps which are at the base of DeFi or decentralized finance. Thus Ethereum offers more relative value compared to Bitcoin and other altcoins.
Exploring further, DeFi offers another opportunity where value-oriented, low-multiple, strong cash-flow generating financial institutions exist, with one of them being Silvergate Capital (SI) for example. This crypto bank has been out of favor over recent months but could benefit from the rising rate environment in the same way as the traditional financial sector. However, regulatory risks exist as lawmakers increasingly want to regulate the crypto space having in mind the interest of investors.
In this case, the boom in companies offering cryptocurrency loans and high-yield deposit accounts like for staking USDC and USDT is viewed as disrupting the banking industry and leaving lawmakers scrambling to catch up.
Remaining with financials, DeFi eliminates human intermediaries like brokers, bank clerks, and traders, and instead uses algorithms to execute financial transactions, such as lending and borrowing. As such, it is largely immune to the problems being faced by many Wall Street banks currently. These may have to increase fees to justify raising the bankers’ remunerations in order to hold onto talent in a labor market where inflation has made the cost of living expenses.
Now, as opposed to previous periods of high inflation when there were only banks, in the current one there are also FinTechs now using a higher dose of technology in financial transactions as well as blockchain-based solutions to reduce costs. Consequently, it would be difficult for regulators to remove them completely out of the equation, but, we cannot rule out more stringent rules.
Thinking green, with rising energy costs, crypto miners that are not highly efficient will be gradually pushed out of business. This brings us to another advantage of Ethereum: it is less energy-intensive than Bitcoin. Thus, with more uses as well as being more energy-efficient, it is Ethereum that should eventually benefit from more cryptocurrency demand in the future. For this matter, again consulting the price action, it is ETHE has shown more progress during the last five days when compared to GBTC, with some respite also observed for the wider tech sector (QQQ).
Investing In Long-Term Innovation
I see crypto innovation continuing to accelerate around Ethereum and believe that it remains in its early innings. Volatility will continue to be challenging though, but crypto investors are accustomed to wild fluctuations in prices, and know how to search for opportunities when they occur. At current levels, an investment into Ethereum through Grayscale makes sense.
As for Bitcoin, its future trajectory will depend on the Bitcoin for Corporations panel to be hosted by MicroStrategy’s CEO Michael Saylor on February 1, an event which will also include Block’s (SQ) Jack Dorsey and Silvergate Capital’s Alan Lane.
Finally, it is interesting to note that geopolitical risks like for Russia-Ukraine and China-Taiwan have been historically beneficial for cryptos, despite their typical behavior as risk-on assets.
Disclosure: I/We are long SI. This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.