A short guide on how to beat the US equity market with Ethereum

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  • There is a strong case to be made for Ethereum as a substitute for a high-growth tech investment.
  • The outperformance of an optimized equity portfolio that includes Ethereum vis-à-vis a NASDAQ 100 benchmark amounted to around 10%-points per year since 2021 without significantly compromising on overall volatility or max drawdown of the pure equity portfolio
  • We think that the market has yet to fully discount the performance potential of Ethereum (ETH) especially with regards to the potential price impact via the Ethereum ETF trading launch in the US
Ethereum: A High-Growth Tech Investment with Strong Outperformance | ETC Group

Becoming the next "Morningstar"

Equity fund managers are always on the lookout for new investment ideas that may help them to “beat the market”, i.e. outperform their respective equity index/benchmark.

In particular, US equity benchmarks are considered to be one of the best performing and most competitive equity benchmarks worldwide. In recent years, popular strategies have evolved around overweighting high growth quality stocks such as the “FAANGs” or the “Magnificent 7” in order to outperform major US indices like the S&P 500 or the NASDAQ 100.

This report presents a novel approach to structurally outperform a high-growth US equity benchmark like the NASDAQ 100 without compromising too much on risk by adding exposure to one of the fastest growing major cryptoassets – Ethereum.

What is Ethereum?

Ethereum represents a significant evolutionary step in the internet's development, transitioning from Web1 and Web2 to Web3 or the “Internet of Value.”

Since its inception in 2015, Ethereum has developed a diverse ecosystem of decentralized applications (dApps), notably in Decentralized Finance (DeFi).

In general, Ethereum is expected to dis-intermediate and disrupt the following industries:

  • Banking & Payments
  • Social Media / Marketing / Gaming
  • Infrastructure (tokenisation)
  • AI

Ethereum is similar to an app store or tech platform like Android or iOS where decentralized applications can be built on and assets can be transferred as easy as sending an Email.

Ethereum can be considered a new type of asset that covers multiple business reservoirs, extracting value from each via transaction fees/”taxes” from those who build on Ethereum and leverage the security and the tech platform.

Unique to Ethereum is the ability for investors to own a part of its value layer by investing into the Ethereum token (ETH), akin to owning shares in the foundational internet protocol TCP/IP.

Moreover, Ethereum investors can earn a yield like equity dividends by validating transactions – so-called “staking rewards”. In addition, the Ethereum protocol takes a certain amount of tokens out of circulation through its “burn” mechanism which is comparable to a stock buyback in equities.

It is no surprise that Ethereum (ETH) tends to be somewhat correlated with the performance of major equity indices such as the S&P 500 or the NASDAQ 100 but also offers diversification relative to pure equity allocations. For instance, the full sample correlation of Ethereum (ETH) to the S&P 500 is only around 0.31.

Ethereum (ETH): 3-months rolling correlations to major equity indices image 1
Source: Glassnode, Bloomberg, ETC Group

We therefore think that there is a strong case to be made for Ethereum as a substitute for a high-growth tech investment.

Read more in our special report on the investment case for Ethereum.

The numbers

The following chart and table present the performance of a plain-vanilla NASDAQ 100 (NDX) investment, an optimized portfolio consisting of NASDAQ 100 (NDX) and Ethereum (ETH) as well as a pure Ethereum (ETH) investment:

Allocations to Ethereum (ETH) can significantly enhance returns of a pure growth equity portfolio image 2
Source: Bloomberg, Glassnode, ETC Group; Monthly rebalancing; *Compounded Anual Growth Rate; Sharpe Ratio was calculated with 3M USD Cash Index as assumed risk-free rate;
ETH performance includes staking returns; Past performance not indicative of future returns.

As one can see, an equity manager would have outperformed a pure NASDAQ 100 benchmark significantly by allocating approximately a quarter of this equity portfolio to Ethereum (ETH).

Optimal Ethereum (ETH) allocation to a NASDAQ 100 portfolio image 3
Source: Bloomberg, Glassnode, ETC Group;
Optimized weights based on maximized Sharpe Ratio; Sample: Jan 2021 - Today

The outperformance vis-à-vis a NASDAQ 100 benchmark amounted to around 10%-points per year since 2021 without significantly compromising on overall volatility or max drawdown of the pure equity portfolio.

What is more is that Ethereum's “Price-to-Earnings” ratio implied by staking rewards (“dividends”) and burn rate (“buybacks”) is comparatively attractive relative to the Magnificent 7 stocks, despite very high expected returns for Ethereum over the coming 10 years:

P/E Ratio: Ethereum vs US Equities image 4
Source: Bloomberg, Glassnode, ETC Group; ETH P/E-Ratio based on staking rewards and burned supply;
12-months forward P/E for Equities; Data available as of close 2024-07-15

We don't think that the market has yet fully discounted the performance potential of Ethereum (ETH) especially with regards to the potential price impact via the Ethereum ETF trading launch in the US as analysed here.

Bottom Line

  • There is a strong case to be made for Ethereum as a substitute for a high-growth tech investment.
  • The outperformance of an optimized equity portfolio that includes Ethereum vis-à-vis a NASDAQ 100 benchmark amounted to around 10%-points per year since 2021 without significantly compromising on overall volatility or max drawdown of the pure equity portfolio
  • We think that the market has yet to fully discount the performance potential of Ethereum (ETH) especially with regards to the potential price impact via the Ethereum ETF trading launch in the US

Important information:

This article does not constitute investment advice, nor does it constitute an offer or solicitation to buy financial products. This article is for general informational purposes only, and there is no explicit or implicit assurance or guarantee regarding the fairness, accuracy, completeness, or correctness of this article or the opinions contained therein. It is advised not to rely on the fairness, accuracy, completeness, or correctness of this article or the opinions contained therein. Please note that this article is neither investment advice nor an offer or solicitation to acquire financial products or cryptocurrencies.

Before investing in crypto ETPs, potentional investors should consider the following:

Potential investors should seek independent advice and consider relevant information contained in the base prospectus and the final terms for the ETPs, especially the risk factors mentioned therein. The invested capital is at risk, and losses up to the amount invested are possible. The product is subject to inherent counterparty risk with respect to the issuer of the ETPs and may incur losses up to a total loss if the issuer fails to fulfill its contractual obligations. The legal structure of ETPs is equivalent to that of a debt security. ETPs are treated like other securities.

About Bitwise

Bitwise is one of the world’s leading crypto specialist asset managers. Thousands of financial advisors, family offices, and institutional investors across the globe have partnered with us to understand and access the opportunities in crypto. Since 2017, Bitwise has established a track record of excellence managing a broad suite of index and active solutions across ETPs, separately managed accounts, private funds, and hedge fund strategies—spanning both the U.S. and Europe.

In Europe, for the past four years Bitwise (previously ETC Group) has developed an extensive and innovative suite of crypto ETPs, including Europe’s largest and most liquid bitcoin ETP.

This family of crypto ETPs is domiciled in Germany and approved by BaFin. We exclusively partner with reputable entities from the traditional financial industry, ensuring that 100% of the assets are securely stored offline (cold storage) through regulated custodians.

Our European products comprise a collection of carefully designed financial instruments that seamlessly integrate into any professional portfolio, providing comprehensive exposure to crypto as an asset class. Access is straightforward via major European stock exchanges, with primary listings on Xetra, the most liquid exchange for ETF trading in Europe.

Retail investors benefit from easy access through numerous DIY/online brokers, coupled with our robust and secure physical ETP structure, which includes a redemption feature.

Contact

General Inquiries info@etc-group.com
Institutional investors institutional@etc-group.com
Press Inquiries media@etc-group.com

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