Looking to diversify your crypto portfolio? Ethereum may be a better buy than Bitcoin

Signs of a global economic downturn are everywhere these days. In mid-January, the World Bank warned that it was likely to happen this year, led by weaker growth in the US, Europe and China. As such, the threat of a recession should be top of mind for anyone thinking about investing in crypto this year.

While it may not be possible to recession-proof your crypto portfolio, there are steps you can take to make it more resilient. To invest in Ethereum (ETH -1.50%) may be the best way to achieve that goal.

Bitcoin is losing its luster

But wait, you’re probably asking: Isn’t it Bitcoin (BTC -0.01%) the best crypto to hold in case of an economic downturn? That may have been the belief before 2022, but as the events of the past year have shown, Bitcoin is not the hedge against recession it was once thought to be.

First, 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 just like all other risk assets as macroeconomic headwinds intensified.

For 2022, Bitcoin was down almost 65%. The disastrous showing has led to a re-evaluation of the entire “Bitcoin is digital gold” investment thesis. The point of buying gold is to have a reliable store of value. If Bitcoin can’t hold its value in tough times, it’s hard to argue that it’s digital gold.

While Ethereum was also down more than 65% in 2022, the story is much 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 how valuable Ethereum could become. Since June 30, Ethereum is up more than 45%, while Bitcoin – even with the January rally – is only up 8%. Even if you only consider year-to-date gains, Ethereum still has the edge.

Diversification benefits

One reason why Ethereum has recently outperformed Bitcoin may be due to its huge diversification benefits. While Bitcoin can only be used for online payments, Ethereum has a much wider set of possible use cases. For example, it has become the premier blockchain for decentralized finance (DeFi) applications. Ethereum is also the market leader in non-fungible tokens (NFT). Since 2015, the number of uses people and businesses have found for Ethereum has exploded. There are now metaverse worlds built on top of Ethereum, blockchain games built on Ethereum, and new decentralized applications running on Ethereum.

Image source: Getty Images.

In addition, the blockchain is increasingly integrated into the technology stacks of the largest companies in the world. 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 top of the Ethereum blockchain. The Enterprise Ethereum Alliance now has more than 200 member organizations actively working to integrate their blockchain in creative yet practical ways, such as tracking shipments and deliveries on a global scale.

All this integration with the real world should make Ethereum much more resilient to the ups and downs 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 may not thrive during a recession, for example, but if DeFi does, it will support the value of the token.

Bet out rewards

An additional factor in Ethereum’s favor is the ability of token holders to earn passive income via staking. On popular cryptocurrency exchanges, you can now earn an annual return of close to 4% by staking Ethereum. It may not sound like much, but it adds an extra upside to holding tokens. In contrast, because Bitcoin is a proof-of-work cryptocurrency, it does not offer the ability to earn stake rewards. If you buy and hold crypto for the long term, staking Ethereum can be an effective way to increase your returns.

Time to Buy Ethereum?

That said, Ethereum may not be able to diversify away the entire 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 be a decline of more than 33% from its recent price near $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 get access to the full diversity of the Ethereum ecosystem, combined with the diversification that it offers across a full range of economic activities and industries. Even if the US and the world avoid a recession this year, I am positive both short and long term on Ethereum.