- 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
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
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
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
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
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
Informazioni Importanti
Le opinioni espresse rappresentano una valutazione del contesto di mercato in un determinato momento e non costituiscono una previsione di eventi futuri né una garanzia di risultati futuri. Sono soggette a ulteriori discussioni, integrazioni e modifiche.
Le informazioni contenute nel presente documento non sono intese a fornire, né devono essere considerate, consulenza contabile, legale o fiscale, né raccomandazioni di investimento.
Nulla in questa comunicazione deve essere interpretato come una raccomandazione, un’approvazione o un incentivo a intraprendere attività di investimento. Si invita il lettore a richiedere, ove opportuno, una consulenza legale, fiscale o finanziaria indipendente.
Per ulteriori informazioni sul contenuto di questa ricerca, si prega di contattare europe@bitwiseinvestments.com.
