Over the past four years, Ethereum has outperformed Bitcoin on key metrics such as risk-adjusted returns and price appreciation.
The volatility of both Ethereum and Bitcoin has decreased, making long-term holdings less risky than before.
Ethereum’s role in the rise of stablecoins and decentralized finance makes it a utility powerhouse.
If you’re managing a portfolio in today’s market and aren’t paying attention to Ethereum, you could be missing out. That’s according to Wall Street firm Fidelity Investments.
Sure, Bitcoin has dominated the attention, but Ethereum has been steadily gaining ground, especially when we talk about performance, volatility, and return metrics.
Is it better than Bitcoin?
When we compare Ethereum’s performance in its most recent four-year cycle (2020-2024) to Bitcoin’s earlier cycle (2016-2020), the former has the upper hand in many areas, indicating that its rewards are stronger than its risks.
For those unfamiliar with these metrics, the Sharpe and Sortino ratios measure risk-adjusted returns. The higher the number, the better the asset compensates for volatility.
Interestingly, this analysis doesn’t even include the staking yield you can earn, which is around 3-5%. Ethereum’s main yield comes from price appreciation, not just staking rewards.
Bitcoin did outperform Ethereum by 8% CAGR during the 2016 cycle, but the gap between their betas (a measure of volatility relative to the broader market) has been narrowing in recent years.
Ether is ripe.
Volatility story: Declining over time
Volatility scares people off, but it is not as scary as it once was. Both assets have become less volatile over time. Sure, there are still wild swings, but volatility has been steadily decreasing.
Fidelity’s Zack Wainwright noted that Bitcoin’s volatility is on par with some of the most traded stocks. ETH is a close second.
Looking at the three-year rolling returns of Ethereum and Bitcoin, long-term holders rarely suffer losses.
If an investor holds Bitcoin for three years, they will experience only 78 losing days over the nine-year period. In comparison, Bitcoin has experienced only 33 losing days since it began trading in 2010.
This is a strong argument for long-term investing. The longer you hold on, the better the returns.
Relevance
Now let’s talk about correlation. People often think that adding Ethereum to a portfolio doesn’t provide much diversification because it is highly correlated with Bitcoin. They’re not wrong, but there’s more to it than that.
Despite major technical upgrades to Ethereum, such as its merger to proof-of-stake in 2022 and the Deneb-Cancun upgrade in 2024, the correlation between the two assets has not changed much. That’s weird, right?
While Bitcoin is still viewed as a store of value, Ethereum’s utility is expanding with the rise of decentralized finance (DeFi) and smart contracts.
Although, due to market performance, the market still trades them as interchangeable currencies.
However, as the assets mature and investors begin to recognize them for what they are — two different solutions to two different problems — the correlation between Ethereum and Bitcoin may decline.
Stablecoins and Ethereum
The biggest difference between Ethereum and Bitcoin is practicality. The Ethereum network has become the preferred platform for stablecoins because transactions require speed and low fees.
Compared to traditional financial systems, Ethereum is miles ahead. Settlement time takes about 15 minutes (the time it takes for 300,000 verifications to sign twice). Now try to get your bank to move money that fast?
Layer 2 solutions are even faster, comparable to credit card speeds. Transparency is another advantage. Every transaction can be audited in real time, all on a public blockchain.
Ethereum layer 1 stablecoins will transfer $3.5 trillion in value in 2023. Bitcoin? $3.4 trillion.
Ethereum’s strength is what it has already built. Critics like to say new platforms will eventually dominate, but they ignore the power of network effects.
Ethereum has spent more than eight years building a very strong ecosystem, and this momentum is difficult to break.
While other platforms may offer better performance in some respects, Ethereum’s established liquidity is a significant hurdle for competitors.
Developers building on Ethereum have access to a massive pool of capital and users — why jump to a new network that doesn’t have the same liquidity?
As of July, Ethereum had 36% of full-time blockchain developers working on its core protocol. If you include Layer 2, that number soars to 80%.
Consider that 80% of the talent in blockchain development is tied to Ethereum.
But Ethereum also has risks. First, its network is more complex than Bitcoin, which brings technical risks.
Ethereum's protocol undergoes frequent changes and other upgrades every year, and there is always the possibility of problems with each upgrade.
Another problem? You don’t actually have to hold ether to invest in Ethereum’s success. Many applications on the network have their own tokens, so capital can flow into the ecosystem without directly raising the price.
If applications end up accounting for the majority of revenue, this could limit Ether’s long-term price appreciation.
