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Signs that a global economic slowdown is coming are everywhere these days. In mid-January, the World Bank warned that one will likely occur this year, led by weaker growth in the U.S., Europe, and China. As such, the threat of a recession should be top-of-mind for anyone thinking about investing in crypto this year.
Although it might not be possible to recession-proof your crypto portfolio, there are steps that you can take to make it more resilient. Investing in Ethereum (ETH) could be the best way to accomplish that goal.
But wait, you’re probably asking: Isn’t Bitcoin (BTC) the best crypto to hold in case of an economic downturn? That might have been the belief before 2022, but as events of the past year have shown, Bitcoin is not the hedge against recession that it once was thought to be.
For one thing, 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 be doing. But in 2022, it fell just like every other risk asset as the macroeconomic headwinds intensified.
For 2022, Bitcoin was down nearly 65%. That disastrous showing has prompted a reevaluation of the whole “Bitcoin is digital gold” investment thesis. The point of buying gold is to have a reliable store of value. If Bitcoin can’t retain its value during tough times, it’s difficult to make the case that it is digital gold.
While Ethereum was also down by more than 65% in 2022, the story is much different if you only take into account the final six months of the year. This period of time covers the months heading into The Merge, as well as the three months after. 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 its January rally — is up just 8%. Even if you take into account only year-to-date gains, Ethereum still has the edge.
One reason Ethereum has outpaced Bitcoin of late could be due to its enormous diversification benefits. Although Bitcoin can only be used for online payments, Ethereum has a much broader set of possible use cases. For example, it has become the premier blockchain for decentralized finance (DeFi) applications. Ethereum is also the market leader when it comes to non-fungible tokens (NFTs). Since 2015, the number of uses that 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 that run on Ethereum.
Image source: Getty Images.
Moreover, its blockchain is increasingly being integrated into the tech stacks of the biggest 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 its blockchain in creative but practical ways, such as by tracking shipments and deliveries on a global scale.
All of 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 like a well-diversified conglomerate, with its hands in just about every niche of the blockchain and crypto world. NFTs might not thrive during a recession, for example, but if DeFi does, it will support the value of the token.
One 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 yield of close to 4% by staking your Ethereum. That might not sound like much, but it does provide an additional upside to holding the tokens. In contrast, because Bitcoin is a proof-of-work cryptocurrency, it does not offer the ability to earn staking rewards. If you are buying and holding crypto for the long term, staking Ethereum might be an effective way to boost your returns.
That said, Ethereum might not be able to diversify away the full risk of a difficult macroeconomic situation. Some analysts are predicting that the price of Ethereum might drop below the psychologically important level of $1,000 in 2023, which would be a more than 33% decline from its recent price in the neighborhood of $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 spectrum of economic activities and industries. Even if the U.S. and the world avoid a recession this year, I’m bullish both short term and long term on Ethereum.
Dominic Basulto has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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