In an article featuring recent science research into the cryptocurrency market, Ross Pomeroy offers some researchers’ perspective on why Ethereum tends to be more stable than Bitcoin:
Ethereum might be a better long-term investment than Bitcoin. The cryptocurrency Ethereum ranks second to Bitcoin in terms of popularity, yet two studies have shown that tends to be more stable and a better “safe-haven” investment during difficult economic times. As a team of researchers from Singapore wrote in the journal PLoS ONE, “Although both Bitcoin and Ethereum are digital tokens that serve as decentralised currency based on blockchain technology, there are crucial differences between them. While Bitcoin has positioned itself as an alternative monetary system in the financial market, Ethereum has mostly focused on monetising smart contracts. Also, being the first cryptocurrency, Bitcoin has been widely used for speculative purposes. These traits are reflected in the user composition… where the behavior of Ethereum users is observed to be more stable as these users are more optimistic of the market. In contrast, the behavior of the Bitcoin users tend to fluctuate according to the trend of the market, with a loss of optimism when the market goes down.”
Ross Pomeroy, “Five Things Science Has Told Us About Cryptocurrency” at RealClearScience (February 22, 2021) The paper is open access.
Other science findings were that cryptocurrency consumes a great deal of energy and that its traders are more erratic than traditional investors. But nonetheless cryptos are part of a balanced portfolio and crypto investors display herd behavior.
Now, the “herd behavior” part does not seem like a very big surprise or new idea in the market. But it is interesting that the cryptos are coming to be seen as part of a balanced portfolio. The paper cited is here: “ This study investigates the impact of diversification with the addition of five cryptocurrencies from November 2015 to November 2019 on four traditional asset portfolios. The results show that the diversification increased the returns in most of the cases, and reduced the portfolio volatility in all portfolios, and also provided higher returns as compared to the traditional portfolios for the same level of risk.” (Technol Forecast Soc Change, December 2020, open access).
Some analysts are less enthusiastic. Economics prof Gary Smith wrote here at Mind Matters News, “Investors who buy bonds get paid interest. Investors who buy stocks get paid dividends. Investors who buy apartment buildings get paid rent. People who buy cryptocurrencies get nothing more than the hope that they can sell their cryptocurrency to a Greater Fool for a higher price than they foolishly paid.” (December 16, 2019)
Is crypto really just a flash in the pan? It’s been on a wild ride recently.
February 16, 2021: Bitcoin Price 2021: 8 Big Companies Boosting BTC to $50K
February 23, 2021: Ethereum (ETH/USD) Crushed as Cryptocurrency Market is Overrun by Sellers
Maybe not a bubble. But truly ready for prime time?
You may also wish to read:
How Bitcoin works: The social value of trust It is very interesting to study a technology that doesn’t rely on trust. However, in the end, the most interesting thing it tells us is not how we should build a network but rather the social value of trust in society. (Jonathan Bartlett)
and
Bitcoin is a classic bubble investment. In large data sets, correlations are easy to find. Useful relationships are more elusive. (Gary Smith)