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Bitcoin & Ethereum- new digital Gold & Silver?

Updated: Dec 11, 2021

The past 2 months have been really great for the crypto holders. Bitcoin hit an all-time high in December, doubling its previous all-time high in 2017. A rising tide lifts all boats. Hence, most of the other cryptocurrencies have also experienced some forms of FOMO where they see substantial increase in prices. Though most of them are probably still far away from their all-time high set in 2017. Despite not hitting its all-time high set in 2017 yet, there is one cryptocurrency which experienced a huge growth in prices (more so than Bitcoin) in the past year and that is Ethereum, which will also be one of the focus in this article.

If you are thinking this article is about whether you should be buying bitcoin or not, I'm sorry but that is not the focus here. In fact, I have highlighted in a previous article the potential huge benefits you could get from just allocating a very small portion of your portfolio to Bitcoin. That stance hasn't changed and I don't foresee I will be changing it in the future.

Instead, I will be exploring more on what has happened to the prices of Bitcoin, and also Ethereum recently, and also what I will be looking forward to in the near future.

So, let's start off with Bitcoin first.

Bitcoin had its third halving last year. Prior to that, I wrote an article anticipating the potential rise in its price as witnessed in the first two halvings. True enough, the price jumped last year.

When we look at the chart above, we might be thinking that Bitcoin is a pump and dump scheme. However, it couldn't get more wrong than that. Despite the steep peaks and valleys you are seeing in the chart, Bitcoin actually enjoys an CAGR of almost 90% since Sep 2014. This means that you are looking at very good gains in your portfolio even if you just merely hold Bitcoin from Sep 2014 onwards without doing anything- you don't even need to speculate on its price movements. This result is despite the bear market in cryptocurrency which happened from 2018 to early part of 2020. So I personally believe that if your holding time horizon is long enough, Bitcoin is always a good investment (as very small positions in your portfolio).

In the last bull run which happened in 2017, the price of Bitcoin grew ~6 times in a single uptrend (from Sep 17 to Dec 17). In an almost similar fashion in this current bull run, the price of Bitcoin grew ~4 times from Sep 20 to Jan 20. It has recently started to show some pullbacks in prices so it's probably anyone's guess if the all-time high could be broken again.

If we look at the graph (Bitcoin Price % off high) below though, there is something interesting to note.

(Source: YCharts- data accurate as of 10th Jan)

In the previous bull run in 2017, Bitcoin is constantly making new all-time highs throughout 2017 as you could see from the many points of 0% on the graph. In the recent bull run, there are very few of such points. If history is any indication, there might still be chances we could see Bitcoin hitting new highs again in this short period of time. But of course, this is mere speculation and you shouldn't be considering buying bitcoin now if you are looking at very short time horizons.

Now, what's equally exciting (or even more exciting) than Bitcoin since last year is Ethereum. I haven't exactly mentioned Ethereum in my blog so far but I have been observing it for quite some time. Last year, Ethereum had an even greater price growth (~6 times) as compared to Bitcoin (~3 times).

Below is the price chart of Ethereum.

While the Ethereum has a more impressive growth, it is also subjected to deeper drawdowns as compared to Bitcoin. This could be more clearly seen in the graph (Price % off high) below.

(Source: YCharts- data accurate as of 10th Jan)

You can see that Ethereum has suffered deeper drawdowns in the last 3 years as compared to Bitcoin. There are even periods of time when Ethereum has almost a 90% drop in price. While it can have an explosive growth, this aggressiveness can happen in the other way too. (This brings back the point to never allocate too much of your portfolio to a cryptocurrency- imagining losing 90% of your net worth).

Despite its explosive growth, Ethereum did not surpassed its previous all-time high set in 2017 until yesterday (19th January). This leads many to believe that there is a good chance that there is still some room to grow for its price in the very near future given what happened to Bitcoin after it breaks its all-time high. This is of course again an interesting observation (and also a speculation).

You might be wondering which is a better cryptocurrency to own in this case. Should it be Bitcoin which has less extreme drawdowns or Ethereum which has a more explosive growth?

In this Twitter post by an analyst who's covering Bitcoin, he has shown that the Sharpe Ratio of Ethereum seems to be lesser than that of Bitcoin most of the time (or at least two-thirds of the time). Ethereum also has less of a history as compared to Bitcoin and hence there is probably not too sufficient data to draw a promising conclusion. Nonetheless, I would think this is probably still some good information to know.

I couldn't help but relate the price movements of Bitcoin and Ethereum to be akin to that of Gold and Silver. Silver tends to have wider movements than Gold. In bear markets, the price of Silver drops more than that of Gold. In bull markets, the price of Silver rises more than that of Gold. This is very similar to what we are seeing in Bitcoin and Ethereum too. Since there are many people who are beginning to think of Bitcoin as the new digital gold, I think we could probably also argue that Ethereum could be the new digital silver by the same logic.

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