Ether And Bitcoin Are Not The Same

Weekly Investor Letter: Macroeconomic Update

By Steven McClurg and Leah Wald

The inordinate thirst of gain that had afflicted all ranks of society was not to be slaked even in the South Sea. Other schemes, of the most extravagant kind, were started. The share-lists were speedily filled up, and an enormous traffic carried on in shares, while, of course, every means were resorted to to raise them to an artificial value in the market. — Charles Mackay, 1841

Charles Mackay, a 19th-century Scottish poet, journalist, and author, wrote about three of the most famous financial bubbles in history: the Mississippi Scheme, the South-Sea Bubble, and Tulipomania in his pinnacle book, Extraordinary Popular Delusions and the Madness of Crowds. The story of Ethereum may become a postscript to this volume.

With Bitcoin’s halving behind us, many speculators in the cryptocurrency trading markets are turning their attention back to the other top alternative coins, and more specifically, back to Ethereum.

The media has touted the superiority of Ethereum’s technology and enticed investors in its native digital currency, Ether (ETH), since Ethereum’s network went live on July 30, 2015. Despite the investor frenzy, Ether has not been able to become an adequate store of value; it has remained purely a speculative instrument.

Ether is a risk-on asset; not an investment.

Digital Tungsten

How can you “store value” in a speculative instrument? An investment cannot be a store of value if it lacks stability. It must be stable enough against future purchasing power that when retrieved in the future it can still be proved predictably useful.

Ethereum does not have one of the greatest value propositions of Bitcoin: predictable scarcity. Instead, the antithesis is the reality. The monetary policy behind Ether issuance is extremely unstable and due to its centralization, there remains an ability to inflate the money supply, such as was seen in the DAO hack in 2016 and diffusing the difficulty bomb, thereby debunking any belief in its ability to be seen as digital gold.

Given market participants do not deem Ether as a suitable monetary asset, then it is more akin to a simple commodity used only for smart contract computation. Therefore, there is no logical reason for an individual or institution to store wealth in it but only to have sufficient amounts for their needs, similar to AWS credits.

Catch 22

Ethereum users need to pay directly for the computational power they use in Ether, known on the network as “gas”. Given you need Ether to power Decentralized Applications (Dapps) and pay developers and miners, transaction costs need to be cheap enough to attract users, and as with all scalable technologies, depreciate in cost to stave off competitive networks.

If you are a trader, you are motivated purely by financial gains. You want the price of Ether to appreciate. However, as the price of Ether increases, it becomes more expensive to use Ethereum. Because the price of gas is high, users drop off, and companies who built on the Ethereum blockchain often go under (often needing to sell Ether to fund their operations), which leads to a depreciation in the price of Ether. When speculators see the signs of this price capitulation, they sell their holdings which further exacerbates the downward pressure. Traders know the phrase “buy the dip” but, on the flip side, there is also “sell the rip”.

Ether needs to be cheap for users yet it needs to appreciate dramatically in order to outperform Bitcoin for speculators. It can’t be both.

Institutional Money

Bitcoin has been correlated to traditional asset classes for the past seven years. There are times of decoupling but in the long-run, the statistical correlation has been clear.

Institutions like family offices that are allocating to cryptocurrencies are predominantly allocating to Bitcoin, due to its clear and understandable narrative, market capitalization, and liquidity (i.e. being able to allocate $5mm without significantly impacting price).

According to a recent survey released by Fidelity, as many as 36% of institutional investors in the US and Europe own crypto assets. 25% of those surveyed stated that they have long-exposure to BTC, whereas 11% have exposure to ETH. Additionally, a majority of the speculative trading volume in cryptocurrency markets has moved away from altcoins to Bitcoin futures in recent years, with the number of institutions buying futures doubling in 2020.

Broad diversification in the cryptocurrency markets is counter-intuitive; virtually all altcoins are correlated to Bitcoin yet Bitcoin has a higher correlation with the equal-weighted S&P index.

Bitcoin acts as a de-facto proxy for the entire cryptocurrency market. Investors are better off taking concentrated bets on Bitcoin, not smaller bets on Ether or other altcoins.

BTC Vs ETH Speculators

Organic demand is driving Bitcoin right now yet seemingly all of the demand for Ether is on margin. Most traders expect Ether to always follow Bitcoin’s price action. However, this has not always been the case and may not be the case for the next bull run as well.

One reason that they are correlated is that they are both risk assets. As an investor, that means that you have the same level of exposure that you already have with Bitcoin but with higher beta with less liquidity, akin to being exposed to small-caps in the stock market.

Before and after the halving there has been a clear de-coupling of Ether and Bitcoin. In the two weeks prior to the halving, Bitcoin’s price rose from below $8,300 to almost hitting $10,000; during this time period, Ether remained relatively stagnated.

While Ether may see periods of significant outperformance against Bitcoin, it is often short-lived due to the propensity of Ether holders to sell for more Bitcoin over multiple hype cycles. Cryptocurrency traders utilize a different strategy and hold a different mentality towards Ether than Bitcoin. Ether traders regularly accumulate Bitcoin “stacking sats” because it is common practice to trade altcoins in order to gain more Bitcoin, given Bitcoin is the primary unit of account. However, Bitcoin investors typically maintain a buy-and-hold “hodl” mentality and strategy, deeming it both a store of value and unit of account.


Unless on-chain scaling succeeds, the utility of the Ethereum network is heavily bottlenecked and users will begin to move to second-layer scaling solutions or the multitude of other competing blockchains.

Ceteris Paribus reported that gas prices on the Ethereum network have quadrupled since the end of April. On March 12th, during the sell-off activity, average gas prices spiked 900% from the day prior. Additionally, yesterday, on June 10th, a user paid $2.6 million gas fee to move $130 in Ethereum (ETH). Less than 24 hours later, after the first transaction for $130 (0.55 ETH) an identical fee amount was processed. Some people in the community have suggested money laundering whereas some experts have determined it was because of a bug. Regardless, this type of dangerous activity decimates trust from users.

Critics may argue that on-chain scaling is problematic in Bitcoin as well. Possibly. However, there is a key difference due to their use cases. For the average hodler of bitcoin, there is less need to conduct frequent transactions, given its ability to serve as digital gold. The average hodler of Bitcoin owns Bitcoin and does not move coins on-chain for months or even years. Therefore paying a high transaction fee every now and then is not a bad trade-off for storing wealth on the most secure public chain in the world. Contrast this with Ether; as a smart contract blockchain, it clearly requires far lower fees to have any form of utility, as the use cases promised by the Ethereum network inherently requires a much larger number of on-chain transactions to be useful.

Network Effects

Ether should be viewed more like data fees on a cellular network, rather than a currency because Ether is charged as the cost to move a unit of data across a network. As with cellular technology, as participants join, the network grows, which improves the value of the service, more data is moved, and cost decrease (this is known as the network effect). This means the cost per unit of data will drop significantly. The average data plan for cell phones was $100/monthly 2011, but in 2012, the average bill was $47/monthly, and now, in 2020, the average bill for an unlimited data plan is $30/ monthly. In 2016, on average a smartphone consumed 1.7 GBs of cellular data per month; that number is projected to reach 8.9 GBs in 2021 and some providers offer more than 1T (1024 GB) of mobile data usage, which falls under the unlimited data plans at $35/monthly.

This matters because in computer networks there exists a trade-off between cost, security, speed, and flexibility. In 2016, Tuur Demeester explained in his Medium piece, “Why I’m short Ethereum (and long Bitcoin)”, Bitcoin’s protocol prioritizes security, to ensure that it can function as a decentralized store of value, whereas Ethereum prioritizes flexibility, compromising on security, speed, and cost. Ethereum developers have attempted to harness the power of network effects (or the demand-side economics of scale) yet by compromising on security, they have bound themselves to an unscalable model prone to hacks and/or self-serving utility-maximizing activities of nefarious actors or Ethereum Killer competitors. In summation, as more users join, the cost of gas increases, the network clogs, there are potential security issues, which decreases the value of the service, leading to poor user experience, and therefore users drop off and move to other blockchains. During that switching process, they often sell their ETH for another coin.

Ether 2.0

The Ethereum 2.0 protocol upgrade, which will change the consensus mechanism to proof-of-stake (PoS), is very complex and has been long delayed (Ethereum has been looking to shift to PoS since 2014). When it does go live, an investor must pay close attention as market narratives will drive the price action. Given historical precedence, there will be numerous setbacks and disruptive issues, leading to periods of significant underperformance.

Furthermore, the difference in the price of Ether 2.0 and Ether itself will lead to market confusion in the short-term, further depressing investor confidence. The perception of Ether being a more speculative asset than Bitcoin will continue to hold true until it reaches maturity (if it does at all). There is a non-zero possibility that in its transition stage, ETC (Ethereum Classic) may see a resurgence in interest as miners are incentivized to keep the PoW chain alive, further splintering a network undergoing an important transition.

This highly fragmented space has created an opportunity for “Ethereum Killers” to compete with Ethereum for the same use cases and has diluted the space across multiple protocols. These Ethereum Killers, such as Cardano and EOS, carry billion-dollar launch values and compete for users’ attention. How can a DApp developer determine which blockchain to build on?

Bitcoin has secured the digital gold narrative and its message to investors has remained unchanged. Ethereum and Ethereum Killers have not been able to create a clean and concise message to investors or consumers and provide a clear point of differentiation from Bitcoin for newcomers to the space.

Investments And Speculations

In The Intelligent Investor, Benjamin Graham wrote: “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

The Bitcoin White Paper built in a progressive vision of a future — a daring solution to replace the world financial order. Bitcoin has continued to develop into this vision, slow and steady, which includes its ability to successfully serve as a store of value and safe haven against certain fast-depreciating currencies. It is possible to invest in Bitcoin because it holds these intrinsic properties. Therefore, an investor can have a reasonable expectation that the money allocated towards the purchase may appreciate over a longer time-horizon.

On the other hand, given Ether’s inability to adequately serve as a store of value, it remains a highly risky speculative instrument. Ether traders look to take profit from its subsequent price changes over a short time-horizon. They chase high returns, coupled with high risk. Visions of digital ingots dance before their eyes.

However, these visions are formed without evidence. Like Ether, they are pure speculation.

Ether is both a poor store of value and a terrible cryptocurrency to speculate on.

Valkyrie Funds

Steven McClurg — CIO
Leah Wald — CEO

Valkyrie is a discretionary global macro investment management firm. By analyzing fundamental macroeconomic, geopolitical, and social factors we are able to listen to the markets and effectively manage risk and generate alpha.

Valkyrie believes that shifts in government economic policies, political climates, currency exchange rates, international trade, international relations, and interest rates impact all financial markets. Utilizing this expertise of the global economy and financial markets, ExI has constructed unique portfolios with a dynamic macro edge that includes exposure to emerging asset classes.

Together, Steven and Leah utilize macroeconomic strategy to structure and manage portfolios.

About Steven McClurg (CIO):

Steven McClurg is the Chief Investment Officer at Valkyrie. He was a managing director at Galaxy Digital, through the acquisition of his previous company, Theseus Capital, where he was a founding partner and CEO/CIO. Steven started his asset management career at Guggenheim Partners, a leading global investment and advisory financial services firm, where he was managing director and portfolio manager, including oversight of Emerging Markets and Sovereign Credit.

About Leah Wald (Portfolio Manager):

Leah Wald is the CEO at Valkyrie. She was a Partner at Lucid Investment Strategies, an asset management firm specialized in investing in macroeconomic trends. Prior to joining Lucid, Leah was at Vital Financial analyzing investment strategies for Japan, Asia, Middle East energy, and global macro strategy. Leah started her career working at the World Bank Group reporting directly to the former Vice President of the Africa Region.

A big shoutout to Aaron Tay for all his help writing this piece.


The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. All Content in this document is information of a general nature and does not address the circumstances of any particular individual or entity. Nothing in the document constitutes professional and/or financial advice, nor does any information in the document constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. The content in this piece does not represent the views of the United States Government.

Valkyrie is a Bitcoin Investment Management Group that makes investing in alternative assets accessible, secure, and smart.