It’s not often that one of the major wirehouses tells clients to pay attention to cryptocurrencies, so when Morgan Stanley Wealth Management introduces a 20-page primer on the cryptocurrency Ether, it is noteworthy.
The report, authored by investment strategist Denny Galindo, makes a case that Ether has enough to distinguish it from other cryptocurrencies to make it worth considering as an investment separate and apart from the far more well-known Bitcoin.
The report emphasizes up front that “we make no recommendation whether to buy or sell Ether,” rather offering the opinion that, “we do not see this asset class disappearing,” and so advising, “the faster we can get educated, the faster we can understand how cryptocurrency may fit into some, though not all, portfolios.”
The report lays out the basics: Ether is the second-largest cryptocurrency after Bitcoin, and new coins are created by a “blockchain.” In Ether’s case, the blockchain is known as Ethereum. And Ether has the same two essential characteristics as Bitcoin. One, the currency is decentralized, created by anyone who sets themselves up with computers to mint coins using Ethereum rather than by a central bank. And, two, it promotes digital “scarcity,” by making some piece of code, such as a file, uniquely identifiable and therefore able to be assigned as property to someone.
The real thrust of the report, however, is how Ether, not Bitcoin, is becoming attached to a larger collection of activities than just payments and store of value, the two functions of Bitcoin. Ether, and the Ethereum blockchain, have attracted the most users as the foundation of an emerging class of software programs called decentralized applications, or “Dapps.”
Ethereum acts as an app store owned by no one, and it makes possible things such as decentralized finance applications, or DeFi, such as banks, exchanges, and even mutual funds that have no central operator but rather are controlled by the Ethereum blockchain’s practically unbreakable encryption. It also makes possible the recently popular “NFTs,” or “non-fungible tokens,” which are copies of a digital work, such as an image, that can be uniquely owned and traded like collectibles.
In reflecting on the question, “Can Ethereum fit in a portfolio,” Galindo simply itemizes the cases for and against. Ethereum, by making a big market for Dapps, has more potential utility, and therefore a potentially bigger market, than Bitcoin. Moreover, there could be some scarcity value as Ethereum moves to what’s called staking, where new coins are created by loans collateralized by existing Ether coins, reducing the float of Ether.
On the negative side of the balance, there are all the same regulatory issues that confront Bitcoin. It’s by no means in the clear with respect to securities law and monetary policy .
In addition, Ether is not a hedge to equities, despite what some might think.
“While Ethereum and Bitcoin have had a 0.70 correlation to one another since December 2018, Ethereum has been nearly twice as correlated to the S&P 500, at 0.26, versus 0.14 for Bitcoin,” the report states. “If these correlations hold, replacing some Bitcoin exposure with Ether might actually make a portfolio more correlated to equities.”
As always with cryptocurrencies, the future seems bright, and the present fraught with risk.
Tiernan Ray is a New York-based tech writer and editor of The Technology Letter, a free daily newsletter that features interviews with tech company CEOs and CFOs as well as tech stock news and analysis.
