Two Undervalued Assets
I'm Buying Ethereum and International Stocks
I've been working on this article for a few months. I apologize for not publishing it sooner when these assets were cheaper.
Bitcoin has been outperforming Ethereum for several years. American stocks have overshadowed international stocks for decades. I believe both situations will change going forward. In this article, I present my arguments for these reversals, and their connection to the rise of AI.
Why International Stocks Underperformed
The U.S. makes up 67% of global stock market capitalization despite being only 27% of global GDP. If you value stocks by their earnings (price-to-earnings ratio), American stocks are nearly twice as expensive as other countries. Many others have noticed this disparity, but there are good reasons people have paid a premium for American stocks, including a run of recent incredible productivity growth, among numerous other factors. Basically, people pay more for stocks they expect to grow more, and the habit of assuming American outperformance has become quite entrenched. The articles linked above tell the story well, so I'll let them explain.
Why Ethereum Underperformed
For completely different reasons, Ethereum has underperformed Bitcoin. A chart of Ethereum's market cap vs bitcoin shows that at one point Ethereum was worth 80% of bitcoin's market cap. A couple years ago it was still around 50%. Recently it fell below 12% before bouncing back a bit. If Ethereum were to simply return to 50% of bitcoin's market cap, one ETH would be worth ~$9000 (up from $2800 today).
One reason for this divergence was hype around bitcoin. Bitcoin is easy to explain compared to Ethereum, and bitcoin has become a kind of "meme stock". Building up a bitcoin treasury became an easy way for companies to get free hype and publicity for their own stock, which created a positive feedback loop for the price of Bitcoin, with companies using their increased stock price to buy more Bitcoin, further driving up the price. I love Bitcoin, but the idea of joining the crowd in a meme investment makes me very nervous.
Ethereum, on the other hand, declined in price for numerous reasons, among them:
The project is extremely ambitious and dizzyingly complicated, making it difficult to explain to a casual investor.
As an asset that pays interest via staking, and as the primary platform for decentralized finance, Ethereum attracted a lot of ire from regulators.
Many other projects compete against Ethereum
Ironically, many say Ethereum is a victim of its own success, the devs having made the platform too cheap to use via layer 2 protocols, leading to some people calling Ethereum "completely dead" as an investment despite an explosion in activity.
I believe there is another reason for Ethereum's decline, which I don't see anybody talking about: the rise of AI. The vision of Ethereum attracts a certain type of techno-optimist who wants to be investing in the bleeding edge of a world-changing project. Many of those investors will have reallocated much of their capital to AI-related investments, because AI is the "new hotness". Ethereum, in comparison, seems like yesterday's news.
Why International Stocks Should Outperform
The simplest reason to expect international stocks to do better than American stocks is that they tend to outperform periodically in the very long history of these assets, and reversion to the mean is one of the most fundamental principles of investing.
However, I prefer explanations driven by fundamentals. I have written previously about how the decline of using dollars in trade will eventually have catastrophic effects for the US economy, and that is certainly part of my calculus for buying international, but there's no way to know how long that risk will take to materialize. It might not even happen in my lifetime.
In the much nearer term, I argue that Artificial Intelligence will help international companies more than American companies. In the article linked above, I argued that despite all the hype, AI remains vastly under-hyped, and has the potential to increase productivity exponentially. The only question for me is what to buy to best benefit from that growth . . .
The obvious answer is to buy stock in companies working on AI, and many people have done that. However, outside of an "AI crash" where values fall a lot, I don't see this as a good investment. Everybody has an AI model, and none of them have anything like an insurmountable lead. This means that despite the eye-watering sums being spent on R&D, AI is probably going to be a commodity, cheaply available to everyone. That's bad news for AI companies, but great news for literally everyone else in the world (assuming AI remains benevolent).
If the value of AI largely does not go to AI companies, that means it goes to the stock market as a whole. However, it won't be evenly beneficial. Just as AI helps novice programmers more than expert programmers, I expect AI to help the laggards (international stocks) more than American stocks, because they have a lot more room to improve, especially in regards to worker productivity.
Partnering with AI turns me into a mid-level expert on just about every topic and skill set. It allows me to speak any language. It can make any Joe on the street into a decent computer programmer, allowing anyone to casually do tasks that formerly required years of training or hiring a VERY expensive software engineer. As much as people complain about hallucinations, I rarely see them in my own work, and when I do they are usually easy to spot. The true hallucinators are those who think that AI represents anything less than an economic singularity.
Who benefits more from AI-powered language fluency? Yes, it helps Americans who already speak the global language of business, but it's far more transformative for non-English speakers now able to participate in global commerce without months of study. Who gains more from becoming a mid-level expert at everything? The American professional may refine their niche, but someone with basic education can now write like a college graduate and handle white-collar tasks that were once out of reach. AI helps decode regulations and lowers startup costs which eases cultural barriers around risk. For every obstacle facing international entrepreneurs, AI helps.
After I made these realizations a few months ago, I bought index funds of international stocks, and they have indeed outperformed, and I expect they will continue to do so for some time.
Why Ethereum Should Outperform
A lot has been written about why Ethereum is great. If you don't already know, go check it out. I won't go over the selling points except to say that it has achieved widespread adoption. One way to measure that is a metric known as "total value locked (TVL)", which shows that people use Ethereum way more than other protocols to store assets used in decentralized finance.
Looking at the TVL graph linked above, it doesn't seem like Ethereum is under much serious threat from competitors (although that could change at any time). The most dangerous competitor at the moment is probably Solana, which currently seems to be mostly focused on meme coins.
Regarding regulatory challenges, cryptocurrency voters have emerged as a real force in elections. I wrote an article last year encouraging crypto holders to vote as a bloc, and I am pleased that our unity seems to have directly caused regulators to back off (although I can't say I approve of all the candidates that wave our flag).
So what about the "problem" that Ethereum has become too cheap to use? Layer 2 protocols have lowered the cost of Ethereum transactions to almost nothing, and some argue that the economic benefits of widespread Ethereum adoption aren't flowing to Ethereum holders. I find this argument preposterous. Do people really think that Ethereum developers will never find a way to benefit from the ballooning value of projects built on their platform? Giving users a free ride in order to shut out competitors is a time-honored strategy to dominate a market and build up insurmountable network effects. The Ethereum base layer wants as much economic activity as possible, and it doesn't need to "tax" that activity until it has an insurmountable lead. Nearly every internet giant printing billions today started with similar strategies of subsidizing growth. Nobody expected them to be free forever. Ethereum devs are playing the long game, and Ethereum will eventually benefit from all the activity it supports.
I think Ethereum is a great investment and currently way undervalued. Ethereum has been declining against bitcoin for years, but the reasons for that are not existential threats (competitors, broken code), nor are they deadly (regulators). Instead, we have a widely used innovative protocol which isn't currently in a hype cycle, and is building for long term value. I'm glad to be along for that ride.
Edit: I published this article and literally the next day a Long, Thoughtful PDF was published which makes my arguments about Ethereum much better than I did, and with many additional arguments I did not address above. I highly recommend checking out ethdigitaloil.com to see it.
Stay Safe
I hope it's obvious that I'm talking about assets that I own and am enthusiastic about, and I hope others can benefit from following my lead, but there are no guarantees, especially with volatile cryptocurrency assets. Anything can happen. I think I am right in the long run, but to quote Keynes, "in the long run we are all dead" and even if the market is pricing assets irrationally, "markets can remain irrational longer than you can remain solvent"
Also, regarding Ethereum, the new ETFs make it super easy to buy, and for large buyers, ETFs are safer from a physical security standpoint (lower kidnapping risk). I never put much money in crypto ($200 back in 2011), and although that was a great investment, I've had to spend most of that money over the years, which means I'm probably one of the poorest early adopters of crypto (I still need my day job). Still, being a public figure in the crypto space has been dangerous lately, which has led me to transition out of self custody in favor of using ETFs for 95% of my crypto. It means I miss out on staking rewards (hopefully ETFs will remedy that soon), and I have extra risks ("not your keys not your coins"), but I prefer those financial risks to the physical risks of self custody.