It's been an exceptionally volatile year for equities due to the unprecedented uncertainty created by the coronavirus pandemic. Nevertheless, it'll probably go down as a largely positive year for investors. After losing more than a third of its value during the first quarter, the benchmark S&P 500 is now on track to deliver gains of more than 14% for the year.

But most equities can't hold a candle to what cryptocurrencies have done in 2020. After beginning the year with an aggregate digital-currency market cap of $191.5 billion, the combined valued of more than 7,900 cryptocurrencies as of Dec. 9 topped $551 billion. This 188% year-to-date gain in total market value has been largely fueled by bitcoin.

Having recently eclipsed a new all-time closing high, the world's largest digital token by market cap is up approximately 153% on a year-to-date basis. Bitcoin has benefited from multiyear lows in the U.S. dollar (some investors view bitcoin as an intriguing store of value) as well as an aversion to cash during the pandemic. We were already witnessing a shift toward cashless payments prior to COVID-19. The pandemic has merely accelerated this ongoing trend.

A fanned stack of one hundred dollar bills transforming into digital currency.

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Yet, a broader look at the crypto space shows that a number of popular digital currencies ran circles around bitcoin in 2020, based on year-to-date performance.

NEM: Up 535%

Among the largest and most popular digital tokens, NEM's XEM token has been one of the top performers. Its 535% year-to-date gain more than triples up what bitcoin has delivered for its investors in 2020.

What sets NEM apart from other cryptocurrencies is its Smart Asset System, which allows its blockchain technology to be easily customized to meet a business' needs. For example, swapping out traditional payment platforms for blockchain will likely be time-consuming, costly, and burdensome. NEM's architecture helps to resolve this problem by allowing its blockchain to be open and decentralized or permissioned and private, depending on what a business desires.

NEM's Smart Asset System can also be used as an authentication service with cryptographic signatures. This is a fancy of way of saying that actions can be permissioned ahead of time to empower Internet of Things (IoT) devices to operate at peak efficiency.

NEM has announced numerous partnerships over the past couple of years. But none has garnered more buzz than its partnership with StakeHound, which culminated in the launch of stakedXEM in the decentralized finance ecosystem on Ethereum on Monday, Dec. 7. 

A person holding up a physical gold coin with the word Ethereum stamped on it.

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Ethereum: Up 321%

Speaking of Ethereum, the Ether token has more than doubled up bitcoin's gain in 2020. But unlike bitcoin, which is valued for its transactional appeal, the optimism surrounding Ether has everything to do with its underlying blockchain technology.

The reason Ethereum's blockchain is so popular is its usage of smart contracts. Instead of its underlying ledger bound to currency-only transactions, Ethereum's smart contracts allow for the management of agreements between two users. Similar to how NEM's Smart Asset System allows actions to be taken by IoT devices, Ethereum's smart contracts allow for actions to occur when certain conditions are met between two parties. The use of smart contracts could completely revolutionize how companies manage and track their supply chains.

Ethereum is also being bolstered by the Enterprise Ethereum Alliance (EEA). The EEA has over 200 well-known companies as partners that are looking to drive adoption and collaborative opportunities for Ethereum's blockchain. These include money-center giant JPMorgan Chase (JPM -1.21%), which launched its Ethereum-backed Interbank Information Network (IIN) in 2018. JPMorgan's IIN is a scalable, peer-to-peer network that's aiming to reduce hurdles in cross-border payments and allow for the seamless sharing of information between banks. 

Beyond currency-only transactions, Ethereum's blockchain is arguably generating the most buzz.

A person holding a small glowing lock, with superimposed connected dots symbolizing blockchain technology.

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Cardano: Up 307%

Crypto investors have also seen Cardano's Ada token blow bitcoin out of the water this year. Ada's 307% ascent more than doubles the return of the world's most popular digital token.

To keep with the ongoing theme here, investors appear to be really excited about the ongoing reinvestment in developing Cardano's blockchain. In late July, the Cardano team launched Shelley, which will allow more nodes to be run by network participants. In other words, Shelley is designed to vastly increase decentralization of the network, presumably making it more secure. 

Engineers are also hard at work on Goguen and Voltaire, which are the respective next steps in differentiating the Cardano blockchain. Goguen is especially important, as it'll bring smart contracts to the network. The goal of developers is to create a smart contract that's accessible to a wider audience of businesses and subject matter experts (i.e., those without an understanding of programming). Beyond improved functionality, Goguen should also support new tokens on its platform. 

A small stack of physical gold bitcoins in a mouse trap.

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A word to the wise

While crypto gains in 2020 are bringing back vivid memories of 2017 and 2018, people who believe cryptocurrency is a good investment need to understand the incredible risks they're taking on by putting their money to work in digital tokens.

One of the biggest issues is that blockchain adoption is far from a certainty. Blockchain technology finds itself in a Catch-22. It needs businesses to test-drive the technology to prove its efficacy and encourage adoption. However, no businesses are willing to make the broad-scale switch to blockchain without it being a proven technology in the real world. For now, blockchain remains a novel idea that's still a long way away from having game-changing potential for financial and nonfinancial institutions.

Investing in cryptocurrencies also involves tax and legal risks. The Internal Revenue Service expects digital token owners to pay capital gains tax. If you're an investor or trader in digital currencies, this makes sense. But if you're using bitcoin to buy other goods or services, you'll still need to pay capital gains tax based on the current value of bitcoin tokens at the time of your transaction. Additionally, should your tokens be stolen by hackers, the Securities and Exchange Commission can do little to recover what's lost.

Investing in crypto looks to be nothing but a dart throw, and it's quite possible another bubble is brewing.