Historically, the stock market is the greatest wealth creator on the planet. Even though there have been short periods where commodities or housing have outperformed, no other asset has been able to hold a candle to the steady long-term appreciation of equities.
But everything changed when cryptocurrencies came along. The S&P 500's total return (i.e., including dividends) of slightly more than 10% per year since 1981 has been dwarfed by the average annual return of some of the hottest digital currencies.
If you had the foresight and fortitude to invest $10,000 into each of the following three ultra-popular cryptocurrencies five years ago (as of Feb. 24, 2021), you'd be sitting on well over $1 million today.
Bitcoin: $1.15 million
I won't leave you in suspense: Bitcoin (BTC -0.11%), the world's largest cryptocurrency by market cap, is absolutely one of the three. A $10,000 investment in Bitcoin five years ago would have appreciated to roughly $1.15 million today.
Bitcoin has benefited from an assortment of traditional catalysts and brand-name business adoption. In terms of old-school catalysts, optimists continue to tout its 21 million token limit as a hedge against a constantly growing U.S. and global money supply, as well as its growing use among businesses.
More recently, Bitcoin has been boosted by increased acceptance from brand-name companies. Tesla Motors purchased $1.5 billion Bitcoin for its balance sheet, with CEO Elon Musk leading the charge of optimism for Bitcoin on social media sharing platform Twitter. Payment-facilitator Mastercard also announced that it would begin supporting select cryptocurrencies later this year, and Bitcoin will undoubtedly be one.
But there remain a lot of question marks concerning the staying power of Bitcoin's recent move to $50,000. For one, even with more businesses accepting Bitcoin than ever before, Fundera finds that only around 2,300 U.S. businesses out of an estimated 7.7 million with at least one employee accept it as a form of payment.
Additionally, Bitcoin isn't even the best at what it does. As a payments-focused network, Bitcoin can validate and settle payments in an average of 10 minutes. Comparatively, Stellar (XLM -1.14%) can do the same thing with its Lumens coin in a few seconds. Bitcoin has first-mover advantages, but it's unclear if it has staying power.
Dogecoin $1.75 million
The fire being lit under Dogecoin in recent weeks largely has to do with retail investors banding together on social platforms. Both Reddit's SatoshiStreetBets board and Twitter have served as the perfect sharing tools for retail investors to work together to drive the penny-priced Dogecoin higher. Even Elon Musk has gotten in on the action by pumping up Dogecoin on Twitter.
What's worrisome about this move is that there's genuinely no substance behind it. As an example, I might be critical of Bitcoin, but there are identifiable reasons why it's moved higher. For Dogecoin, simple pumping by Musk and retail investors seems to be the only reason it's up over 1,000% in 2021. Dogecoin lacks any true differentiation from other alt-coins and has very limited utility. This is to say that very few merchants are willing to accept it as a form of payment.
If you needed any more proof that Dogecoin should be avoided, just brush up on its origins. It was developed in a matter of hours by two engineers in 2013. They thought it would be amusing to combine two of the buzziest internet topics at the time (cryptocurrency and a Shiba Inu dog meme) into a digital currency.
Suffice it to say, the only people laughing now are those who managed to sell their Dogecoin to an even higher bidder. This isn't an asset that should be in your portfolio.
Ethereum $2.52 million
The top-performing cryptocurrency of this trio over the past half-decade is Ethereum (ETH -0.29%). If you'd invested $10,000 into Ethereum five years ago and sat on your hands, you'd have over $2.5 million in your account today.
The Ethereum growth story revolves around its applications outside the financial space. Whereas Bitcoin, Stellar, and a host of other digital currencies are designed to expedite how payments are transparently and immutably logged, validated, and settled, Ethereum's underlying blockchain offers the potential to reshape supply chains, improve energy-trading platforms, handle real estate or title transfers, or ensure tax regulation and compliance, to name a few possibilities.
What allows Ethereum to stand out is its incorporation of smart contracts. These are protocols agreed upon by parties that help to verify, facilitate, and enforce the negotiation of a contract. For example, if all parties agreed that a certain product should be automatically reordered once 70% of that existing product is sold, a smart contract could execute that order. Because Ethereum isn't tied down to just the financial sector, it may offer greater potential than Bitcoin.
However, enterprise adoption of blockchain hasn't exactly been robust. With brand-name businesses unwilling to make the costly and time-consuming switch to blockchain-based networks, Ethereum's future remains pinned on the hope that companies become more trusting of the technology.
I'm personally a much bigger fan of investing in ancillary cryptocurrency stocks than in digital currencies themselves. But among the three listed here, I believe Ethereum's Ether token has the most convincing backstory and outlook.