Cryptocurrencies have had a whirlwind of a year so far. Between reaching record-breaking highs and then crashing a few months later, they've experienced a roller coaster of ups and downs.
Many of the major cryptocurrencies -- including Bitcoin (BTC -1.21%), Ethereum (ETH 0.29%), and Dogecoin (DOGE 0.45%) -- are still in a slump. Over the last two months, the price of Bitcoin is down nearly 35%, Ethereum has fallen by nearly 50%, and Dogecoin has dropped by close to 60%.
However, if you've been waiting to invest, now might be a smart buying opportunity. Market downturns can be a good chance to "buy the dip" and invest when prices are at their lowest.
Not all cryptocurrencies are created equal, though, and some are a better investment than others. Between Bitcoin, Ethereum, and Dogecoin, which option is best for you? Here's what you need to know.
Created in 2009, Bitcoin is one of the oldest cryptocurrencies. It also has the most name recognition, which gives it an advantage over its competitors, and it's been referred to as "digital gold" because there is a limited supply of tokens that can be created. Its supporters believe that scarcity will increase Bitcoin's value over time.
Also, while cryptocurrency is still far from being widely accepted by merchants, Bitcoin is more popular among sellers than its competitors. This also gives Bitcoin a leg up, because gaining widespread adoption will be key to surviving over the long term.
There are downsides to Bitcoin as well, however. For example, it is incredibly energy-intensive. The Bitcoin mining process uses more energy than the entire country of Austria, according to data from the University of Cambridge, and that has many investors and regulators concerned about Bitcoin's impact on the environment. If it doesn't find a way to become more energy efficient, that could pose a threat to its future.
Ethereum is the second most popular cryptocurrency behind Bitcoin, and it also has its advantages and disadvantages.
Its biggest advantage is the Ethereum blockchain itself. The blockchain allows developers from all over the world to build applications on the technology, which creates utility outside of cryptocurrency alone. For example, non-fungible tokens (NFTs) and decentralized finance both use the Ethereum blockchain. If those applications succeed, Ethereum will benefit as well.
All of these applications may also require the use of Ether, Ethereum's native token. So if any of Ethereum's blockchain solutions eventually become mainstream, Ether could become a dominant form of cryptocurrency.
The downside to Ethereum is that its future is uncertain. Blockchain technology is still relatively new, and nobody knows whether it will eventually become widely accepted or not. If it doesn't, it will be tough for Ethereum to compete with Bitcoin.
Dogecoin rose to fame earlier this year after it gained a following among retail investors and celebrity billionaires like Elon Musk and Mark Cuban. Despite its record-shattering returns, Dogecoin is by far the riskiest cryptocurrency of the three.
For any cryptocurrency to survive over the long run, it needs to have a real-world purpose. Dogecoin, though, doesn't have much of a competitive advantage in the industry.
The vast majority of merchants do not currently accept Dogecoin as a form of payment, and there are several other cryptocurrencies with lower transaction fees than Dogecoin. The primary reason its price has exploded over the past several months is because it gained a large fan following. But once those investors inevitably move on to something new, Dogecoin's price will plummet.
Which cryptocurrency should you choose?
First, it's important to consider whether crypto is the right investment for you. Regardless of which option you choose, cryptocurrency is a highly speculative and risky investment. Nobody can predict whether it will eventually become mainstream or fall by the wayside, and that uncertainty can be dangerous.
If you do decide to invest in cryptocurrency, think about how much risk you're willing to tolerate. Right now, Bitcoin may be the "safe" option among the three, while Ethereum has potential for significant gains -- though it is riskier. Dogecoin is the riskiest and more akin to gambling than investing.
Regardless of which one you choose, make sure you've weighed your options carefully. Cryptocurrency isn't right for everyone, but by doing your research, you can limit your risk as much as possible.