In general, cryptocurrency tends to be a very volatile investment. Between May and July of this year, the collective market value of all crypto assets was cut in half -- in just a few short weeks. But since then, that figure has roared to a new high, reaching $2.67 trillion in October.
That volatility is just one reason that many smart investors have very different opinions on this space. Personally, I think cryptocurrency makes a good addition to an already well-diversified portfolio. In this context, a small position (maybe 5%) isn't all that risky, but you still get exposure to this burgeoning asset class.
With that in mind, here are my top cryptocurrencies to buy and hold for the long term.
Bitcoin (CRYPTO:BTC) was the first cryptocurrency to see widespread adoption. It leans on blockchain -- a decentralized database technology secured by cryptography -- to replace institutions like banks with a distributed network of miners. In short, miners solve complex cryptographic puzzles to validate blocks of Bitcoin transactions, thus ensuring that no one fabricates tokens. And each time a block is validated, the miner is rewarded with Bitcoin, thereby minting new currency. In other words, Bitcoin is a self-sustaining financial system that (theoretically) exists beyond the control of central regulators.
That value proposition has been a significant growth driver. Since its launch in 2009, Bitcoin has become synonymous with cryptocurrency, and it remains the most valuable token, with a market value of $1.1 trillion. To put that in context, all crypto assets collectively have a current value of $2.5 trillion, meaning Bitcoin accounts for 44% of the total.
Going forward, Bitcoin is unlikely to replace the dollar or any other currency; transaction speeds on the network are too slow. However, its supply is limited to 21 million tokens, making Bitcoin a sort of digital gold. And like other assets that exist in limited quantities, Bitcoin's price should continue to rise over time, assuming demand continues to rise.
As a final thought, CEO of Ark Invest Cathie Wood is an outspoken supporter of Bitcoin. During an interview in September, she predicted that its price could surpass $500,000 per token within five years. Wood also noted Ark's increased confidence in Ethereum (CRYPTO:ETH), which happens to be the next topic in this article.
Ethereum was designed to expand on Bitcoin's relatively limited utility. Specifically, the Ethereum blockchain offers far greater programmability, creating use cases beyond payment transactions. For example, the network supports smart contracts, a fancy term for computer code that runs on the blockchain.
Smart contracts define and enforce rules, and they are used to power decentralized applications (dApps). Just as Bitcoin creates a decentralized payments system, decentralized finance (DeFi) apps create an entire ecosystem of monetary services, offering consumers a way to borrow, save, invest, and lend money without going through a traditional bank. In the years since its inception, this ecosystem has become quite sizable, and $103 billion are currently stored in DeFi applications.
However, not all dApps are designed for DeFi services. Just like any other software, these applications offer a range of utility, from gaming and social media to web browsers and productivity tools. Collectively, this decentralized ecosystem could eventually become Web 3.0, a more private and more accessible version of the current internet (Web 2.0).
Like Bitcoin, Ethereum benefits from a first-mover's advantage. As the first widely adopted programmable blockchain, the token that fuels Ethereum (i.e. Ether) is the second-largest cryptocurrency, with a total market value of $468 billion.
As a final thought, there are two reasons to believe Ethereum could appreciate in value over time. First, if DeFi services and dApps on the blockchain continue to gain traction, consumers will be required to purchase more Ether tokens to pay the associated transaction fees. Likewise, although there is no hard cap, the production of this cryptocurrency will slow over time. Assuming demand continues to rise, that should put upward pressure on the price, making each token worth more.