Cryptocurrency is one of the hottest investments of the year, but it can also be risky. It's still highly speculative at this point, and nobody can be certain whether it will succeed over the long run.
That said, some cryptocurrencies are riskier than others. To be clear, cryptocurrency, in general, is still riskier than investing in stocks. The stock market has a long history of earning consistent growth over time, while crypto is still a relatively new investment. Cryptocurrency can also be extremely volatile, so if you choose to invest, be sure to brace yourself for a rollercoaster of ups and downs.
For that reason, cryptocurrency won't be the right investment for everyone, and that's OK. If you're extremely risk-averse, you may be better off investing elsewhere. But for those who want to dip their toes into the crypto waters while avoiding as much risk as possible, there are a few options that may be right for you.
One of the oldest cryptocurrencies in existence, Bitcoin (BTC -2.35%) is a relatively safe option when it comes to investing in crypto. It has the most name recognition, and it's also the most widely accepted among merchants. Widespread adoption will be key to cryptocurrency's long-term success, and Bitcoin is a step ahead of its competitors in that regard.
Bitcoin is also far and away the most popular cryptocurrency among investors. It currently has a market cap of more than $1.2 trillion, while Ethereum (ETH -2.70%), the second most popular cryptocurrency, sits at around $564 billion.
One downside to investing in Bitcoin is that it's not the most environmentally friendly cryptocurrency. The Bitcoin mining process uses a proof of work (PoW) protocol, meaning it involves high-powered computers solving increasingly complex puzzles to verify transactions. That process uses an immense amount of energy, and some critics believe Bitcoin will need to find a way to reduce its energy usage to be successful over the long run.
Ethereum is the second most popular cryptocurrency behind Bitcoin, and although it isn't as widely accepted as a form of payment as its competitor, Ethereum shines in other ways.
The Ethereum blockchain is home to many different decentralized applications (dApps), including non-fungible tokens (NFTs), decentralized finance (DeFi), and smart contracts. The blockchain is also open-source, meaning developers from around the world can build new applications on Ethereum.
Because of these applications, Ethereum itself does not necessarily need to become a widely adopted form of payment to compete with Bitcoin. If any applications become mainstream, Ethereum will benefit from it.
In addition, Ethereum is currently transitioning from a PoW protocol to a proof of stake (PoS) protocol, which will make it far more energy-efficient. In fact, once the transition to Ethereum 2.0 is complete, it's expected that it will use around 99.95% less energy. This could give it a major advantage over cryptocurrencies like Bitcoin that still use an energy-intensive PoW protocol.
Cardano (ADA -3.45%) is a newer cryptocurrency that aims to solve problems plaguing its competitors. It was created by one of the co-founders of Ethereum, and the two cryptocurrencies share many advantages.
For example, Cardano also supports applications on its blockchain, including NFTs and smart contracts. Unlike Ethereum, however, Cardano already uses a PoS mining protocol. This gives Cardano an immediate advantage, as it will likely take months before Ethereum 2.0 is fully rolled out -- and there could be growing pains in the process.
That said, Cardano is still a relatively risky cryptocurrency, primarily because it's newer. It doesn't have the same name recognition as Bitcoin, and its blockchain isn't as popular for applications as Ethereum. It does have potential, but only time will tell whether it's strong enough to stay competitive over the long term.
Cryptocurrency may be a risky investment, but it can also be rewarding -- as long as you're strategic about where you invest. By doing your research and investing in cryptocurrencies with the most long-term potential, you can limit your risk while maximizing your earnings.