The cryptocurrency market recently crossed $2.7 trillion -- a new all-time high. Just three years ago, the collective value of all cryptocurrencies was just $220 billion, meaning the market has grown at an annualized 132% over that period. That incredible figure is severalfold higher than popular stock market indices like the S&P 500 and the NASDAQ Composite.
Of course, cryptocurrency tends to be more volatile. But assuming you have an emergency fund, a well-diversified portfolio, and a few decades until retirement, I think it makes sense to put a small percentage (maybe 5%) of your money into this emerging asset class. Building on that idea, here are two cryptocurrencies that look like they will reward long-term investments.
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1. Ethereum
Ethereum (ETH 0.46%) is a programmable blockchain. Developers can deploy code on the network to create smart contracts, a fancy name for computer programs that automatically run when certain conditions are met. Those smart contracts make it possible to build decentralized applications (dApps) like social networks, video games, and decentralized finance (DeFi) services.
In all cases, those products don't require regulatory oversight. So, you could use a DeFi application to lend, borrow, or save cryptocurrency without going through a traditional bank. And by eliminating the intermediary, DeFi services have the potential to cut costs and expand access to the financial system.
That's great, but there's a problem. The Ethereum blockchain currently supports just 30 transactions per second (TPS), far short of the 76,000 TPS that Visa can theoretically handle. That means, in its current form, Ethereum lacks the scalability to support the widespread adoption of DeFi services.
To solve that problem, the network is in the middle of an upgrade. In early 2022, Ethereum will switch consensus mechanisms, moving from energy-intensive proof of work to eco-friendly proof of stake, a methodology that distributes mining power based on a validator's stake in the network. Later in the year, 64 shard chains will be added to the core Ethereum blockchain, boosting its throughput. To clarify, those shards are additional blockchains that will spread the collective database over more infrastructure, reducing network congestion.
Once all is said and done, Ethereum will theoretically support 100,000 transactions per second, in turn, supporting widespread adoption of dApps and DeFi services.
So what? Those dApps and DeFi services require computing power, and that costs money. So, users must pay transaction fees to access those products, meaning they have to buy the cryptocurrency. If Ethereum's ecosystem of applications and services sees widespread adoption, the resultant demand for the cryptocurrency should drive its price higher. That's why Ethereum looks like a smart long-term investment.
2. Polkadot
Polkadot (DOT -3.31%) is similar to Ethereum 2.0. The platform comprises a core blockchain, known as the relay chain, as well as permanent side chains (parachains) and dynamic side chains (parathreads). Each of those side chains is connected to the relay chain, which itself is responsible for securing and orchestrating the entire ecosystem.
What's the point? Parachains (or parathreads) serve the same purpose as shard chains in Ethereum 2.0, meaning they can support an array of smart contracts, DeFi services, and dApps while enabling data transfer between different internal networks. What's more, Polkadot also supports bridges, meaning the relay chain can interact with external blockchains such as Bitcoin or Ethereum.
As a caveat, parachains are not live yet, so this functionality is somewhat theoretical. However, the first parachain slots will be auctioned on Nov. 11, 2021, an event that will allow blockchain project developers to bid for slots on the relay chain. That means Polkadot is on the precipice of an enormous upgrade. Initially, the platform will support 20 shards per block but gradually scale to 100 shards per block over time. At that point, creator Gavin Wood believes Polkadot will support one million TPS, meaning its throughput could surpass that of any other blockchain, even Ethereum 2.0.
However, there's still one more variable to consider: how quickly transactions are finalized. TPS refers to throughput, whereas finalization refers to how quickly transaction data can be permanently added to the blockchain. Transactions on Ethereum 2.0 will reach finality in approximately six minutes, but Polkadot's consensus mechanism will support finality in 12 to 60 seconds. In short, Polkadot promises all the functionality of Ethereum 2.0 but with greater processing power and faster finalization. That's why this cryptocurrency could be a smart buy right now.
