The cryptocurrency market keeps expanding, and that means a lot more choices for investors looking for exposure in digital currencies. Risk is inherent in all types of cryptocurrency, but there are some denominations that should hold up better on a relative basis.
Bitcoin (BTC -0.65%), Ethereum (ETH 0.75%), and USD Coin (USDC -0.02%) are my three largest personal investments in the cryptocurrency space. They also happen to be my top choices in terms of limiting the unusually high risks that come with the wild price swings for the market.
The world's best known cryptocurrency is Bitcoin, and understandably so. It's the one that put digital currencies on the map. With a market capitalization of $1.1 trillion, it is more valuable than the next 40 cryptocurrencies combined. If Bitcoin were a stock there would only be five U.S. publicly traded companies commanding larger market caps.
Bitcoin is the industry standard. Some companies are converting some of their cash reserves to Bitcoin, and a growing number of financial platforms are allowing their customers to trade in the top dog of digital currencies.
There are risks, of course. Bitcoin has been susceptible to sharp spikes and plunges. We've seen it happen this year. Bitcoin peaked in April, only to shed more than half of its value by June. It would go on to more than double, hitting fresh all-time highs earlier this month. If this is the kind of volatility that scares you away, you're not going to want to hear that it has had even bigger crashes in the past. Bitcoin has always bounced back, but that's obviously not a guarantee of future performance.
Bitcoin is also coming under fire this year for the vast amount of energy consumed in mining for the crypto as a proof-of-work platform. It's also expensive to transfer relative to some more nimble digital currencies. It's not perfect, but it's the default crypto as long as it sits atop the market cap throne.
The world's second-most valuable denomination -- with a market cap just above $500 million -- is Ethereum. Despite commanding less than half of Bitcoin's value it overtook the top dog as the most traded crypto on Coinbase Global in the last two quarters.
Ethereum's blockchain tech has the superior functionality when it comes to use cases beyond being merely a store of capital. Ethereum has become a popular choice for decentralized applications -- dApps -- for gaming transactions, advertising, and non-fungible token bidding wars. Bitcoin's recent Taproot update will help it close the gap on some fronts, but Ethereum's already looking ahead to its next major transformation.
Ethereum is migrating away from proof of work to proof of stake, a shift that will make the world's second-most valuable crypto even more energy efficient when it comes to generating new tokens but also help speed up transactions and related costs.
Picking a stablecoin as my third choice for risk-averse cryptocurrencies may not seem fair, but it certainly makes the cut as a digital currency. Coinbase created USD Coin -- more commonly referred to as USDC -- and the leading trading exchange stands by it as coin with a price locked at $1 and pegged 1-to-1 with the U.S. dollar.
Why would you want to own a crypto locked at $1? Coinbase only offers a 0.15% yield on traders holding the stablecoin, but there are far better alternatives elsewhere if you're willing to risk it on another app that will lend, stake, or otherwise use your USDC. Platforms like Celsius Network currently pay more than 10% on USDC. Voyager is rolling out a debit card where you can earn 9% interest on your USDC until you use it for purchase.
Chasing yield on USDC is riskier than just parking it on Coinbase or in a crypto wallet, and even if you're OK with just earning 0.15% on Coinbase you are at the mercy of the platform's financial viability. It's still a low-risk crypto with a decent $37 billion currently in circulation.