Last week, growth stocks got routed as investors weighed the uncertainty surrounding rising inflation rates and the omicron variant of the coronavirus. Unfortunately, as money was pulled out of riskier assets, many cryptocurrencies also saw sharp declines. In fact, at the time this article was written, the crypto market was worth a collective $2.29 trillion, down 23% from its all-time high on Nov. 10.
However, investors with any experience in the space will know this sort of thing has happened before. In fact, the crypto market lost over 50% of its value between May and August earlier this year, and like last time, heavily leveraged positions appear to have sparked the most recent sell-off. Of course, it's never fun to lose money, but a sharp decline under those circumstances doesn't break the long-term investment thesis.
With that in mind, now looks like a good time to buy some (or some more) of the two largest cryptocurrencies: Bitcoin (BTC -0.08%) and Ethereum (ETH -0.01%). Here's why.
Bitcoin's price currently sits 28% below its all-time high, with a market value of $930 billion. However, it's still the largest and most popular cryptocurrency by a wide margin, and the long-term investment thesis is still intact.
Specifically, Bitcoin's source code imposes a supply limit of 21 million tokens. Similar to gold and other finite assets, that quality makes Bitcoin valuable. Basic economic principles suggest that, when supply is held constant, rising demand leads to rising prices. And Bitcoin's popularity should keep it in high demand for the foreseeable future.
On that note, Fidelity released a study in 2020 suggesting that 36% of institutional investors owned digital assets, with Bitcoin and Ethereum being the most popular holdings. Earlier this year, a follow-up study indicated that 52% of institutional investors owned digital assets, and Bitcoin and Ethereum still ranked first and second. More importantly, 71% of those surveyed said they planned to buy digital assets in the future, up from 59% last year.
That trend bodes well for crypto investors, especially those holding Bitcoin and Ethereum. Going forward, as institutional adoption continues to rise and big money pours into the crypto market, Bitcoin's price should rise too. In fact, fund manager Cathie Wood believes that catalyst will eventually drive Bitcoin to $500,000, implying 920% upside from its current price.
Now looks like a good time to buy this cryptocurrency.
Ethereum's price currently sits 15% below its all-time high, with a market value of $494 billion. However, it's still the largest decentralized finance (DeFi) ecosystem and the second-most-valuable cryptocurrency. And like Bitcoin, its long-term investment thesis is still intact.
Specifically, DeFi products make it possible to lend, borrow, and earn interest on cryptocurrency without involving banks or other financial institutions. And by eliminating those third parties, DeFi products make the financial system more accessible and more efficient. In fact, Wood recently noted that DeFi is "collapsing the cost of the infrastructure for financial services."
Why does that matter? With $165 billion invested in DeFi products, Ethereum is the most popular DeFi platform by a wide margin. For context, Binance Coin ranks second with just $17 billion invested in DeFi. Not surprisingly, Ethereum's edge has captured the attention of institutional investors. In fact, 20% already own Ethereum. And more importantly, DeFi is gaining popularity at a rapid pace.
Over the past year, the total amount invested in DeFi products across any blockchain climbed from $17 billion to $253 billion -- that's a fourteenfold increase in a very short time period. And as that trend continues, Ethereum's popularity means it should command an outsized portion of the market.
Of course, DeFi services aren't free. Investors pay transactions fees using the blockchain's native cryptocurrency. In other words, as DeFi products on the Ethereum blockchain see increased adoption, more users will have to buy the underlying cryptocurrency, driving its price higher. That's why Ethereum looks like a smart long-term investment.