During the past year, the cryptocurrency market has surged 240% to $2.2 trillion. That's even more impressive in light of the recent sell-off. Since peaking at almost $3 trillion in early November, the market has fallen by more than a quarter. Unfortunately, that type of volatility is common when dealing with crypto assets. Token prices tend to fluctuate wildly, often without apparent reason.
Regardless, cryptocurrencies have undoubtedly created tremendous wealth, and that trend is set to continue. Digital assets are now gaining traction with wealth managers, public companies, and other institutions. In the years ahead, that dynamic should push the price of Bitcoin (BTC +0.75%) and Ethereum (ETH +1.45%) higher since they currently rank as the two most widely held digital assets among institutional investors.
Here's what you should know.
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1. Bitcoin
The investment thesis for Bitcoin is straightforward. First, it's the most popular cryptocurrency. Since its debut in 2009, Bitcoin has achieved a market value of almost $900 billion, and it accounts for about 41% of the entire crypto market. Adoption by fintechs such as Block (formerly known as Square) and PayPal have only reinforced that advantage, making it easier for consumers to buy Bitcoin.
Second, Bitcoin is a finite asset. Its source code stipulates that only 21 million coins will ever exist, and roughly 90% of that total is already in circulation. Moreover, because an algorithm controls the speed at which Bitcoin can be mined, the last coin won't be minted until the year 2140. That means the supply will be fairly stable during the next century. The laws of supply and demand suggest that when supply is held constant, rising demand correlates with rising prices.
That brings me to the third and final point. Demand for Bitcoin is gaining momentum among institutional investors. In November 2020, institutions owned 3.6% of Bitcoin on a fully diluted basis. That figure has nearly doubled during the past year, reaching 7.1%. More importantly, that trend is set to continue. A recent study from Fidelity suggests that institutions are increasingly bullish on cryptocurrency, with 71% of those surveyed planning to buy digital assets in the future, up from 59% last year.
Popular fund manager Cathie Wood echoes that sentiment. In fact, she believes institutional investors will eventually allocate 5% of their funds toward cryptocurrency, driving the price of Bitcoin to $500,000 by 2026. But that's not the only digital asset that has captured Wood's interest. She's also increasingly confident in Ethereum. Wood recently said she would use the following allocation plan in building a crypto portfolio: 60% Bitcoin and 40% Ethereum.
2. Ethereum
The investment thesis for Ethereum is simple. It's the most popular programmable blockchain, meaning developers can build smart contracts (self-executing computer programs) on the platform. That technology forms the basis of decentralized finance (DeFi) applications, products that make it possible to borrow, lend, and earn interest without involving banks or other centralized intermediaries. To that end, DeFi makes financial services cheaper.
Currently, there's $165 billion invested in DeFi products on the Ethereum blockchain. That's nearly 10 times more than the $16.7 billion invested on the Binance Smart Chain, the second-largest DeFi platform. Ethereum's lead boils down to its first-mover status and the breadth of its ecosystem. Specifically, Ethereum was the first programmable blockchain, and it currently supports 2,900 decentralized applications (dApps), much more than any other platform.
Put another way, Ethereum benefits from brand recognition and a broad product portfolio. That's particularly important because the DeFi industry itself is gaining momentum. Since December 2020, the value invested in DeFi across all blockchains has skyrocketed 1,290% to $250 billion. Given its ability to make financial services cheaper, I think the industry will continue to grow.
Why does that matter? DeFi products aren't free. Investors pay transaction fees using the blockchain's native cryptocurrency. In the case of Ethereum, that requires the ETH token. That means increased adoption of Ethereum-based DeFi products will translate into demand for ETH, driving its price higher over time. But that's not the only tailwind. Ethereum is also the second most widely held digital asset (after Bitcoin) among institutional investors, according to Fidelity. Assuming that pattern remains intact, its price should rise as more institutions diversify into cryptocurrency. That's why this digital asset looks like a smart long-term investment.
