Institutional investors represent big money in the financial world. With roughly $100 trillion in assets under management, their decisions to buy or sell an asset can have a significant impact on prices. And recently, those big money movers have taken an interest in cryptocurrency. In fact, 52% of institutional investors already own digital assets, and 71% plan to buy in the future, according to a study from Fidelity.
Similarly, decentralized finance (DeFi) is growing in popularity. By making it possible to borrow, lend, and earn interest without the help of banks, DeFi products make financial services cheaper, more efficient, and more accessible. Not surprisingly, that value proposition has translated into rapid adoption, with DeFi investments soaring more than 1,200% in the past year to $253 billion.
In light of those trends, it's reasonable to allocate a small percentage of your portfolio to cryptocurrency (maybe 5%). And while thousands of crypto assets exist, and dozens look like worthwhile investments, a few stand out from the pack. Here are three great examples.
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Bitcoin: the digital equivalent of gold
In 2009, Bitcoin (BTC -3.59%) went live, becoming the first modern cryptocurrency. Twelve years later, it's still more popular than any of its peers. In fact, Bitcoin's market value currently sits at almost $900 billion, meaning it comprises 40% of the entire crypto market. What's driving that popularity?
Beyond its first-mover status, Bitcoin is a finite asset. Its blockchain protocol limits its total supply to 21 million tokens. For that reason, many investors think of Bitcoin much like digital gold. Regardless, basic economic principles tell us that an asset's price will rise when demand outpaces supply, and there is good reason to believe that will happen. Bitcoin is the most popular digital asset among institutional investors, and as those big money managers continue to diversify into cryptocurrency, Bitcoin is likely to be a major beneficiary.
For what it's worth, Ark Invest Chief Executive Officer Cathie Wood shares that opinion. In fact, the popular fund manager believes institutions will eventually allocate 5% of their wealth to the crypto market, pushing Bitcoin's price to $500,000 by 2026. That implies 960% upside from its current price, which on its own makes for a compelling investment thesis.
Ethereum: an ecosystem of decentralized applications
Ethereum (ETH -2.40%) was introduced in 2015, becoming the first programmable blockchain. That means developers can write code and build self-executing computer programs known as smart contracts on the platform. Since then, that technology has evolved into decentralized applications (dApps), software that exists on a peer-to-peer network rather than centralized corporate servers.
Notably, dApps can be anything -- social-media platforms, productivity tools, file storage, or DeFi products. And in all cases, Ethereum is the leader by a wide margin. In fact, there are more than 2,900 dApps deployed on Ethereum and $155 billion invested in DeFi products on the blockchain. For perspective, those figures represent 75% of all dApps and 63% of all DeFi investments.
Of course, dApps and DeFi products aren't free. Users pay transactions fees, using the native cryptocurrency, ether or ETH. So as more consumers make use of products on the Ethereum blockchain, demand for the ETH token should rise, sending its price higher. At the same time, Ethereum is the second-most widely held digital asset among institutional investors. That should supercharge demand as more big money pours into the crypto market.
Chainlink: a bridge between blockchains and real-world systems
Smart contracts are programs that execute under predefined conditions. Once they are deployed, the code cannot be changed. To complement that, smart contracts are an efficient and trustworthy way to enforce agreements, because they are tamper-proof and they eliminate the need for centralized oversight.
However, there is a problem. Blockchains cannot interact with external systems, or the real world, which dramatically limits the utility of a smart contract. For instance, consider a DeFi protocol that allows consumers to buy and sell physical assets like cars or houses. To function properly, the smart contract would need to know the value of those assets at the time of the proposed sale. How could you get that data onto the blockchain without relying on a single source and potentially compromising the decentralized nature of the network? The answer is Chainlink (LINK -4.67%)
Chainlink is a decentralize oracle network that's powered by the LINK token. Oracles are sensors such as application programming interfaces (APIs) that bring real-world data onto the blockchain. To participate, Oracle node operators -- the people running the software and hardware -- must stake LINK tokens, a precaution that ensures their honesty, as their stake can be taken if they attempt to perpetrate fraud.
Here's how it works: When a smart contract requests data from Chainlink, node operators bid on the job, and the network selects several oracles to retrieve the information. The Chainlink protocol then aggregates and reconciles that data to achieve an accurate result, thereby maintaining the decentralized nature of the smart contract. Finally, the LINK token comes into play again, as it is used to pay the oracle node operators for their services. In short, Chainlink makes smart contracts more useful by making it possible to bring real-world data onto any blockchain.
On that note, as the DeFi industry continues to grow, more smart contracts will undoubtedly need access to real-world data. In turn, that will create demand for oracles (and the tokens that power their networks). And Chainlink is the most popular oracle network by a wide margin, as it integrates with over 1,000 blockchain projects. Also noteworthy, the LINK token is the fourth-most-popular digital asset among crypto hedge funds, and as more institutions diversify into cryptocurrencies, that should supercharge demand, driving its price higher.
