Despite a recent pullback, the crypto market has still generated incredible wealth. In fact, the collective value of all crypto assets totals about $2 trillion, up about 100% during the past year and almost 800% in the past two years. After that unprecedented performance, it makes sense for risk-tolerant investors to allocate a portion of their portfolios to this emerging asset class.
Of course, there are thousands of different cryptocurrencies, dozens of which look like worthwhile investments. But unfortunately, there is no magic formula that will help you separate the good ideas from the bad. Instead, the best course of action is to look for crypto assets that have some type of competitive advantage. For instance, Terra (LUNA 20.85%) has gained popularity in the decentralized finance (DeFi) market, and Bitcoin (BTC 0.24%) is the oldest and most valuable cryptocurrency. And both look like smart additions to a well-diversified portfolio.
Here's what you should know.
Image source: Getty Images.
1. Terra
The Terra blockchain aims to make financial services more efficient. The platform features a variety of stablecoins, cryptocurrencies that track the prices of fiat currencies, such as the TerraUSD token, which is pegged to the U.S. dollar. In all cases, the Terra stablecoins are powered by the LUNA token, another cryptocurrency on Terra.
LUNA is designed to absorb volatility, thereby keeping the stablecoins at the appropriate prices. For instance, when rising demand for TerraUSD drives its value above $1, the system incentivizes token holders to convert LUNA to TerraUSD, thereby increasing its supply, causing its price to fall. The system works the same in reverse.
The Terra blockchain is built on the Cosmos framework, meaning it's secured by the tendermint consensus algorithm, a proof of stake protocol designed for high speeds. To that end, Terra can theoretically scale to 10,000 transactions per second (TPS), and those transactions are finalized in just two seconds. By comparison, Ethereum -- the most popular dApp and DeFi ecosystem -- handles a mere 14 TPS, and it takes six minutes for transactions to reach finality (i.e. to be incorporated into the blockchain).
Not surprisingly, Terra's DeFi ecosystem is growing quickly. In fact, with $19 billion invested in products on the platform, it ranks as the second-largest DeFi network behind Ethereum. And there is good reason to believe it will become even more popular. For instance, the Chai mobile app uses Terra stablecoins to simplify cross-border e-commerce payments, and it's already attracted 2.5 million users in South Korea. Moreover, because it's powered by blockchain technology, traditional financial institutions are not necessary, meaning transactions settle more quickly and they incur fewer fees.
The same benefits apply to Anchor, a DeFi product built on the Terra blockchain. Whereas Chai aims to displace legacy payments solutions, Anchor aims to revolutionize the way people save money. Specifically, Anchor pays interest to investors who lend stablecoins on the platform, and the interest rates are much higher than those paid by banks. In fact, investors can earn 19.5% annualized right now by lending TerraUSD on Anchor.
So why invest in LUNA? The Chai payments app, the Anchor DeFi protocol, and many other dApps and DeFi products on the blockchains create demand for Terra stablecoins. As those products become more popular and demand for stablecoins rises, demand for the LUNA token will rise as well, sending its price higher. In other words, the more Terra is used, the more valuable LUNA will become.
2. Bitcoin
Bitcoin's 2009 debut was the spark that ignited interest in the cryptoeconomy. And nearly 13 years later, it's still the most valuable cryptocurrency by a wide margin. In fact, with a current market cap of $800 billion, Bitcoin's value accounts for more than 40% of the crypto market. And that popularity forms the core of the investment thesis.
The Bitcoin protocol limits its supply to 21 million tokens. Like other finite assets -- think gold or platinum -- Bitcoin's scarcity makes it valuable. Basic economic principles tell us that an asset's price will rise when demand outpaces supply. And there is good reason to believe demand for Bitcoin will continue to rise.
Specifically, institutional investors -- a group that collectively has more than $100 trillion in assets under management -- are increasingly interested in cryptocurrency. In fact, according to a recent study from Fidelity, 52% of institutional investors already own digital assets, and 71% plan to buy in the future. Not surprisingly, Bitcoin is the most popular digital asset among those big money managers, a trend that should translate into demand as more institutional investors diversify into crypto.
As a final thought, influential fund manager Cathie Wood is thinking along the same lines. She expects institutions to eventually allocate 5% of their wealth to cryptocurrency, pushing Bitcoin to $500,000 by 2026. That implies a gain of more than 1,000% from today's price. So despite the tremendous wealth that Bitcoin has already created, I think it's still worth buying today.
