Over the past three months, high inflation and the threat of higher interest rates sparked a grueling rotation away from riskier assets and toward more conservative investments. That sell-off crushed most cryptocurrencies and undermined the much-touted idea that such tokens could be effective hedges against inflation.

However, that sell-off could also represent a good buying opportunity for investors who can stomach the near-term volatility. Let's examine the top three cryptocurrencies investors should watch in February -- and whether or not they'll stabilize and rally again in this challenging market.

A visualization of a Bitcoin being mined.

Image source: Getty Images.

1. Bitcoin

As the world's top cryptocurrency, Bitcoin (BTC 1.18%) is the bellwether of this market -- but even with a recent price pop behind it, it's still down by more than 35% over the past three months, changing hands now in the vicinity of $44,000.

Bitcoin has plenty of big backers, but it also faces lots of regulatory challenges. President Biden reportedly plans to release an executive order soon with new regulations, policies, and a new oversight regimen for cryptocurrencies and other digital assets.

The Securities and Exchange Commission also recently rejected spot Bitcoin exchange-traded fund filings from SkyBridge Capital, Kryptoin, VanEck, WisdomTree, and Fidelity.  

China banned the use and mining of cryptocurrencies last year, and Russia's central bank recently recommended that the Duma pass similar laws in that country. India also plans to levy a 30% tax on all capital gains from cryptocurrencies and digital assets -- but will not allow traders' capital losses from such investments to be used as deductions to offset other income.

Nonetheless, bullish investors like Ark Invest's Cathie Wood believe that Bitcoin still has plenty of upside potential. Wood says she expects institutional buying to boost Bitcoin's price to $560,000 by 2026 and $1 million by 2030.

2. Ether

Wood is also fiercely bullish on Ether (ETH 3.57%), which consumes significantly less power to mine than Bitcoin. The Ethereum blockchain network can also host decentralized apps (dApps), smart contracts, and non-fungible tokens (NFTs), so it's technically the foundation of a "Web 3.0" world.

Web 3.0 evangelists believe dApps, NFTs, and Ethereum-based tokens will gradually replace the "Web 2.0" world -- where tech giants like Alphabet, Apple, and Meta control most of the data on centralized platforms. They also believe these decentralized applications will be integrated into metaverse platforms -- which can host virtual-reality or augmented-reality applications.

Ethereum's advocates believe the network's lower energy consumption makes it an appealing alternative to Bitcoin, and that its platform will be more useful than Bitcoin's to developers who want to create NFTs or decentralized apps.

They also believe that the forthcoming Ethereum 2.0  transition -- which will change its mining process from the energy-intensive "proof of work" method to a more energy-efficient "proof of stake" method -- will reduce the network's total mining energy consumption by a whopping 99%.

That upgrade, which will likely be Ether's top catalyst this year, could make it faster and more energy-efficient than its newer smart-contract challengers -- which include Solana (SOL 1.27%) and Cardano (ADA -0.33%).

Ether's price has also dropped about 30% over the past three months to about $3,000. However, Wood expects it to hit the $170,000 to $180,000 range by 2030 as decentralized finance (DeFi) platforms take market share away from traditional banking services.

3. Solana

Solana gained a lot of attention last year as a potential alternative to Ether. Instead of prioritizing decentralization and security features like the Ethereum network, Solana focuses on scalability, speed, and low transaction costs.

Unfortunately, Solana started struggling with serious network congestion and security issues over the past several months. It suffered major traffic jams in September, December, and January, followed by the revelation that its network was exposed to a major security flaw in Wormhole -- one of the largest bridges between Solana and other blockchain networks.

All those setbacks undermined the argument that it was an attractive alternative to Ethereum for decentralized app developers. They also suggested that Solana was sacrificing its security for scalability and speed. To make matters worse, Ethereum's upcoming upgrade, which will enable it to more efficiently process transactions, could still render Solana, Cardano, and other smaller smart-contract rivals obsolete.

As a result, Solana's price tumbled more than 50% to about $115 over the past three months -- and it remains a much riskier play than Bitcoin or Ether. Nonetheless, this altcoin could also have more upside potential if it resolves its network congestion and security issues in a timely manner.

Should you buy any of these cryptocurrencies?

It might seem like a bad idea to buy cryptocurrencies as interest rates rise. Nonetheless, Bitcoin should remain the safest cryptocurrency to own, and is likely to increasingly be considered a potential alternative to fiat currencies. Ethereum should also retain its first mover's advantage in the Web 3.0 world.

If investors believe in those secular trends, they should consider accumulating a little more Bitcoin and Ether. However, I'd steer clear of Solana and the smaller altcoins until the market's appetite for speculative growth returns.