Despite the general weakness in the cryptocurrency market over the past few months, the volatile asset class has surged in value over the years. This has sparked interest from investors looking to gain exposure to the new technology.
Continue reading to learn more about the characteristics and investment cases of these top digital assets.
Bitcoin: A global, decentralized, digital cash system
Founded in 2009, Bitcoin was developed to be a peer-to-peer electronic cash system that is controlled by its users, not by a central authority. Launching during the 2008-2009 financial crisis, a time when the excessive risk-taking of huge financial institutions set off a worldwide recession and unprecedented monetary stimulus, Bitcoin wanted to put power back in the hands of the people. Over the past five years, it has generated a monumental 4,350% return (as of Feb. 10).
Transactions on Bitcoin's network are validated by something called a proof-of-work (PoW) algorithm. This requires expensive, energy-intensive computers to run complex math problems to earn the right to add transactions to the blockchain. Although it isn't very scalable, upgrades such as the Lightning Network, which is a Layer 2 Bitcoin solution enabling fast transactions between two parties, are trying to fix the problem.
Bitcoin is gaining broad acceptance as a place for investors and corporations to park their cash. Money managers like Ark Invest are extremely bullish. And companies such as Block (formerly Square), MicroStrategy, and Tesla have even allocated some of the cash on their balance sheets to Bitcoin.
Even if Bitcoin is only viewed as a store of value, taking the place of money that's invested in physical gold or even sovereign debt that now has inflation-adjusted negative yields, then its value should soar.
Ethereum: The world's computing platform
Seeing the lack of functionality on Bitcoin's blockchain, Ethereum was launched to the public in 2015 to encourage programmers to increase utility. The network enables the use of smart contracts, which are self-executed computer programs that run if certain conditions are met. Like Bitcoin, Ethereum's goal is to be decentralized. ETH, the native token, has skyrocketed 108,000% since the network was founded.
While the Ethereum network has historically used PoW, a new mechanism is being developed. Proof-of-stake, expected to be implemented some time this year, is faster, more scalable, and more energy-efficient than PoW. This is because it relies on ETH holders to pledge their coins to be used in validation nodes. And since Ethereum can only process about 13 transactions per second today (with extremely high transaction, or "gas," fees), in order for mass adoption to occur, speed and scalability need to be upgraded. The planned update should help with this.
Unlike Bitcoin, which is mainly used as a store of value, Ethereum's programmability is spawning the creation of decentralized applications (dApps). There are currently more than 2,900 different dApps on Ethereum, ranging from gaming and social media to non-fungible tokens and decentralized finance. Just over the past 24 hours, an incredible $779 million in transaction volume was sent to various dApps.
Ethereum's promise is to bring real-world use cases to the crypto economy.
Which should you buy?
I think both Bitcoin and Ethereum can be worthwhile additions to a well-diversified and long-term-focused portfolio. As we've already discussed, they each serve completely different purposes, so the risk of concentrating into competing cryptocurrencies doesn't exist here. I think these two can exist together.
Bitcoin was created to be a payments network, and it's now starting to be viewed by individuals and institutions as a store of value. Ethereum, on the other hand, is a massive computing platform that enables the creation of dApps that can one day be an important part of our daily lives.
Furthermore, no projects out there have the track record or mindshare of these two cryptocurrencies. People who are completely unfamiliar with the industry have probably heard of Bitcoin and Ethereum, and they will most likely be the two digital assets that first-time crypto users buy. As the financial infrastructure continues developing and government regulation becomes clearer, it will only become easier to buy these cryptocurrencies.
And the longer they stick around, the lower the probability that they disappear. Bitcoin and Ethereum have weathered crypto winters before, only to come roaring back again. They can no longer be ignored.
So if you're looking to get exposure to the burgeoning crypto market, then you should consider buying the top two that are out there.