Cryptocurrency has become increasingly trendy over the past decade, especially with younger investors. Meme tokens like Dogecoin and Shiba Inu have undoubtedly played a role in that phenomenon. Both have generated astonishing gains, turning pocket change into fortunes almost overnight.
But the industry itself is intriguing. Whereas assets like real estate and equities have been around for centuries, the crypto market is brand new and bursting with potential. It's like the Wild West of the financial world.
Unfortunately, that novelty also makes it dangerous. There are now more than 17,700 different cryptocurrencies, and governments around the world are still grappling with regulatory concerns. Even worse, countless cryptos have amassed die-hard followings on social media, meaning investors are constantly bombarded with information, but it's often difficult to separate the worthwhile insights from the misleading propaganda.
For that reason, there are few rules you should commit to following before buying any cryptocurrency. Here's what you should know.
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How to get started
The first rule is to make sure you understand the risk involved. The crypto market is incredibly volatile -- it has fallen 42% in less than four months -- so if the thought of losing half your money is terrifying, steer clear of this asset class.
Second, you should only invest money you won't need for the next five years. That means you should never borrow money to buy cryptocurrency. Some people have had success investing with that strategy, but others have lost everything. It's not worth the risk.
Third, build a diversified portfolio of cryptocurrencies that have a durable competitive advantage. The long-term winners in this industry will likely have some unique quality that differentiates them from their peers. Those are the assets you want to own.
Finally, always do your own research. Don't buy a cryptocurrency just because someone on the internet said it was a good idea -- that includes the two cryptos I'm going to discuss in this article, Ethereum (ETH 0.94%) and Chainlink (LINK 0.91%). While the internet is full of great information, just make sure you understand what you're buying and why you're buying it.
1. Ethereum: An ecosystem of decentralized software and services
Most cryptocurrencies are powered by blockchain technology, a type of distributed database that tracks transactions to prevent fraud and double spending. But the Ethereum blockchain is also programmable, meaning the platform is more than a system of record. It can be used to run self-executing computer programs known as smart contracts, a technology that forms the heart of decentralized applications (dApps) and decentralized finance (DeFi) services.
That's particularly important, because DeFi products allow investors to trade, borrow, lend, and earn interest on cryptocurrencies without going through a traditional financial institution. And by eliminating those intermediaries, DeFi makes financial services more efficient.
In addition, thanks to its first-mover status, Ethereum is the largest DeFi ecosystem in the blockchain industry. Investors have $116 billion stored in DeFi products on the platform, a figure that represents 59% of all DeFi investments across any blockchain.
Of course, dApps and DeFi products aren't free. Users pay transaction fees using the blockchain's native cryptocurrency. In this case, that would be the ETH coin. In other words, as more consumers and investors are drawn to Ethereum's ecosystem of dApps and DeFi products, demand for ETH should rise, boosting its price. That's why this cryptocurrency looks like a smart buy.
2. Chainlink: A bridge between the real world and blockchains
Smart contracts are simply computer protocols that enforce rules when a predetermined set of conditions are met. For instance, smart contracts can be used to manage rental properties by automatically texting tenants an access code once the rental agreement is signed and the security deposit is collected. And because smart contracts cannot be altered once deployed, the tenant retains access to the property for as long as they continue to make monthly rent payments.
Unfortunately, blockchains weren't designed to interact with external systems, meaning they can't access real-world data (i.e., information that doesn't live on the blockchain). That severely limits the practical utility of smart contracts. In the example above, how would the protocol know when the security deposit was received? And how would it provide the tenant with an access code? The answer is Chainlink, a network of decentralized oracles.
Blockchain oracles are entities like application programming interfaces (APIs) -- bits of code that support the exchange of data between software platforms -- that can bring real-world information onto a blockchain. In the context of Chainlink, the oracle network is powered by the LINK token. Chainlink node operators (i.e., the people running the network's hardware and software) must stake LINK tokens in order to participate, and they are paid in LINK when they complete a job.
To make sense of that, let's return to my example. After a tenant signs the rental agreement and pays the deposit, APIs tied to the landlord's e-signature platform and bank account verify the information and notify the smart contract. Multiple APIs are used to eliminate any single point of failure. At that time, the smart contract communicates with the rental unit's smart locks to set a temporary access code, and another API is used to text that code to the tenant, allowing them to open the door. Once that data has been relayed, the smart contract operator -- in this case, the landlord -- pays all oracle node operators a previously agreed-upon sum.
So what differentiates Chainlink? It is the most popular decentralized oracle network by a long shot, integrated with 90 different blockchains and more than 500 different DeFi protocols. Band Protocol is the next closest competitor, and it integrates with just a handful of blockchains and DeFi products. That means Chainlink has far more utility. To that end, as more smart contracts make use of real-world data, demand for Chainlink oracles (and LINK tokens) should rise, driving the token's price higher.
