I know, I know. The whole crypto market is melting down as we speak. Investors have turned their backs on risky investments in 2022 amid geopolitical struggles, skyrocketing inflation, supply chain challenges in nearly every industry, and more. As the textbook definition of "risky investment," the crypto sector took the brunt of this marketwide correction.
Among the 81 cryptocurrencies with market caps of at least $500 million today, only one name is up by more than 1% in 2022. At the same time, 69 names have fallen 50% or more. You can't even trust a stablecoin to hold steady nowadays.
So how can I recommend buying cryptocurrencies in this brutal market? This downturn is the beginning of the end -- right?
What this downturn will accomplish
Not so fast. I think that this market correction will be good for cryptocurrency investors in the long run for two important reasons:
- The downturn should shake out many weaker hands and not-so-serious cryptocurrency projects. For example, I'd be surprised to see Dogecoin (DOGE 0.34%) and Shiba Inu (SHIB 0.52%) emerging unscathed from this pricing challenge. Their meme-based marketing muscle won't be enough in a world where winning cryptocurrencies have to provide real-world value or utility in the long run. The dog-themed coins may limp forward for a while, but they won't hang near the top of this sector's valuation lists for much longer.
- Blockchain networks and cryptocurrencies should soon find their feet, supported by a solid regulatory framework and a plethora of real-world use cases. The idea of ultra-secure digital transactions without middlemen and third-party money managers such as banks and financial services is too powerful to ignore. There's a disruptive shakeup coming to the financial world, and it relies on cryptocurrencies. The true nuts-and-bolts plays on the future of decentralized finance should be able to dust themselves off after this temporary downturn and get back to revolutionizing the financial world.
Therefore, I recommend keeping a close eye on proven leaders such as Bitcoin (BTC 0.35%) and Ethereum (ETH 0.74%) as the crypto market boils down. These digital coins will play crucial roles in the next era, and I expect multi-bagger returns from all three over the next couple of years.
The first name in the game is still the biggest blockchain-based value hoard on the planet, with a market cap of $433 billion. That's a steep drop from $1.26 trillion last November but it's still a respectable market footprint.
Bitcoin's massive scale is arguably the cryptocurrency's greatest strength. The coin was created as "a purely peer-to-peer version of electronic cash," intended to let people send payments to each other without interference from financial institutions.
The "electronic cash" vision also implies a system for value preservation in the long run. Fiat currencies like the U.S. dollar or the Euro provide stability through the backing of the government that issued them. Every national currency has used this system since the last holdout, Switzerland, dropped the Swiss Franc's connection to gold reserves in 1999.
But Bitcoin is already making inroads to replace traditional currencies. El Salvador has recognized the digital currency as legal tender for all debts (alongside the U.S. dollar) since September 2021, followed by the Central African Republic in the spring of 2022. These two economies are fairly small but larger nations will probably follow suit as the Bitcoin market stabilizes and matures.
We may be looking at the early seed of a global medium of financial exchange here, with a potential long-term market cap measured in many trillions of dollars. Buying into this massive opportunity while prices are low should give your wallet a huge boost over the next few years.
Bitcoin's market scale advantage also applies to Ethereum, but in a different sub-sector of the crypto market. While Bitcoin can manage digital payments and value storage in their simplest forms, Ethereum adds the ability to execute program code and trigger transactions based on changing market conditions and other inputs. These smart contracts form the basis of innovative new products and services like non-fungible tokens (NFTs), decentralized finance applications, and blockchain-powered games.
This is not the only provider of smart contract features, and some of its challengers can execute their code faster and cheaper than Ethereum. But that will soon change, as the Ethereum community plans to give the blockchain network a tremendous upgrade in what's known as "The Merge" (aka "Ethereum 2.0"). This event is scheduled for August 2022, and the final dress rehearsal took place without a hitch.
After The Merge, smart contract developers can continue to rely on Ethereum's game-changing computing platform without worrying about slow performance or high fees. You know how it works -- the rich get richer and winners keep winning. The so-called Ethereum killers don't pose a real threat to the leading smart contracts platform.