When investing in cryptocurrencies, you must understand that they are a highly volatile asset class. Some would call the entire category "speculative," and many digital coins fit that description for every investor. However, if you're willing to take on that risk, it's possible to see significant returns.
One key difference between investing in cryptocurrencies and traditional stocks is that the crypto market is still relatively new and not as well regulated, which can make it more risky. However, it also means that there is potential for higher returns. More risk can equal more substantial rewards, assuming that things work out as planned. You're getting compensated in return for the risk you're taking on.
Now, you can manage the crypto risks by sticking to the safer options. Just like how you wouldn't want to put all of your money into a single penny stock, you don't want to put all of your money into one unproven token, perhaps one featuring a cute dog mascot. (Ahem.) Instead, you want to diversify your portfolio by investing in a variety of different, established cryptocurrencies. Let me show you a few examples that could provide a robust foundation for your crypto portfolio today.
These are the cryptocurrencies you can buy today and hold forever, for all practical purposes.
1. Bitcoin
No alarms and no surprises, right? If you're just dipping your toes in the cryptocurrency waters, Bitcoin (BTC 0.04%) should probably be the first and perhaps largest position to build.
This was the first cryptocurrency, it is still the largest in terms of market value and everyday utility, and it was built specifically to hold value over a long time. A tightly limited inflation system is built into the Bitcoin code, and 91.7% of all Bitcoins that will ever exist have already been mined. A couple of nations already accept it as legal tender, and others are thinking about doing the same.
I can't guarantee that Bitcoin will achieve all its goals or gain value over time. However, it has the first-mover advantage and it will take a very special cryptocurrency indeed to replace it as the gold standard of the crypto market.
2. Ethereum
Again, I'm not here to shock you with unheard-of ideas. The smart contracts platform Ethereum (ETH -0.81%) is more of a bet on blockchain-based financial apps and services gaining traction. If you think decentralized banking, insurance, and payment systems sound like a great idea, Ethereum would be the obvious place to start investing.
In time, these new tools are poised to disrupt several trillion-dollar industries -- and Ethereum is involved in more of these projects than any other cryptocurrency. Just like Bitcoin, Ethereum defends its dominant market position with the forces of scale and experience.
3. Staking Tether or USDC
All right, this idea might be less obvious. It should also be the most reliable and traditional option on my short list. You can pick up many different stablecoins -- such as sector leader Tether (USDT 0.01%) and runner-up USD Coin (USDC -0.01%) -- and then earn interest on those holdings. Some of these coins, including USD Coin and Tether, are backed by cash and federal bonds, while others stand on less solid ground, but all of them are meant to mirror the intrinsic value of the U.S. dollar, euro, Japanese yen, or other traditional currency.
This idea comes close to imitating the high-interest savings or money market accounts of decades long past. It's done by staking your stablecoins, which lets other investors borrow against your holdings and pay interest like you do on any serious loan. Yes, that sounds a lot like your old bank's money market accounts, but the yields you earn by staking stablecoins tend to be more generous.
So this is the go-to choice if you're looking for ultimate stability, paired with generous interest rates and digital flexibility. If Bitcoin and Ethereum are too rich for your blood, this is the most sensible way to manage your cash reserves on the blockchain. Just ensure that your chosen stablecoin stands on a solid financial footing, and you're earning your staking rewards through an equally respectable crypto exchange. Things can get ugly when experimental stablecoins don't live up to their name.
Don't play a high-stakes game of Jenga with your crypto investments. Image source: Getty Images.
Why safer cryptos are important
You don't have to hold on to your crypto investments with diamond hands, shrugging off every bit of good news or bad because you made a firm commitment. If something changes to the fundamental value proposition, you're always free to take action. Instead, the key is to not get caught up in the hype and make impulsive decisions. Just like how you wouldn't want to sell all of your stock investments after a single bad quarter, you don't want to sell all of your crypto investments after one bad day or one harsh crypto winter.
Successful investors have a long-term perspective and hold onto their investments for the long run. That's a great strategy to follow. Letting your winners run unlocks the magic of compound returns, which is how master investors like Warren Buffett made their billions.
So investing in cryptocurrencies can be a good idea if you're willing to take on the inevitable risk and put your main focus on safer options. There's a place for altcoins with promising long-term prospects. I could talk your ear off about the unique potential of cross-chain connector Polkadot (DOT -1.02%) or the friction-free international payments you get from Ripple (XRP 1.67%). I own both of these tokens, but with fairly small cash commitments. More speculative options may belong in your portfolio, but those investments should be smaller due to their additional risks.
Remember, only buy and hold larger stakes of the safest cryptos and avoid selling them based on short-term news. A sprinkling of more exciting opportunities keeps things interesting, but that shouldn't be the core of your crypto portfolio. This approach is similar to buy-and-hold investing in the stock market, and can apply whether your investments are digital or not.
