In 2022, a year that was plagued by scandals and major losses, cryptocurrency investors were harshly reminded that prices can fall just as fast as they rise. In addition to the rapid decline, some cryptocurrencies even became completely worthless.
These events, although painful, in hindsight will likely be remembered as a necessary reality check that a majority of the cryptocurrencies in circulation today are highly speculative investments.
Image source: Getty Images.
This becomes more evident when we take a look back at data for the top cryptocurrencies by market cap in years past. Of the top 10 most valuable cryptocurrencies in 2015, only three remain in the top 10 today while the other seven are barely clinging to life as they trade for less than a penny. The bull market of 2021 may have provided investors with false hope, but the reality is that the majority of cryptocurrencies will come and go.
To ensure that your investment remains safe for years to come, it should first have a proven track record. This entails a history of surviving multiple bear markets and consistent growth in value. Second, the cryptocurrency should provide some sort of utility that is unique and novel. Cryptocurrencies that serve no purpose will likely disappear just as fast they arrived. And last, and most importantly, cryptocurrencies that are highly decentralized and secure should be prioritized. During 2022, a majority of the cryptocurrencies that suffered the most brutal losses were the ones that were highly centralized.
Of course this raises the question, which cryptocurrencies today fit this criteria?
When analyzing the many cryptocurrencies in circulation, two stand out from the rest -- Bitcoin (BTC 5.51%) and Ethereum (ETH 10.44%). Each possess characteristics of long-term potential, decentralization, security, and a proven track record of remaining resilient through bear markets. However, I have slightly different reasons why these are my top risk-averse cryptos.
The original crypto still has it
Bitcoin was initially created for two specific purposes: to transfer money without the need of banks or other intermediaries and to preserve its value with time. Since its creation in 2009, it seems that Bitcoin's utility as a store of value has come to be the most attractive characteristic for investors as fiat currencies continue to lose purchasing power with time.
In a world with an uncertain future when it comes to monetary policy, Bitcoin offers holders transparency and assurance. Hardwired into Bitcoin's code is a limit on the number of coins that will enter circulation, set at just 21 million. Today there are 19.25 million, meaning that only about 1.75 million will be released at a diminishing rate until the year 2140 when the last Bitcoin is set to be mined. Until then, it is highly likely that Bitcoin's price will continue to be subject to the dynamics of a limited supply and increasing demand, just as it has since it was created 14 years.
The smart contract champion
While the creation of Bitcoin laid the foundation for all of cryptocurrency, the launch of Ethereum transformed the entire crypto landscape into what it is today. Ethereum changed the game in 2015 thanks to one key feature -- smart contracts. With smart contracts, developers could now create all kinds of new blockchain-based applications that run and execute automatically. Thanks to these smart contracts, entire new sectors such as decentralized finance (DeFi) and things like non-fungible tokens (NFTs) came into existence.
Although a number of new smart contract capable blockchains have come along in recent years, they all face an uphill battle to unseat Ethereum as the top blockchain.
To see just how dominant Ethereum is, we can look at a metric known as total value locked (TVL), which analyzes how much value is locked into a DeFi capable blockchain. It could be thought of as being similar to market cap, but is more focused as it only compares the value among smart contract blockchains in DeFi.
When analyzing the TVL of other blockchains it becomes clear that Ethereum is the clear-cut leader, and it's not even close. Today, Ethereum's TVL sits at around $28.3 billion, representing nearly 60% of all the value in DeFi. The next closest are Tron and BSC, each with less than $5 billion.
When considering that both Bitcoin and Ethereum not only serve unique and valuable roles, but are also some of the most decentralized, secure, tenured, and proven assets, it becomes clear why they account for more than 60% of all value in the cryptocurrency market. As such, a majority of the cryptocurrencies are inevitably correlated to their price and remain much more speculative. For those looking to reap the benefits of the best that cryptocurrency has to offer without being exposed to too much risk, keep it simple. Look no further than Bitcoin and Ethereum.
