Entering the world of crypto investing can be a daunting experience. A massive number of cryptocurrencies exist -- over 15 million, according to CoinMarketCap data. Because of how easy it is to launch a new cryptocurrency, the number is only growing.
But most of them have little to offer for investors. Crypto is a top-heavy market, and it's full of scams and projects with no legitimate use or value.
So, which cryptocurrencies are worth your time? Start with these three to better understand the use cases for crypto and the top investment opportunities.
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1. Bitcoin
Launched in 2009, Bitcoin (BTC -1.77%) is the first cryptocurrency and the most successful. Remember how I said that the crypto market is top heavy? Well, with a market cap of $2.4 trillion (as of Aug. 14), Bitcoin makes up 56% of the entire market.
Bitcoin's purpose was to be a decentralized currency, meaning one that wasn't beholden to banks or any governing body. To accomplish that, it uses a blockchain -- a digital transaction ledger that's maintained and updated by a network of computers. Anyone who wants to participate in the Bitcoin mining process can become part of this computer network and help verify transactions.
While Bitcoin was originally intended as a currency, most people don't actually use it that way. It's too volatile, and transactions are slow and expensive compared to newer cryptocurrencies.
Bitcoin has instead become a digital store of value. There's a limited number of Bitcoin available, as it has a maximum supply of 21 million. Bitcoin proponents believe that the built-in scarcity will lead to continued growth.
2. Ethereum
Early cryptocurrencies used blockchains solely to record transactions. Ethereum (ETH -4.74%) changed that when it launched in 2015. Ethereum was unique because it could run smart contracts, which are programs built into a blockchain.
The introduction of smart contracts significantly expanded what could be done with blockchain technology. Smart contract blockchains aren't just transaction ledgers; they're platforms where developers can build decentralized apps (dApps) and launch projects.
One of the notable use cases for smart contract blockchains is decentralized finance (DeFi). DeFi refers to financial systems built on blockchain technology, such as crypto borrowing and lending protocols. For example, Aave is a peer-to-peer crypto loan service that was originally built on the Ethereum blockchain (it's also now available on other blockchains). The Aave protocol is able to facilitate crypto loans entirely with smart contracts.
Many blockchains now have smart contract capabilities, but Ethereum was the first and has the most activity. There's $154 billion of total value locked into DeFi protocols across the entire crypto market, according to DeFiLlama. Over 60% of that value is locked into the Ethereum blockchain.
3. Tether
Tether (USDT 0.01%) is the largest stablecoin by market cap. A stablecoin is a cryptocurrency designed to stay pegged to another asset, meaning it mimics that asset's value. Tether is a U.S. dollar stablecoin, so 1 USDT should ideally maintain a value of $1 at all times.
Even though stablecoins aren't an investment, they play a crucial role in the crypto market. Most cryptocurrencies are volatile, which poses a problem when you want to use them as a currency. The value can change quite a bit between the time you purchase a cryptocurrency and when you're ready to use it.
Since they aren't volatile, stablecoins are better for this role. They haven't reached widespread adoption yet, but it could be a matter of time. The U.S. passed the Genius Act last month, a landmark piece of legislation that regulates stablecoins. In addition, several top financial companies are developing or considering their own stablecoins, including JPMorgan Chase, Bank of America, and PayPal.
Tether is one of many stablecoins, but since it's the biggest, it serves as a good starting point. It also demonstrates the potential risks involved. The issuer, Tether Limited, paid a $41 million fine in 2021 for misleading statements about the reserves backing its USDT tokens. Even though stablecoins are supposed to be stable, they're really only as safe as the issuer and the reserves backing them.
Managing risk as a crypto investor
While exciting, cryptocurrency is an extremely risky asset class. Bitcoin, Ethereum, and most other top coins have gone through periods where they've lost 50% or more of their value.
If you're going to invest in crypto, it should ideally be a small portion of your portfolio. A good rule of thumb is to have anywhere from 1% to 5% of your portfolio in cryptocurrency and the rest in more established investments, including stocks and bonds. Also, only invest money you can afford to lose so you're not tempted to sell if the crypto market drops.
