By now, most investors have probably heard of cryptocurrencies. Cryptocurrencies are widely seen in the headlines as an asset to invest in for the future. The hype surrounding cryptocurrencies makes it difficult for investors to differentiate investments and know which cryptocurrencies to invest in.
As with any new investment, there will be survivors and losers. Investors in the dot-com era probably remember all search engine startups, and many of them no longer exist. So which cryptocurrencies are worth investing in and which ones should be avoided? First, we will discuss what a cryptocurrency is and its risks.
What is a cryptocurrency?
Cryptocurrencies are digital money or virtual currency. It is a digital asset stored on a network of distributed computers. Computers use cryptography and encryption to make and verify transactions between people and institutions.
Cryptocurrencies use blockchain technology to record and verify transactions on a distributed ledger. It can be thought of as a shared public distributed database. The decentralized function means that transactions are permanent and irreversible. Each individual cryptocurrency has its own distributed ledger.
The critical point is that cryptocurrencies are not controlled by any single entity such as a government or a reserve bank. For example, the US Federal Reserve controls the ability to print more US dollars.
Cryptocurrencies can be mined by using a network of computers to solve complex mathematical problems to create digital money. They can also be bought on the stock exchange from a broker or other investor.
Risk of investing in cryptocurrencies
Like any investment asset, there are risks for the investor. Previously, cryptocurrencies had a reputation for being used in criminal activities. However, they are now becoming more popular as banks, large companies, governments, and the wealthy invest in or support cryptocurrencies. This fact added credibility to the asset class. However, there is still high volatility and the risk of hacking.
Volatility is the fluctuation in the price of a traded asset. Cryptocurrencies like bitcoin are unstable. For example, the price of bitcoin fluctuated from a low of ~$29,800 to a high of ~$67,600. In addition, the price was affected by rising interest rates, restrictions from some governments and positive or negative statements from some well-known investors.
Another risk is hacking. The blockchain is reportedly difficult to hack because it is decentralized. However, hackers managed to steal cryptocurrency from wallets and exchanges. For example, on March 30, 2022, $614 million was stolen from the Ronin network. The private keys were reportedly stolen and used to steal Ethereum and USDC. There were eight more widely publicized hacks, valued at tens to hundreds of millions of dollars.
Further, cryptocurrencies are difficult to use in real commerce. Very few retail transactions are made using digital currencies. Finally, unlike stocks, ETFs, bonds, gold and cash, cryptocurrencies are poorly regulated.
3 cryptocurrencies for investment
1. Bitcoin
Bitcoin is an outstanding cryptocurrency and the oldest one. The cryptocurrency was reportedly created by Satoshi Nakamoto in 2009. However, no one stepped forward and introduced himself as that person. He mined the first bitcoin and published the first magazine article about it. Some people think that Satoshi Nakamoto is the pseudonym of a group of programmers. Elon Musk believes that this is the pseudonym of Nick Szabo.
Either way, Bitcoin has the longest track record and the largest digital currency market share. However, Bitcoin’s dominance has waned and it now holds about 40% of the total market share due to the proliferation of other cryptocurrencies. According to CoinDesk, one bitcoin is worth $41,284.90 at the time of this writing. There are 19.1 million bitcoins in circulation, and thus a total market capitalization of over $780 billion. The limit on the number of bitcoins is 21 million.
Apart from its popularity among retail investors, Bitcoin has been widely adopted by financial institutions and technology companies. As a result, some major tech companies hold Bitcoin on their balance sheets. For example, Tesla (TSLA) owns 43,000 bitcoins worth about $2 billion. Other bitcoin holdings include Square (SQ), Mercade Libra (MELI), Coinbase (COIN), and Microstrategy (MSTR).
The value of bitcoin is perceived as gold. It is viewed as a store of value because investors think it has the same value as fiat currency. The reason is that the number of bitcoins is limited, they cannot be copied, they can be traded, as well as stored and moved in a digital wallet. Also, retail transactions do not take place in bitcoin as they do in gold.
Also, bitcoin appears to be unrelated to cash and bonds and is seen as a hedge against inflation. However, it correlates with growth stocks. Bitcoin does not have an underlying asset to back it up and does not pay dividends or interest, so it has no intrinsic value. This fact causes higher volatility.
2. Ethereum
The second cryptocurrency on this list is Ethereum, not a cryptocurrency. Ether (ETH) is the actual cryptocurrency underlying Ethereum. The blockchain technology platform that controls Ethereum is Ethereum. In any case, Ethereum is now often referred to as a cryptocurrency, but there is a difference between it and Ethereum. Vitalik Buterin invented the Ethereum concept in 2013 and the platform was launched in 2015.
Ethereum is the second most used cryptocurrency for investment with a market share of around 19.5%. Although Ethereum is a cryptocurrency, it is different from Bitcoin and targets a different market niche. The Ethereum platform works with decentralized applications called dApps. Developers make it easy to buy, sell, and use Ethereum or other cryptocurrencies. Applications run on smart contracts, which are programs. Applications can send money, lend money, make peer-to-peer lending, and more.
An important difference between Bitcoin and Ethereum is that the latter allows completely new cryptocurrencies, known as tokens, to be created on the platform. Examples include Chainlink and XRP. In addition, Ethereum allows digital art to be sold using non-fungible tokens (NFTs).
Since Ethereum is an open source blockchain platform, it has attracted companies such as Microsoft (MSFT) and Advanced Micro Devices (AMD) to expand and build the platform. As of this writing, one Ethereum is worth $3,123.46, according to CoinDesk.
There is approximately 119 million Ethereum in circulation, and thus a total market capitalization of over $370 billion. Unlike Bitcoin, the amount of Ethereum is potentially unlimited.
The record price of Ethereum was $4,865.57 and the 52-week low was $1,701.10. The value of Ethereum is determined by its use as the default cryptocurrency or token on the Ethereum platform. Developers and users need Ether to pay transaction processing fees. Despite intrinsic value, Ethereum is not stable.
3. US dollar coin
The volatility of most cryptocurrencies brings us to the next one to invest in, USD Coin (USDC). USD Coin is trying to solve one of the shortcomings of most cryptocurrencies – their volatility. This is a type of cryptocurrency known as stablecoins. The token does this by trying to maintain a peg of one US dollar to one US dollar. USD Coin was announced and launched in 2018 based on Ethereum. It is operated by Centre, a consortium that includes Circle and Coinbase (COIN).
USD Coin maintains a 1:1 peg to the US dollar by holding reserves of US Treasuries with US financial institutions. The amount of funds is confirmed but not verified monthly by the accounting firm Grant Thornton LLP.
USD Coin is the fifth largest investment cryptocurrency with a market share of around 2.64%. USD Coin targets a separate market niche than Bitcoin or Ethereum. For example, USD Coin is used to trade or conduct transactions in other cryptocurrencies and allows you to exchange tokens for US dollars.
The USDC token is compatible with many blockchain technologies and is therefore used in Ethereum, Algorand, Solana, Stella, TRON and Hedera. Therefore, an investor can exchange US dollars for USDC tokens and use them on an exchange, application or service. In addition, this process is reversible, so the investor can return to US dollars.
According to CoinDesk, at the time of this writing, one US dollar is worth 1 US dollar. The total market capitalization is over $50 billion. The amount of USDC is potentially unlimited, but must be backed by US dollar reserves. Despite being pegged 1 to 1, the price fluctuates for short periods of time. For example, USDC’s all-time high was $1.19 and the 52-week low was $0.984947.
The value of USDC tokens lies in the possibility of exchange for US dollars and other cryptocurrencies. It is backed by US pegged reserves and thus has low price volatility and can act as a hedge against inflation. In addition, USDC tokens can transfer money or access the US dollar.
USDC has attracted investments from BlackRock (BLK), Fidelity Investments and other investment companies, which has increased the credibility of the token.
Final Thoughts on Cryptocurrencies for Investing
Cryptocurrencies are an alternative class of investment assets. Investors looking to diversify may consider cryptocurrencies. However, in many cases they are often risky and unstable. Also, not all cryptocurrencies are the same, and there are thousands of them today, making it difficult to choose.
We have listed three of the most common ones in different market niches. Just remember, cryptocurrencies are not regulated and you can lose money.
Denial of responsibility: The author is not a licensed or registered investment advisor or broker/dealer. It does not give you individual investment advice. Please consult a licensed investment professional before investing your money.
This article originally appeared on Wealth of Geeks.