The days when Bitcoin was the only real option for investors looking to get into cryptocurrency are long gone.
Ether, the second largest cryptocurrency, has hit a record high as interest in so-called alt coins continues to rise. Dogecoin, the memecoin that started out as a joke, is now worth almost $ 90 billion.
In all, there are over 7,000 coins currently tracked by CoinGecko, with a bewildering array of names (PancakeSwap, anyone?).
For most people, it makes sense to start with the first two: Bitcoin and Ether. Either would have been a relatively good investment so far in 2021 – Bitcoin has nearly doubled and Ether has quadrupled, compared to a 12% gain for the S&P 500.
So what should you know before deciding where to put your money?
Ether is the token used on the world’s most widely used blockchain – the technology used to verify and record transactions – Ethereum.
Ethereum is used by Microsoft for its blockchain offering and has fueled the explosive growth of non-fungible tokens, the latest digital art craze.
“Ether is a blockchain platform that works like the Apple Store or the Android App Store,” said Pat LaVecchia, managing director of Oasis Pro Markets, a US digital securities trading platform. “Bitcoin is a commodity like gold, or a store of value.”
Unlike Bitcoin, where many of its core features, such as its supply cap, are built into the design, the Ethereum platform is evolving. It is currently undergoing upgrades that should improve the network, even with a change that will reduce supply. This could increase the price by providing greater appeal, while further limiting the amount of Ether available.
“Investors often view Ethereum as a growth-type investment, betting on the continued development of the decentralized ecosystem built on Ethereum,” said Phil Bonello, research director at Grayscale Investments, who oversees the trusts that serve as vehicles for both cryptocurrencies. .
Investors often view Ethereum as a growth-type investment, betting on the continued development of the decentralized ecosystem built on Ethereum.
Phil Bonello, Research Director, Grayscale Investments
They “sometimes see Ether as a way to get index exposure to all the development happening on Ethereum.”
The case of Bitcoin
While some of Bitcoin’s dominance has waned this year – Bitcoin now accounts for around 46% of the total crypto market value, up from around 70% at the start of the year, according to the CoinGecko tracker – that’s still the biggest single piece by far.
It has a market cap of over $ 1 trillion compared to Ethereum’s $ 400 billion, according to CoinGecko.
And it is still the choice of the biggest companies. Tesla and MicroStrategy bought the biggest cryptocurrency, not Ether. When billionaire US hedge fund managers Paul Tudor Jones and Ray Dalio talk about crypto, they are talking about Bitcoin.
This is also reflected in volatility. Cornerstone Macro strategists studied the likely performance of Bitcoin and Ether in a downturn. With the Bloomberg Galaxy Crypto Index falling by around 20%, Ether’s downside risk is significantly higher than that of its larger compatriot, Cornerstone Macro strategist Benson Durham said.
“With a rally of the same magnitude [so up 20 per cent] you don’t really get the concomitant advantage of Ether over Bitcoin, ”Mr. Durham said. “Ergo convexity, if you will, favors Bitcoin.”
The case for both (or neither)
Speaking of volatility, anyone new to cryptocurrencies should be comfortable with price fluctuations, which can be substantial even with the most established ones.
There have also been periodic issues with pirated or failing exchanges.
Cryptocurrencies can be affected by regulations or even their outlook. And the prices could go down; some market watchers warn of a potential bubble.
Most mainstream financial advisers say they would be reluctant for anyone to invest more than 5% of their overall portfolio in crypto – and warn clients that they must be prepared to lose everything.
Still, for those who wish to enter the crypto space, there is an argument to buy both as part of the age-old quest for diversification and hedging.
“Since there are opportunities for diversification among digital coins themselves, we should consider a small basket of them, rather than just Bitcoin, when evaluating whether an allocation to crypto assets can reduce portfolio volatility. alongside traditional assets, ”Cornerstone analysts wrote in a recent report.