There are over 12,000 cryptocurrencies in the crypto market. That’s an exceptionally vast number for an investment class based upon cryptography - the art of solving complex puzzles. However, given the enormous market capitalisation of many of those cryptocurrencies, the asset class as a whole is becoming too big to ignore. While that by no means suggests people should invest their hard-earned money in it, it does mean that they should at least be considered. For instance, more and more financial institutions are looking at ways to invest in this asset class, which is characterised by a vast amount of volatility and the potential for huge returns.
As a result, cryptocurrency continues to be a hot topic in the investment community. It also remains controversial. Commentators consistently debate what makes an investable cryptocurrency versus what does not.
As ever, if you are thinking of investing in any of these or others, be sure that you only ever invest what you can afford and in a way appropriate for your risk profile. Remember, investing in this asset class is exceptionally risky. You could stand to lose the entire value of your initial investment.
What is cryptocurrency?
A cryptocurrency is a digital asset. Cryptocurrencies can be used to pay for goods or exchanged for other digital assets. Most cryptocurrencies are based upon blockchain technology which records all transactions in a distributed ledger.
Key characteristics of cryptocurrencies that make them an attractive investable asset to many are the fact that they are:
- Decentralised, so not beholden to Government action or monetary policy,
- Anonymous, as transactions are recorded on the blockchain without the use of names and addresses, simply private keys
- A good means to add diversification to a portfolio
Cryptocurrencies should not be confused with any digital style assets, however. For example, non-fungible tokens (NFTs) run on the same blockchain technology as cryptocurrencies. But they aren't the same thing. NFTs are usually based upon underlying assets like art, wine, or cars.
What is the best crypto to invest in this year?
In 2022, the future of cryptocurrency will be impacted by many market influences, some that we previously saw in 2021 and others that will be new.
With the potential for continued economic disruption due to Covid-19, 2022 looks set to have as uncertain a backdrop as 2021. However, 2022 will also continue to see inflation rise, potentially far past the 2021 all-time high. Inflation has, until very recently, remained at all-time lows, which has allowed investors to put their money into far more speculative assets more frequently than before. With that no longer going to be the case (at least in the near future), it will be interesting to see how cryptocurrencies in general react.
For now, though, let's delve into some of the most popular cryptocurrencies, look at their competitive advantages in 2022, and why they could be an excellent place to put your money.
Elon Musk's favourite cryptocurrency must be up for debate in any crypto discussion. Now worth a market cap of over $900billion, Bitcoin is 70% up on its 2021 starting point at the time of writing. That could encourage some investors to purchase more, but, interestingly, Bitcoin is not near its 2021 high. It is presently bobbing around the $50,000 mark, having seen highs of nearer $70,000 in October and November.
One of the main advantages to Bitcoin, in particular, is the fact that it has a limited supply. There will only ever be 21 million Bitcoin tokens in existence. When something is limited, it always has better potential to store value than something more common. Digital currencies may be new, but the finite supply theory is simple, traditional economics.
Ether tokens are recorded across the Ethereum network. The blockchain technology behind this coin was intended to help support the ability of smart contracts that are ‘tamper proof’. As a result, for those unsure of what true value digital currencies have, Ethereum does technically have a use. While it seems to have become a competitor to Bitcoin, with investors simply buying it for a holding in their portfolio, the power that the Ethereum network has through using blockchain technology to support financial contracts and apps is enormous.
2022 is a big year for Ethereum. It is moving from the energy-intensive proof of work technology to a proof of stake technology through a series of upgrades. In addition, other cryptocurrencies operate on the Ethereum network, arguably adding to its power, like the quirky named digital currency Shiba Inu.
Investing in Dogecoin started as a joke. The entire asset essentially started as a meme, hence why there is a dog on the digital coins. Its founders wanted to poke fun at the fact that many people were investing in something that (at the time) seemed to have little use. It is now one of the more prominent cryptocurrencies out there. Interestingly, it has tried to oppose the idea of a limited supply making for a reliable wealth store. Dogecoin issues more coins every day and has no final cap on the number going into supply in mind.
In terms of its future in 2022, Dogecoin will benefit from being traded on decentralised exchanges. But, importantly, it has a growing number of investors. The more holders there are, the more it can be seen as a reliable investment and payment form. The two notions work together as the more places it is possible to trade it, the more people can buy it. Disadvantages would be that it runs on proof of work, and many users say it does not have adequate technical support in place.
Cardano was established by the same gentleman that founded Ethereum (Charles Hoskinson). However, it is currently quite different from Ethereum. For example, it runs on proof of stake technology, not proof of work, which is a far less labour and energy-intensive means of running blockchain technology.
Perhaps down to its shared co-founder, Cardano can help create smart contracts. That's because it can be 'programmed' so developers can establish decentralised applications (or 'dapps') with infinite uses. Importantly, though, it is highly secure thanks to being based on its blockchain. As a result, that could have hugely positive ramifications for many companies and how they conduct many of their business dealings. Therefore, it could be a good idea to keep one eye on Cardano throughout 2022. Furthermore, as its blockchain technology is more widely understood and adopted, it could become of more significant interest to many digital asset investors.
XRP is a cryptocurrency established by FinTech firm Ripple. One of its main advantages, particularly over cryptocurrency heavyweight Bitcoin, is that XRP is cheaper and faster than Bitcoin. One of the reasons is that it has more coins on the market, with 1 billion XRP coins pre-mined when launched, compared to Bitcoin's 21 million capped supply. Users tend to like XRP due to it having lower transaction costs. However, detractors do not like that Ripple owns and operates it. Due to such an ownership structure, the impact of being decentralised is immediately less. To some investors, though, that could be an advantage.
Polkadot is an important cryptocurrency to consider when looking at the potential power of the asset class as a whole. That is because Polkadot is looking to connect blockchains that support different digital currencies (for example, Bitcoin and Ethereum run on different networks) so that they can ‘talk’ to each other.
It is potentially, therefore, a significant development. It means that instead of working separately from one another, making transferring one for another difficult, they can be used together. In doing so, cryptocurrencies could be even more potent as all their strengths can be used together, creating a more seamless environment for digital currencies to operate within. Above all, its biggest promoters say that it also adds an extra layer of security, making the arena safer.
Solana burst onto the scene in 2019 and is an increasingly popular cryptocurrency thanks to its fast and secure blockchain network, which also appears to be scalable. That's incredibly important for developers looking to use blockchain networks to make smart contracts. Solana's speed is also matched with low fees for each transaction, yet it already has billions of users. Usually, fees increase with the number of users as more investment is needed to make the network able to service the increased usage. However, Solana has managed to buck that trend.
That being said, those using Solana hardware will find that it is costly to buy if wanted for its decentralised apps capabilities. Additionally, many cryptocurrency commentators also criticise Solana's approach to being decentralised in general. A large amount of its supply is currently believed to be held by startup investors and venture capitalists. When only a few owners hold a high proportion of a company, it is less decentralised than it could otherwise be.
No list of potential cryptocurrency investments is complete without at least one stablecoin. A stablecoin looks to have the best of both digital and traditional currencies, i.e., crypto's returns without its volatility. They achieve that by pegging their worth to a traditional fiat currency or another underlying asset. Therefore, it is meant to be more stable in terms of market movements and, hopefully, more investable.
Tether is meant to be backed by one US dollar. As a result, it gives holders the comfort and confidence that their holdings are more secure. Some investors in Tether are also comforted by the more transparent nature of pricing and less market fear. As a result, it is now one of the world's most popular currencies. However, its main disadvantage is that it instantly becomes less decentralised when pegged to a fiat currency.
How do I buy Bitcoin or other digital currencies?
There are many means now to buy and sell Bitcoin and other digital currencies. An increasing amount of online trading platforms and cryptocurrency exchanges facilitate purchasing these digital assets. For example, Coinbase is a crypto exchange where investors can buy well known digital assets like Bitcoin (BTC) and Litecoin (LTC), as well as lesser-known tokens like Reverse Monk, which at the time of writing was selling for less than 40p a token. 40p a token sounds cheap, but it's still nowhere near the most inexpensive available! Other popular exchanges include Gemini and Bitstamp.
Of course, this is not the only way to access the market. You can become a digital currency holder by selling something and taking a digital currency as a form of payment. Much like you would take currency like the US dollar or take payment through a credit card. More and more entities are now taking cryptocurrency as a form of payment, notably Tesla, which allows customers to pay for cars using Bitcoin.
Other cryptocurrency holders access the market by mining tokens using highly sophisticated software and computers. That software and hardware work together to solve the complex cryptography problems that cryptocurrencies are based upon. At first, that sounds like an easy way to add what could be a highly profitable asset to your portfolio. However, it is not always the cheapest or most environmentally friendly way to do so in practice. The software and hardware are so expensive, without even including the electricity required to run them, that simply buying a cryptocurrency on an exchange can be cheaper.
Investing in the cryptocurrency market
Investing in the cryptocurrency market is, in many ways, like any other investment. Sometimes you will be delighted you invested, while you will wish you hadn't bothered at other times. The highs and lows of even the most stable of stablecoin assets can be eye-watering. You have to have a lot of nerve to hold digital currencies. The volatility is simply so significant that your holdings can gain or lose substantial amounts of money in an hour, let alone over the course of a day.
However, if you are happy to ride out that volatility and play the long game, investing in digital currencies or decentralised applications could pay off. Take Solana (SOL), for example. In 2021 alone, that currency has seen a rise of 11,000%. Even in the fast-moving Forex market, those are returns that traders of USD or GBP and other currencies can only dream of making.
Of course, the attraction of earning those types of returns is incredibly alluring. But, with so many cryptocurrencies being created each year, not all of them can be successful. In fact, 2,000 cryptocurrencies have failed, with another considerable portion worth far less than even 1p.
If you are looking to retire soon, even the most popular cryptocurrencies may be too big a risk to take.