There are over 7,900 cryptocurrencies today, and these digital assets are collectively worth $ 2.7 trillion, skyrocketing over 1,200% since December 2019. To put these gains in context, the S&P 500 generated a total return of 495% over the past two decades.
Based on this data, it makes sense to allocate a small percentage of your portfolio (maybe 5%) to this emerging asset class, assuming you have an emergency fund and you won’t have to. no need for money for at least three years. To help you get started, here are two cryptocurrencies that look like long-term smart investments.
Bitcoin: digital gold
In 2009, the pseudonym Satoshi Nakamoto created Bitcoin (CRYPTO: BTC), a digital currency powered by the blockchain. You’ve probably heard this term before, but it’s important to understand exactly what it means. Blockchain is a decentralized registration system that secures transaction data through cryptography, allowing funds to be transferred electronically without an intermediary (eg a bank).
Specifically, miners validate transactions through a consensus mechanism called proof of work, which means they spend computing power solving complex puzzles. Once resolved, a block of transactions is added to the blockchain and the miner is rewarded with Bitcoin, creating a new currency. However, Bitcoin’s source code states that the reward is halved for every 210,000 blocks.
Ultimately, that means Bitcoin is a finite asset. Only 21 million coins will never exist, and the last one will be mined in 2140. More importantly, like other rare assets (eg gold), the limited supply of Bitcoin makes it valuable. And as long as demand continues to rise, the price of Bitcoin should continue to rise. That’s the investment thesis, or at least half. The other half is about the popularity of Bitcoin.
Since Bitcoin debuted, thousands of other cryptocurrencies have sprung up, but none have reached the same level of importance. Bitcoin is practically synonymous with cryptocurrency, and it is always more valuable than any altcoin. In fact, its market value is currently at $ 1,000 billion, which means that Bitcoin accounts for 42% of the collective value of all cryptocurrencies.
In the coming years, the popularity of Bitcoin is expected to drive its adoption by individual and institutional investors, and this demand is expected to keep its price on an upward trajectory. In fact, fund manager Cathie Wood believes Bitcoin could hit $ 500,000 by 2026, which implies a 790% rise from its current price. This is why this cryptocurrency looks like a smart investment.
Litecoin: digital money
In 2011, Charlie Lee, former engineer at Google (now part of Alphabet), created Litecoin (CRYPTO: LTC) like a fork of the Bitcoin blockchain. To clarify this term, a fork occurs when a change is made to the protocol of a blockchain. In this case, Lee designed Litecoin to be faster and more abundant than its predecessor.
Specifically, miners still rely on a proof-of-work consensus mechanism to validate transactions, but Litecoin blocks are created every 2.5 minutes, which is four times faster than Bitcoin blocks, which are all created. every 10 minutes. This means that Litecoin transactions are finalized faster.
Likewise, Litecoin is also four times more abundant, with a supply limit of 84 million coins. For this reason, this cryptocurrency is often referred to as Bitcoin silver to gold, and again, this is the crux of the investment thesis. Litecoin’s limited supply means its price is expected to continue to rise along with demand.
Finally, Litecoin has achieved some popularity in its own right. For example, Pay Pal mobile wallet users can trade and spend cryptocurrency, but fintech only supports four digital assets. Bitcoin and Litecoin are on this list. This is why this cryptocurrency looks like a smart investment.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.