Over the last four years, the total value of the crypto market has risen from $100 billion to $1.7 trillion, representing an annualized return of 103%.
Of course, it hasn’t been a smooth ride. The market crashed in 2018, dropping 65% in just one month. That cycle repeated itself in 2021, but this time the market plunged 50% in just 12 days, erasing over $1.2 trillion in value.
Despite that volatility, many investors still want crypto in their portfolios, but not everyone has the same risk tolerance. So here are four different ways to invest in cryptocurrency with varying levels of risk.
Bitcoin: First generation
Bitcoin (CRYPTO:BTC) was the first widely adopted cryptocurrency. Launched by the pseudonymous Satoshi Nakamoto in 2009, this digital token was designed to disrupt the traditional financial system. It replaces banks and payment processors with a distributed network of miners, eliminating many transaction fees in the process.
Bitcoin has several qualities that could make it a good long-term investment. First, the total number of tokens is limited to 21 million. In other words, much like gold, bitcoin benefits from scarcity. Economic principles suggest that constant supply and rising demand will cause an asset’s price to rise over time.
To add to that, bitcoin uses a consensus mechanism known as proof of work (PoW), which means miners must spend computational energy to verify transactions and keep the blockchain secure. The bitcoin network currently has a collective hash rate of 150 exahashes (i.e. 150 followed by 18 zeros) per second. That’s a lot of computing power, and it theoretically makes bitcoin the most secure cryptocurrency.
Finally, bitcoin is also the most popular and most valuable cryptocurrency. In fact, its market value constitutes 43% of the entire crypto market. The scale may give bitcoin greater staying power than other tokens.
Ethereum: Second generation
Ethereum (CRYPTO:ETH) launched in 2015, improving upon bitcoin by creating a more programmable network. Whereas the bitcoin blockchain stores transaction data, the Ethereum blockchain can also be encoded with self-executing smart contracts.
For instance, the Ethereum blockchain could be used to tokenize real estate (or other physical assets), allowing land to be transacted without brokers, banks, or notaries, eliminating many fees in the process.
Smart contracts also form the basis for decentralized applications (dapps). For example, the Ethereum blockchain supports an ecosystem of decentralized financial (DeFi) services, allowing consumers to save, lend, borrow, and invest money.
In terms of market value, Ethereum ranks second behind bitcoin, but Ether tokens (i.e. the currency of the Ethereum blockchain) have no supply limit. That’s because the Ethereum network was built to support a sustainable ecosystem of smart contracts and dapps, and limiting the supply of Ether could theoretically make it more costly to access the ecosystem over time.
As a final point of comparison, the bitcoin blockchain currently handles fewer than three transactions per second, and it finalizes transactions every 10 minutes. The Ethereum blockchain is much faster, handling 15 transactions per second and finalizing them in just 14 seconds.
In general, bitcoin and Ethereum skew toward the riskier side of the investment spectrum.
Polkadot: Third generation
Polkadot (CRYPTO:DOT) was developed to decentralize the internet. It’s more than just one blockchain — it’s a network of networks designed to power all types of decentralized applications and services.
To grasp Polkadot’s potential, it’s important to understand the basic architecture: The relay chain is the backbone that provides security for the entire network. The parachains (i.e. side chains) connect to the relay chain, enabling cross-chain data transfer and enhancing transaction capacity. Notably, each parachain is its own blockchain, and can be designed for specific use cases like DeFi services, file storage, social networking, gaming, and many others. Finally, bridges allow parachains to connect to external networks like the Ethereum or bitcoin blockchain.
As a whole, Polkadot’s unique architecture has several benefits. For instance, the presence of parachains makes the network more scalable than other blockchains. In fact, co-founder Gavin Wood believes Polkadot will support up to one million transactions per second. Polkadot also finalizes transactions in just six seconds — faster than bitcoin, Ethereum, and virtually all other crypto networks.
To summarize, Polkadot’s ability to integrate with multiple blockchains (including external networks) means that it will have utility no matter which cryptocurrencies gain mainstream adoption. For that reason, it may be a less risky investment than bitcoin or Ethereum.
Square: The fintech platform
In 2018, Square (NYSE:SQ) brought bitcoin to its Cash App platform, allowing consumers to buy, sell, and hold tokens. Since that time, the Cash App has seen incredible growth.
Cash App Gross Profit
That rapid growth continued in the first quarter of 2021 as Cash App gross profit soared 171% year over year, reaching $495 million. But here’s the secret: Bitcoin itself contributes very little to Square’s bottom line. In fact, the gross margin on bitcoin revenue was just 2.1% in the same quarter. So how does Square benefit?
Bitcoin is both bringing new users to the Cash App and driving engagement with other products like the Cash Card and direct deposit. As a result, Cash App’s gross profit per active customer is trending upward. But this is only one half of Square’s business.
The fintech company also provides hardware and software for sellers, helping them manage both physical and digital storefronts. Bitcoin has no impact on this segment, but growth has still been solid in recent years. Gross profit for this segment doubled from $777 million in 2017 to $1.51 billion last year.
Here’s the big picture: Square stock is a good way to invest in bitcoin without actually buying any of the cryptocurrency. If the entire crypto market crashes and never recovers, Square will still have a strong business in its other segments, but if bitcoin becomes a lasting currency, Square is well-positioned to tap into that huge opportunity.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/06/08/which-crypto-to-buy-4-different-strategies/