The 3 types of cryptos that could outperform Bitcoin this year

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Even with its recent pullback from the $30,000 price level, Bitcoin remains one of the best performing cryptos of 2023. It is up 65% this year, and large market cap coins are hard to come by who can overcome that.

But savvy investors know it’s best not to put all your eggs in one basket. If you’re looking to diversify your crypto portfolio, here are three types of digital coins that could outperform Bitcoin this year.

1. Potential Ethereum Replacements

While Ethereum (CRYPTO: ETH) continues to be the dominant layer-1 blockchain in the crypto world, many newcomers are hoping to dethrone it. Three rivals that stand out are Solana, Aptos, and Fantom. Both Solana and Aptos are up over 100% this year, and Fantom isn’t too far behind at 93%.

Image source: Getty Images.

Judging by their performance, investors are not entirely convinced that Ethereum will retain its dominant role in so many key blockchain sectors, ranging from non-fungible tokens (NFTs) to decentralized finance (DeFi). While The Merge has helped improve the speed, efficiency, and scalability of the main Ethereum blockchain, these blockchain rivals are still much faster and cheaper. This has huge implications in areas such as DeFi, where users are looking for near-zero fees and near-instantaneous settlement of transactions.

Of these Ethereum rivals, my personal pick is Solana, which recently overtook Ethereum. For example, Solana recently launched the first-ever mobile phone for a major blockchain network (the Saga) and explored new initiatives to capitalize on all the hype and excitement around artificial intelligence, including a new plugin for ChatGPT. For Solana to outperform Bitcoin, it will need to show that mobile crypto and crypto-AI are long-term sustainable growth catalysts.

2. Scaling solutions for Ethereum

If you’re looking for a less risky way to outperform Bitcoin, then blockchain scaling solutions for Ethereum might be the answer. Simply put, these scaling solutions sit on top of the main blockchain and help Ethereum process transactions faster and cheaper.

For this reason, they are called layer 2 solutions (meaning they are the second layer above the base Ethereum layer). Each scaling solution uses its own form of proprietary technology to achieve its goals, so it can sometimes be difficult to differentiate between these different solutions.

If you buy into the idea that these Layer 2 coins are critical to the future success of Ethereum, there are a few key prospects to target, including Immutable, Optimism, and Polygon. The name that’s probably most familiar to investors will be Polygon, which has been making waves with new NFT initiatives recently, including a high-profile partnership with Nike to create an all-new NFT marketplace for digital sneakers. potential, a better choice might be Immutable, which has grown 99% this year.

3. Cryptos that help people stake Ethereum

Finally, there are a growing number of cryptos that help people stake Ethereum. Now that Ethereum has moved from a proof-of-work blockchain to a proof-of-stake, this is extremely important. Crypto staking is suddenly big business, and investors are always looking for ways to earn the highest possible staking rewards.

The two big names to watch here are Lido DAO, which is up 95% this year, and Rocket Pool, which is up 157% this year. Both came out of relative obscurity after The Merge due to the popularity of staking, and both now currently. rank in the Top 50 cryptos by market capitalization.

Which of these is the best buy?

The common theme of the three crypto categories detailed above is that they involve Ethereum in some way. The first category, for example, includes anyone capable of one day replacing Ethereum as the preeminent layer 1 blockchain. The second category includes all digital currencies that help Ethereum scale faster and faster. And the third category includes all cryptos that involve staking on Ethereum.

So if the prospect of picking winners and losers in niches in the blockchain space seems too daunting, the classic crypto to buy and hold is Ethereum, which is up a not too bad 52% this year.

But if you’re looking for a bit of extra turbocharging for your wallet, my top picks would be Solana and Polygon. I’m long-term bullish on both, and I still consider both best-in-class for their respective blockchain categories.

Dominic Basulto holds positions in Bitcoin, Ethereum and Polygon. The Motley Fool has positions and recommends Bitcoin, Ethereum, Immutable X, Lido DAO, Polygon, and Solana. The Motley Fool has a disclosure policy.

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