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Over the past four years, the total value of the crypto market has grown from $ 100 billion to $ 1.7 trillion, representing an annualized return of 103%.
Of course, the driving was not smooth. The market collapsed in 2018, falling 65% in just one month. This cycle repeated in 2021, but this time the market plunged 50% in just 12 days, wiping out more than $ 1.2 trillion.
Despite this volatility, many investors still want crypto in their portfolios, but not everyone has the same tolerance for risk. So here are four different ways to invest in cryptocurrency with different levels of risk.
Bitcoin: First generation
Bitcoin (CRYPTO: BTC) was the first widely adopted cryptocurrency. Launched by the pseudonym 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.
Image source: Getty Images
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, just like gold, bitcoin benefits from scarcity. Economic principles suggest that a constant supply and increasing demand will cause the price of an asset to increase over time.
To add to this, Bitcoin uses a consensus mechanism known as Proof of Work (PoW), which means miners have to spend computational energy to verify transactions and secure the blockchain. The bitcoin network currently has a collective hash rate of 150 exahash (i.e. 150 followed by 18 zeros) per second. That’s a lot of computing power, and that theoretically makes bitcoin the most secure cryptocurrency.
Finally, bitcoin is also the most popular and valuable cryptocurrency. In fact, its market value makes up 43% of the entire crypto market. Scale can give bitcoin greater autonomy than other tokens.
Ethereum: second generation
Ethereum (CRYPTO: ETH) was launched in 2015, improving bitcoin by creating a more programmable network. While the bitcoin blockchain stores transaction data, the Ethereum blockchain can also be encoded with self-executing smart contracts.
For example, the Ethereum blockchain could be used to tokenize real estate (or other physical assets), allowing land to be traded without brokers, banks or notaries, thus eliminating many fees.
Smart contracts are also the basis for decentralized applications (dapps). For example, the Ethereum blockchain supports a decentralized financial services (DeFi) ecosystem, enabling consumers to save, lend, borrow, and invest money.
Image source: Getty Images
In terms of market value, Ethereum ranks second behind bitcoin, but Ether tokens (i.e. the currency in the Ethereum blockchain) have no supply limit. This is because the Ethereum network was designed to support a sustainable ecosystem of smart contracts and dapps, and limiting the supply of Ether could theoretically make it more expensive to access the ecosystem over time.
Last point of comparison, the bitcoin blockchain currently handles less than three transactions per second and 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 lean towards the riskier side of the investment spectrum.
Polkadot: Third generation
Polkadot (CRYPTO: DOT) was developed to decentralize the Internet. It’s more than just a blockchain – it’s a network of networks designed to power all types of decentralized applications and services.
Image source: Getty Images
To grasp the potential of Polkadot, it is important to understand the basic architecture: the relay chain is the backbone that keeps the entire network secure. Parachains (i.e. side chains) connect to the relay chain, enabling the transfer of data between chains and improving transaction capacity. Notably, each parachain is its own blockchain and can be designed for specific use cases such as DeFi services, file storage, social media, gaming, and many more. Finally, bridges allow parachains to connect to external networks such as the Ethereum or bitcoin blockchain.
Overall, Polkadot’s unique architecture has several advantages. For example, the presence of parachains makes the network more scalable than other blockchains. In fact, co-founder Gavin Wood believes Polkadot will support up to a million transactions per second. Polkadot also completes transactions in just six seconds, faster than Bitcoin, Ethereum, and pretty much any other crypto network.
To sum up, Polkadot’s ability to integrate with multiple blockchains (including external networks) means that it will have utility regardless of which cryptocurrencies are adopted by the general public. For this reason, it may be a less risky investment than bitcoin or Ethereum.
Square: the fintech platform
In 2018, Square (NYSE: SQ) introduced bitcoin on its Cash App platform, allowing consumers to buy, sell, and hold tokens. Since then, the Cash app has seen incredible growth.
Metric
2017
2020
TCCA
Gross profit of the Cash application
$ 47 million
$ 1.23 billion
197%
Data source: SquareSEC repositories. CAGR = compound annual growth rate.
This rapid growth continued in the first quarter of 2021 as Cash App’s gross profit climbed 171% year-on-year to $ 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 only 2.1% in the same quarter. So how does Square benefit from this?
Bitcoin both brings new users to the Cash app and boosts engagement with other products like Cash Card and direct deposit. As a result, Cash App’s gross margin per active customer is on the rise. But that’s only half of Square’s business.
The fintech company also provides hardware and software to vendors, helping them manage physical and digital storefronts. Bitcoin has no impact on this segment, but growth is still solid in recent years. This segment’s gross margin doubled from $ 777 million in 2017 to $ 1.51 billion last year.
Here’s the big picture: Square stocks are a good way to invest in bitcoin without actually buying cryptocurrency. If the entire crypto market collapses and never recovers, Square will still have strong business in its other segments, but if bitcoin becomes a sustainable currency, Square is well positioned to exploit this huge opportunity.
This article represents the opinion of the writer, who may disagree with the official recommendation position of a premium Motley Fool consulting service. Were motley! Questioning 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.
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