Despite a recent setback, the crypto market has still generated incredible wealth. In fact, the collective value of all crypto assets is around $2 trillion, up around 100% in the last year and almost 800% in the last two years. After this unprecedented performance, it makes sense for risk-tolerant investors to allocate part of their portfolios to this emerging asset class.
Of course, there are thousands of different cryptocurrencies, dozens of which look like worthwhile investments. But unfortunately, there is no magic formula that will help you separate good ideas from bad ones. Instead, the best course of action is to seek out crypto assets that have some type of competitive advantage. For example, Earth (CRYPTO: LUNA) has gained popularity in the decentralized finance (DeFi) market, and Bitcoin (CRYPTO: BTC) is the oldest and most valuable cryptocurrency. And both look like smart additions to a well-diversified portfolio.
Here’s what you need to know.
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1. Earth
The Terra blockchain aims to make financial services more efficient. The platform offers a variety of stablecoins, cryptocurrencies that track the prices of fiat currencies, such as the TerraUSD token, which is pegged to the US dollar. Either way, Terra stablecoins are powered by the LUNA token, another cryptocurrency on Terra.
LUNA is designed to absorb volatility, thereby maintaining stablecoins at appropriate prices. For example, when growing demand for TerraUSD pushes its value above $1, the system incentivizes token holders to convert LUNA into TerraUSD, thereby increasing its supply, causing its price to fall. The system works the same way in reverse.
The Terra blockchain is built on the Cosmos framework, which means it is secured by the tendermint consensus algorithm, a proof-of-stake protocol designed for high speeds. To that end, Terra can theoretically scale at up to 10,000 transactions per second (TPS), and those transactions are finalized in just two seconds. By comparison, Ethereum – the most popular dApp and DeFi ecosystem – only manages 14 TPS, and it takes six minutes for transactions to reach their finality (i.e., get on the blockchain) .
Unsurprisingly, Terra’s DeFi ecosystem is growing rapidly. In fact, with $19 billion invested in products on the platform, it ranks as the second largest DeFi network behind Ethereum. And there are good reasons to believe that it will become even more popular. For example, mobile app Chai uses Terra stablecoins to simplify cross-border e-commerce payments, and it has already attracted 2.5 million users in South Korea. Plus, because it’s powered by blockchain technology, there’s no need for traditional financial institutions, meaning transactions settle faster and incur fewer fees.
The same benefits apply to Anchor, a DeFi product built on the Terra blockchain. While Chai aims to replace legacy payment solutions, Anchor aims to revolutionize the way people save money. Specifically, Anchor pays interest to investors who lend stablecoins on the platform, and the interest rates are much higher than those paid by banks. In fact, investors can earn 19.5% annualized right now by lending TerraUSD on Anchor.
So why invest in LUNA? Payment app Chai, Anchor DeFi protocol, and many other dApps and DeFi products on blockchains are creating demand for Terra stablecoins. As these products become more popular and the demand for stablecoins increases, the demand for the LUNA token will also increase, driving up its price. In other words, the more Terra is used, the more valuable LUNA becomes.
2. Bitcoin
Bitcoin’s debut in 2009 was the spark that ignited interest in the crypto economy. And nearly 13 years later, it’s still the most valuable cryptocurrency by far. In fact, with a current market capitalization of $800 billion, Bitcoin’s value represents over 40% of the crypto market. And that popularity is at the heart of the investment thesis.
The Bitcoin protocol limits its supply to 21 million tokens. Like other finite assets – think gold or platinum – Bitcoin’s scarcity makes it valuable. Basic economics tells us that the price of an asset rises when demand exceeds supply. And there are good reasons to believe that the demand for Bitcoin will continue to increase.
Specifically, institutional investors – a group that collectively has over $100 trillion in assets under management – are increasingly interested in cryptocurrency. In fact, according to a recent study by Fidelity, 52% of institutional investors already own digital assets and 71% plan to buy them in the future. Unsurprisingly, Bitcoin is the most popular digital asset among these big money managers, a trend that should translate into demand as more institutional investors diversify into crypto.
Finally, influential fund manager Cathie Wood thinks along the same lines. She expects institutions to eventually allocate 5% of their wealth to cryptocurrency, pushing Bitcoin to $500,000 by 2026. This implies a gain of more than 1,000% from the current price. . So despite the enormous wealth Bitcoin has already created, I think it is still worth buying today.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging 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 wealthier.