There over 7,900 cryptocurrencies today, and those digital assets are collectively worth $2.7 trillion, skyrocketing over 1,200% since December 2019. To put those gains in context, the S&P 500 has generated a total return of 495% over the last two decades.
Based on that 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 won’t need the money for at least three years. To help you get started, here are two cryptocurrencies that look like smart long-term investments.
Bitcoin: Digital gold
In 2009, the pseudonymous Satoshi Nakamoto created Bitcoin ( BTC 1.56% ), a digital currency powered by blockchain. You’ve probably heard that term before, but it’s important to understand exactly what it means. Blockchain is a decentralized system of record that secures transaction data through cryptography, making it possible to transfer funds electronically without an intermediary (e.g. bank).
Specifically, miners validate transactions through a consensus mechanism known as proof of work, meaning they spend computing power to solve complex puzzles. Once solved, a block of transactions is added to the blockchain, and the miner is rewarded with Bitcoin, effectively minting new currency. However, Bitcoin’s source code stipulates that the reward is cut in half every 210,000 blocks.
Ultimately, that means Bitcoin is a finite asset. Only 21 million coins will ever exist, and the last one will be mined in the year 2140. More importantly, like other scarce assets (e.g. gold), Bitcoin’s limited supply makes it valuable. And as long as demand continues to rise, the price of Bitcoin should continue to climb. That’s the investment thesis, or at least half of it. The other half deals with Bitcoin’s popularity.
Since Bitcoin made its debut, thousands of other cryptocurrencies have winked into existence, but none have achieved the same level of prominence. Bitcoin is practically synonymous with cryptocurrency, and it’s still more valuable than any altcoin. In fact, its market value currently sits at $1.0 trillion, meaning Bitcoin accounts for 42% of the collective value of all cryptocurrencies.
In the years ahead, Bitcoin’s popularity should drive adoption by individual and institutional investors alike, and that demand should keep its price on an upward trajectory. In fact, fund manager Cathie Wood believes Bitcoin could reach $500,000 by 2026, implying 790% upside from its current price. That’s why this cryptocurrency looks like a smart investment.
Litecoin: Digital silver
In 2011, Charlie Lee, a former engineer at Google (now part of Alphabet), created Litecoin ( LTC 0.97% ) as a fork of the Bitcoin blockchain. To clarify that term, a fork occurs when a modification is made to a blockchain’s protocol. 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 — four times faster than Bitcoin blocks, which are created every 10 minutes. That means Litecoin transactions are finalized more quickly.
Similarly, Litecoin is also four times more abundant, with a supply limit of 84 million coins. For that reason, this cryptocurrency is often styled as the silver to Bitcoin’s gold, and once again, that’s the crux of the investment thesis. Litecoin’s finite supply means its price should continue to rise alongside demand.
Finally, Litecoin has achieved a fair amount of popularity in its own right. For instance, PayPal mobile wallet users can trade and spend cryptocurrency, but the fintech only supports four digital assets. Bitcoin and Litecoin are on that list. That’s why this cryptocurrency looks like a smart investment.
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.