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The days when Bitcoin was the only real option for investors looking to get into cryptocurrencies are long gone.
Ether, the second-largest currency, rose to a record as interest in so-called alt coins continues to surge. Dogecoin, the memecoin that started as a joke, is now worth nearly US$90 billion.
In all, there are more than 7,000 coins currently tracked by CoinGecko, with a bewildering array of names (PancakeSwap, anyone?).
For most people it makes sense just to start with the top two: Bitcoin and Ether. Either would have been a relatively good investment so far in 2021 -- Bitcoin has about doubled, and Ether has more than quadrupled, compared with an 11% gain for the S&P 500.
So what do you need to know before deciding where to put your money?
The Case for Ether
Ether is the token used on the world’s most actively used blockchain -- the technology used for verifying and recording transactions -- Ethereum.
Ethereum is used by the likes of Microsoft Corp. for its blockchain offering and has powered the explosive growth in non-fungible tokens, the latest digital art craze.
“Ether is a blockchain platform that functions like the Apple store or Android app store,” said Pat LaVecchia, chief executive officer of Oasis Pro Markets, a U.S. digital securities trading platform. “Bitcoin is a commodity like gold, or a store of value.”
Unlike Bitcoin, where many of its core features like its supply cap are baked into the design, the Ethereum platform is evolving. It’s currently going through upgrades that should improve the network, with even a change that will reduce supply. That could boost the price by offering greater appeal while at the same time putting more limits on how many Ether are available.
“Investors often look at Ethereum as a growth-type investment, making a bet on the continued development of the decentralized ecosystem built on Ethereum,” Phil Bonello, director of research at Grayscale Investments, which oversees trusts that serve vehicles for both cryptocurrencies, said. They “sometimes consider Ether as a way to get index exposure to all the development occurring on Ethereum.”
The case for Bitcoin
While some of Bitcoin’s dominance has waned this year -- Bitcoin now accounts for about 46% of total crypto market value, down from roughly 70 per cent at the start of the year according to tracker CoinGecko -- it’s still the biggest single coin by far.
It has a market cap of more than US$1 trillion compared to Ethereum’s US$380 billion, according to CoinGecko.
And it’s still the choice of more big corporates. Tesla Inc. and MicroStrategy Inc. have been buying the largest cryptocurrency, not Ether. When Paul Tudor Jones or Ray Dalio has talked about crypto, they’ve talked about Bitcoin.
That’s reflected in volatility, as well. Cornerstone Macro strategists studied how Bitcoin and Ether would likely perform in a downturn. With a slide of about 20 per cent in the Bloomberg Galaxy Crypto Index, there’s notably more downside risk to Ether than its larger compatriot, strategist Benson Durham said.
“With a rally of the same magnitude (so up 20 per cent) you don’t really get the concomitant upside to Ether compared to Bitcoin,” Durham said. “Ergo the convexity, if you will, favors Bitcoin.”
The case for both (or neither)
Speaking of volatility: Anyone who goes into cryptocurrencies needs to be comfortable with the price swings, which can be substantial even with the most-established ones.
There have also been periodic issues with exchanges being hacked or going under.
Cryptocurrencies can take a hit from regulations or even the prospect of them. And the prices could go down; some market watchers warn of a potential bubble.
Most mainstream financial advisers say they would balk at anyone putting more than 5 per cent of their overall portfolio into crypto -- and warn clients they need to be prepared to lose all of it.
Still, for those wanting to get into the crypto space, there’s an argument to buy both as part of the age-old search for diversification and hedges.
“Given that there are diversification opportunities among digital coins themselves, we should consider a small basket of them, rather than just Bitcoin alone, when we assess whether some allocation to crypto assets can reduce portfolio volatility alongside traditional assets,” Cornerstone analysts wrote in a recent report.