After Bitcoin's dizzying rise to a record US$40,000 in January 2021, digital currencies or cryptocurrencies are starting to capture public attention.
From around US$7,000 at January 2021, Bitcoin rose to around US$30,000 by December 2021, increased to a new record of above US$40,000 in January 2021 and it is now hovering around US$32,000. In comparison, the hottest stock of 2021, Tesla rose from around US$100 to above US$700 from January 2021 to December 2021, as the S&P 500 only returned around 15% in the same period. With such gains, there's no wonder why even the man in the pub is talking about Bitcoin (and Tesla).
Timeframe: 1 January 2021 to 26 January 2021.
Before we delve deeper into cryptocurrencies, do familiarise yourself with what they are with our cryptocurrency primer. In essence, cryptocurrencies are digital currencies where transactions are stored on the digital ledger (blockchain). This may be a gross simplification as well as other cryptocurrencies have features that differentiate them from one another.
While cryptocurrencies have been previously dismissed by mainstream investors (including large institutional investors), 2021 has seen a resurgence of interest with even DBS getting onboard with a digital exchange platform to enable institutional investors and accredited investors to gain access to cryptocurrencies.
While Bitcoin (BTC) is the most prominent cryptocurrency and the largest in terms of market capitalisation, there are over 8,000 alternative cryptocurrencies besides Bitcoin, also known as altcoins, listed on CoinMarketCap, as of 26 January 2021.
If you believe in cryptocurrencies as an alternative asset class and wish to diversify beyond Bitcoin, there are plenty of choices. Here are 5 prominent digital currencies or altcoins you can consider investing in.
Note: this article does not constitute investment recommendations. We are not recommending you to either purchase or sell any of the mentioned digital currencies.
#1 Ethereum (ETH)
Ethereum (ETH) may be the second largest cryptocurrency by market capitalisation. Often on the same exchanges and gaining just as much institutional attention as Bitcoin (BTC), Ethereum has been steadily on the rise. Ethereum started 2021 around US$130 and ended the entire year at around US$750, a gain of over 550%. However, in just the few weeks of January 2021, it has since almost doubled from $730 to cross its record peak of US$1,400 and is hovering around US$1,350.
Since the cryptocurrency rush in 2021/2021 to today, Ethereum has held its own and solidified its position because the second most prominent digital currency. Unlike Bitcoin that has acted as a store of value similar to gold, Ethereum has the ability to create and hold smart contracts. Smart contracts allow transactions to occur without a third party or central authority. Imagine buying a property without the involvement of the agent, lawyer or the government. This is theoretically possible with a smart contract.
This means that Ethereum is more than a currency, it is a smart contract platform which other digital ledgers can be created as well as on which other cryptocurrencies can be according to. For example, many of the initial coin offerings (ICOs) in 2021/2021 were based on Ethereum and offered as ERC-20 tokens.
Another part of the reason for the recent surge in Ethereum is driven by Ethereum's ability to host decentralised finance (DeFi) decentralised applications (DApps) which allows users to perform financial functions on blockchains. As reported by Cointelegraph, \”Ethereum houses over 95% of all DeFi smart contract\”.
However, this proliferation of DApps has also caused the Ethereum network to become overloaded, leading to performance issues. While Ethereum intends to solve this and other issues by moving to Ethereum 2.0, this is a move that has been years in the making and there is no guarantee that it will likely be a smooth and successful transition.
Price on 1 January 2021: US$130
Price on 31 December 2021: US$752
Performance in 2021: 580%.
#2 Tether (USDT)
The third largest cryptocurrency by market capitalisation is Tether.
What makes Tether different is that it is a stablecoin that is pegged towards the US Dollar. This means that unlike other crypto tokens which can fluctuate dramatically in price, one tether token is generally worth US$1. This allows Tether to be used like a medium of exchange along with a mode of storage of value, especially in the volatile world of cryptocurrencies.
As most cryptocurrencies aren't transacted with fiat currencies, Tether (USDT) becomes the main way that people can use fiat currencies to buy the lesser known cryptocurrencies. For example, if you want to buy an alt-coin that is provided by an exchange that only trades in cryptocurrencies, you should use buy USDT with your US dollars and then buy the alt-coin using USDT.
As cited by Investopedia, \”80% of bitcoin trading is done in Tether, and also the stablecoin is a major source of liquidity for that cryptocurrency market.\”
However, do take caution. The company behind Tether, Tether Ltd., makes no be certain that you can redeem nor exchange your USDT for real US dollars. Additionally, Tether's history has been marred by past regulatory issues like the accusations that Tether's reserves were drained to mask missing funds.
Performance in 2021: not applicable because USDT is pegged to all of us dollar.
#3 Polkadot (DOT)
Polkadot or DOT is the current 4th largest cryptocurrency, based on CoinMarketCap. Polkadot was only listed on the major cryptocurrency exchanges such as Binance, Bifinex and Kraken around end-August 2021. Since its listing, it has risen to above US$9 by the end of 2021, and hit a peak of US$20 in January 2021. Polkadot is currently about US$17.28, double its value from the start of the year.
While Bitcoin, Ethereum and Tether have been in the top 10 cryptocurrencies before the 2021/2021 peak, Polkadot's first token sale only closed in October 2021. This makes Polkadot younger than the other cryptocurrencies mentioned here.
What differentiates Polkadot is that it is a parachain or parallel blockchain. Which means that transactions can be processed more quickly and scaled across parallel chains. An analogy for this how your computer processing has improved tremendously when graphics cards and computer processors moved from single-core to multi-core. Additionally, Polkadot can connect and allow for the transfer of data, not just tokens, across blockchains, which potentially opens up more use cases.
Price on first listing 21 Aug 2021: US$3.11
Price on 31 December 2021: US$9.28
Performance in 2021: 300%.
While the abovementioned digital currencies seem to be ranked by market capitalisation, they're also exemplars of the different subcatogeries of cyptocurrencies. Moving away from market capitalisation, we look at some interesting options to Bitcoin.
#4 Chainlink (LINK)
Chainlink really took off in 2021. While it has been listed on some of the major cryptocurrency exchanges such as Kraken and Coinbase before 2021, its price has risen from US$1.80 to US$11.25 in 2021. Since the start of 2021, Chainlink has doubled to US$23.10. These days it is the 7th ranked cryptocurrency by market capitalisation.
Chainlink is an oracle service that fetches data beyond a blockchain and registering it onto the blockchain. This is important because while blockchains are known for security and immutability, they cannot verify the qualify of information that goes onto the blockchain. This is where an oracle that feeds data towards the protocols comes in. This is especially essential for smart contracts where you may require external data to assess whether the conditions of the contract are fulfilled.
In particular, Chainlink has benefited from the surge of interest in DeFi and it is currently the largest oracle service.
Price on 1 January 2021: US$1.80
Price on 31 December 2021: US$11.25
Performance in 2021: 625%.
#5 Bitcoin Cash (BCH)
Bitcoin Funds are an example of cryptocurrencies that originate from a hard fork or split from an originating cryptocurrency. In this case, Bitcoin Cash was created from a hard fork from Bitcoin in August 2021.
The reason behind a hard fork is typically ideological whereby the developers have differing methods to solve the challenges of the cryptocurrency. For Bitcoin Cash, the problem was how to scale Bitcoin transactions to accommodate the growing volume. There might be multiple hard forks for a cryptocurrency with each hard fork leading to the development of a new cryptocurrency. Bitcoin itself has had several hard forks with Bitcoin Cash and Bitcoin Gold being more prominent and popular variants. Other variants for example Bitcoin XT, Bitcoin Classic or Bitcoin Unlimited have largely fallen from favour.
In 2021, Bitcoin Cash's price rose from US$203 to US$343 and is currently around US$428. BCH is currently ranked 9th by CoinMarketCap.
Price on 1 January 2021: US$203
Price on 31 December 2021: US$343
Performance in 2021: 170%.
Take Caution Since you can Lose All Your Money In Cryptocurrencies
The eye-popping gains might be alluring but cryptocurrencies are still nascent plus some say speculative in nature. In the last ICO rush of 2021/2021, many cryptocurrency traders/ investors lost all their capital when the cryptocurrencies they bought into crashed (to zero value for some). While some have survived or languished, there isn't any certainty that the cryptocurrency you bought today will be the star tomorrow.
For instance, Ripple or XRP, a prominent cryptocurrency that's been 3rd ranked by market capitalisation lost over 40% of their value because of an SEC lawsuit. Not just has its value evaporated overnight, the delisting of XRP from major exchanges implies that if you are a holder of the tokens, but you will also be stuck in a situation where you have problems moving your tokens or liquating them.
For every cryptocurrency which has risen to the top, there are many more that have failed. Even a top ranked cryptocurrency can face the threat of failure. So take caution before you invest in cryptocurrencies and don't lose more than you can afford.