Meanwhile, Cardano (CRYPTO:ADA) and Solana (CRYPTO:SOL) are down over 20% from their highs. Fears of an impending cryptocurrency winter and crackdowns by the U.S. and China may signal a short-term market top. Here’s what to do if you’re worried about falling cryptocurrency prices.
Bitcoin and Ethereum are not a bubble
Long gone are the days of calling Bitcoin and Ethereum a craze. Yes, many doubters remain, but there’s no denying that Bitcoin and Ethereum are much more established than they used to be.
Bitcoin provides a store of value and an inflation hedge, especially in countries that lack a stable fiat currency. New financial products centered around Bitcoin are being introduced. Bitcoin is even being stored on companies’ balance sheets. And most importantly, Bitcoin has remained safe and secure even as adoption has grown exponentially.
Meanwhile, Ethereum is the backbone of decentralized finance (DeFi). The growth of new applications that run on the Ethereum blockchain expands the importance of its network. One reason Bitcoin is so valuable is that it has a peak supply of just 21 million coins. Ethereum doesn’t have a fixed supply, but coin-burning has successfully kept the asset scarce.
Ethereum is burned on purpose by those that try to limit its supply, as well as in transaction volumes for non-fungible tokens (NFTs) on sites like OpenSea. Without getting too much into the details, Ethereum has proven it is in fact scarce, which gives it more value and differentiates it from infinite-supply altcoins like Dogecoin or Shiba Inu.
The impending Ethereum 2.0 upgrade, which is expected in the first half of 2022, will transition Ethereum from a proof-of-work to a proof-of-stake consensus mechanism. In theory, the transition would make Ethereum more safe, secure, and scalable, not to mention less environmentally taxing. In a proof-of-stake method, users will validate transactions based on how many coins they hold, not by deploying computer power as is done in a proof-of-work method.
Distinguishing Bitcoin and Ethereum from altcoins
Bitcoin’s unparalleled decentralization and safety make it a linchpin in the cryptocurrency market, whereas Ethereum is well-rounded and balanced — acting like a smartphone that hosts innovative projects.
According to CoinMarketCap, there are over 14,500 cryptocurrencies currently in existence. Many of these projects will get hyped up, fail, and lose money for a lot of people. But it’s important not to tangle fads and fringe markets in the Bitcoin and Ethereum investment thesis.
How to approach the market now
Whether you’re new to the cryptocurrency market or wondering how to adjust your position amid falling prices, the most important thing is to respect your personal risk tolerance. Despite the potential, there’s no reason to get overly involved in cryptocurrencies, especially the risky ones, if it doesn’t suit you. If you believe that we are in the early innings of decades of cryptocurrency growth, then simply dollar-cost averaging into Bitcoin and Ethereum over time should do the trick. If you want to expose yourself to other options as well, then adding a high-growth name like Solana is OK too.
Some risk-averse investors may even find the high interest rates offered by stablecoins providing an attractive income stream.
The cryptocurrency market is sure to go through cycles of boom and bust for the foreseeable future. But if you think the growth trajectory is headed up, then there’s no reason to fear a short-term market top so long as the investment position is an amount you can afford to lose.
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.