5 digital currencies you can invest in besides bitcoin (And their performance in 2020)

After Bitcoin’s dizzying rise to a record US$40,000 (S$53,000) in January 2021, digital currencies or cryptocurrencies are starting to capture public attention.

From around US$7,000 at January 2020, Bitcoin rose to about US$30,000 by December 2020, shot up to a new record of above US$40,000 in January 2021 and is now hovering around US$32,000.

In comparison, the hottest stock of 2020, Tesla rose from around U$100 to above US$700 from January 2020 to December 2020, while the S&P 500 only returned around 15 per cent in the same period. With such gains, there’s little wonder why even the man on the street is talking about Bitcoin (and Tesla).

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 a digital ledger (blockchain). This may be a gross simplification and various cryptocurrencies have features that differentiate them from one another.

While cryptocurrencies have been previously dismissed by mainstream investors (including large institutional investors), 2020 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 Jan 26, 2021.

If you believe in cryptocurrencies as an alternative asset class and want 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 advice. We are not recommending you to either buy or sell any of the mentioned digital currencies.

#1 Ethereum (ETH)

Ethereum (ETH) is the second largest cryptocurrency by market capitalisation. Often listed on the same exchanges and gaining as much institutional attention as Bitcoin (BTC), Ethereum has been steadily on the rise.

Ethereum started 2020 around US$130 and ended the year at around US$750, a gain of over 550 per cent. 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 2017/2018 to today, Ethereum has held its own and solidified its position as the second most prominent digital currency. Unlike Bitcoin which 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 take place without a third party or central authority. Imagine buying a property without the involvement of an 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 on which other digital ledgers can be created and on which other cryptocurrencies can be based on. For example, many of the initial coin offerings (ICOs) in 2017/2018 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 per cent of all DeFi smart contract”.

However, this proliferation of DApps has also caused the Ethereum network to be 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 be a smooth and successful transition.

Price on Jan 1, 2020: US$130

Price on Dec 31, 2020: US$752

Performance in 2020: 580 per cent.

#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 to the US Dollar. This means that unlike other crypto tokens which can fluctuate dramatically in price, one tether token is usually worth US$1. This allows Tether to be used as a medium of exchange and a mode of storage of value, especially in the volatile world of cryptocurrencies.

As most cryptocurrencies are not 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 offered by an exchange that only trades in cryptocurrencies, you can use buy USDT with your US dollars and then buy the alt-coin using USDT.

As cited by Investopedia, “80 per cent of all bitcoin trading is done in Tether, and the stablecoin is a major source of liquidity for the cryptocurrency market.”

However, do take caution. The company behind Tether, Tether Ltd., makes no guarantee that you can redeem nor exchange your USDT for real US dollars. Additionally, Tether’s history has been marred by past regulatory issues such as the accusation that Tether’s reserves were drained to mask missing funds.

Performance in 2020: Not applicable because USDT is pegged to US dollar.

#3 Polkadot (DOT)

Polkadot or DOT is the current 4th largest cryptocurrency, according to CoinMarketCap. Polkadot was only listed on the major cryptocurrency exchanges such as Binance, Bifinex and Kraken around end-August 2020. Since its listing, it has risen to above US$9 by the end of 2020, 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 2017/2018 peak, Polkadot’s first token sale only closed in October 2017. This makes Polkadot younger than the other cryptocurrencies mentioned here.

What differentiates Polkadot is that it is a parachain or parallel blockchain. This means that transactions can be processed more quickly and scaled across parallel chains. An analogy to 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 Aug 21, 2020: US$3.11

Price on Dec 31, 2020: US$9.28

Performance in 2020: 300 per cent.

While the abovementioned digital currencies appear to be ranked by market capitalisation, they are also exemplars of the different subcatogeries of cyptocurrencies. Moving away from market capitalisation, we look at some interesting alternatives to Bitcoin.

ALSO READ: Shenzhen's $2m digital currency lottery attracts 2 million hopefuls

#4 Chainlink (LINK)

Chainlink really took off in 2020. While it has been listed on some of the major cryptocurrency exchanges such as Kraken and Coinbase before 2020, its price has risen from US$1.80 to US$11.25 in 2020. Since the start of 2021, Chainlink has doubled to US$23.10. It is currently the 7th ranked cryptocurrency by market capitalisation.

Chainlink is an oracle service that fetches data outside of 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 data that goes onto the blockchain.

This is where an oracle that feeds data to the protocols comes in. This is especially important for smart contracts where you may need 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 is currently the largest oracle service.

Price on Jan 1, 2020: US$1.80

Price on Dec 31, 2020: US$11.25

Performance in 2020: 625 per cent.

#5 Bitcoin Cash (BCH)

Bitcoin Cash is 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 2017.

The reason for a hard fork is typically ideological whereby the developers have differing solutions to solve the challenges of the cryptocurrency. For Bitcoin Cash, the issue was how to scale Bitcoin transactions to accommodate the growing volume.

There can be multiple hard forks for a cryptocurrency with each hard fork leading to the creation of a new cryptocurrency. Bitcoin itself has had several hard forks with Bitcoin Cash and Bitcoin Gold being more prominent and widely used variants. Other variants such as Bitcoin XT, Bitcoin Classic or Bitcoin Unlimited have largely fallen out of favour.

In 2020, 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 Jan 1, 2020: US$203

Price on Dec 31, 2020: US$343

Performance in 2020: 170 per cent.

Take caution because you can lose all your money in cryptocurrencies

The eye-popping gains may be alluring but cryptocurrencies are still nascent and some say speculative in nature. In the previous ICO rush of 2017/2018, 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 is no certainty that the cryptocurrency you bought today will be the star tomorrow.

For instance, Ripple or XRP, a prominent cryptocurrency that has been 3rd ranked by market capitalisation lost over 40per cent of its value because of an SEC lawsuit.

Not only has its value evaporated overnight, the delisting of XRP from major exchanges means 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 that 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.

ALSO READ: Bitcoin climbs towards all-time high after topping $25k

This article was first published in Dollars and Sense.