Bitcoin and Ethereum have the best risk-reward profiles of any of the top cryptocurrencies.
Even the most popular and trusted names in the crypto market can be extraordinarily volatile. Both Bitcoin (BTC -2.30%) and Ethereum (ETH -4.34%), for example, were down more than 65% for the year.
Despite last year's poor market performance, Bitcoin and Ethereum are two cryptos that investors can buy and hold forever. Both have long track records of bouncing back from previous crypto market declines, and both have attractive long-term growth prospects. Let's take a closer look at what makes these two cryptos so attractive to buy-and-hold investors.
Bitcoin
As the original cryptocurrency, Bitcoin has the longest track record of bouncing back from sudden market crashes and protracted bear market declines. In fact, over its 14-year history, Bitcoin has bounced back from several major market crashes. And Bitcoin has also endured two absolutely miserable years that looked a lot like 2022. In 2014 Bitcoin fell 58%, and in 2018 it fell 73%. Both times, Bitcoin bounced back. While past performance is no guarantee of future performance, this track record mitigates some of the risk of holding cryptocurrency for the long haul.
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Where Bitcoin really shines is in its ability to deliver market-beating returns over an extended period of time. From 2011 to 2021, Bitcoin was the top performing asset in the world, delivering annualized returns of 230%.No other asset class even came close. Over its history, Bitcoin has delivered astounding 16,515% returns to investors.It's for good reason that Bitcoin is the original "buy and HODL" crypto.
While it is highly unlikely that Bitcoin will deliver the same type of performance in the future, there are plenty of investors and asset managers who have set some pretty high price targets for Bitcoin. For example, Ark Invest's Cathie Wood suggests Bitcoin could hit a price target of $1 million by the end of 2030.Other asset managers have set price targets of $250,000 and $500,000 for Bitcoin.
Just keep in mind that many of these predictions are based on some fairly aggressive assumptions. Bitcoin bull Michael Saylor, for example, thinks Bitcoin will eventually replace gold as a store of value. And Silicon Valley venture capitalist Tim Draper thinks Bitcoin will become ubiquitous as a form of online payment for just about everything.
Ethereum
While Bitcoin might deliver more upside potential than Ethereum, the real benefit from holding Ethereum comes from its unparalleled diversification. When Ethereum launched back in 2015, it introduced the world to smart contracts, which are simply small pieces of executable computer code that reside on a blockchain. With smart contracts, it was possible to build the modern blockchain and crypto world -- everything from decentralized finance (DeFi) to decentralized apps, Web3, gaming, and non-fungible tokens (NFTs).
Since Ethereum has exposure to so many niches in the blockchain world, investors are able to diversify away some of the risk of holding crypto. If the NFT market collapses, for example, you might still be able to capture the upside of other market niches, such as gaming or the metaverse. Now that Ethereum has completed its transition to a proof-of-stake blockchain via The Merge, it will be able to offer even more market opportunities.
The best way to think about the Ethereum blockchain is that it is a base layer that developers can build on top of in order to create value. Thus, when you invest in Ethereum, you are not just investing in a cryptocurrency -- you are also investing in the full Ethereum ecosystem. The continued growth of this vibrant ecosystem ensures Ethereum will continue to have long-term value, especially as more brands and companies enter the blockchain space.
Risk vs. reward
From my perspective, Bitcoin and Ethereum have the best risk-reward profiles of any cryptos in the market today. Together, they account for nearly 60% of the entire capitalization of the crypto market, and for good reason. They both have enormous upside potential and also have demonstrated their ability to bounce back from difficult market conditions. If you are willing to take on the risk and volatility of investing in crypto, I suggest you start with Bitcoin and Ethereum. I'm bullish on them, both short- and long-term.
Dominic Basulto has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
