Cryptocurrencies are risky, speculative investments, but they can potentially be lucrative. Certainly, some investors have made millions buying and selling tokens — but others have incurred big losses.
Some of the volatility stems from the fact that the whole cryptocurrency model is still in its infancy. And while the underlying technology does have the potential to revolutionize a variety of industries, it’s still unclear whether that will actually happen, or which tokens will benefit if it does.
So if you’re going to trade in cryptocurrencies, it’s crucial to understand what you’re getting into, and to pick carefully from among the ever-growing array of tokens — because some are significantly more risky than others.
Why is Dogecoin so risky?
Dogecoin’s price has run up by more than 4,000% since the beginning of the year. It quickly became one of the fastest-growing cryptocurrencies, far outpacing the growth rates of two of its biggest (and more mature) competitors, Bitcoin and Ethereum.
Just because an asset’s price is skyrocketing, however, that doesn’t mean it’s a good buy. With any investment, would-be buyers should focus more on the underlying factors that can contribute to its long-term success.
Dogecoin’s price surges were mainly driven by the fact that retail investors bought the cryptocurrency in droves after it received massive hype from celebrities and on social media. The more people bought it, the more its price increased, feeding that hype cycle.
The problem is that Dogecoin’s underlying fundamental value has become disconnected from its price. Compared to other tokens, it doesn’t have many advantages as a useful cryptocurrency. That will make it harder for Dogecoin’s price to continue growing over the long term. Instead, it’s likely that the token will be trampled by the competition, and that retail investors who bought in will move on to different cryptocurrencies.
In fact, Dogecoin’s price has already fallen by nearly 60% from its peak, and it may not recover its former upward momentum. Unless it develops a strong competitive advantage, it might have a tough time keeping up with other cryptocurrencies.
Why Ethereum is a stronger choice
Ethereum, on the other hand, does have clear advantages. Not only is its native token, Ether, the second most popular cryptocurrency behind Bitcoin, but Ethereum’s blockchain technology also gives it endless opportunities for growth.
Ethereum is a major player in the blockchain industry, and it underlies applications such as decentralized finance, non-fungible tokens (NFTs), and smart contracts. Also, because its blockchain is open-source, developers around the world can use it to create new applications. If any of those applications are widely adopted, Ethereum will benefit.
Developers are also working on an update to the technology, Ethereum 2.0, which will be gradually rolled out next year. With this update, Ethereum will move to a proof-of-stake protocol, making it faster and significantly more energy-efficient, giving it another leg up on the competition.
Regardless of where you invest, it’s wise to take a long-term approach and only buy stocks or cryptocurrencies that you believe can perform well over several years or even decades. While there is no guarantee that Ethereum will succeed over those time frames, it does have serious advantages over Dogecoin that give it a better chance at achieving long-term growth.
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.