Cryptocurrency has been making headlines in recent months, and three types of digital currencies, in particular, are gaining the most attention: Bitcoin (CRYPTO: BTC), Ethereum (CRYPTO: ETH), and Dogecoin (CRYPTO: DOGE).
Not all cryptocurrencies are created equal, and it can be confusing trying to decide which type is right for you. Each currency has advantages and disadvantages, and which one you choose to invest in will depend on your unique situation.
First, it's important to think about whether cryptocurrency is right for you at all. All cryptocurrencies are highly speculative investments that are subject to extreme volatility. Nobody knows for sure whether crypto will succeed over the long run, so be sure you have a very high tolerance for risk before you decide to invest in cryptocurrency.
If you know for certain you want to buy crypto, here's how to decide whether Bitcoin, Ethereum, or Dogecoin is the right fit for you.
While there's no such thing as a “safe” cryptocurrency, Bitcoin is somewhat less risky than Ethereum and Dogecoin. Again, this doesn't mean it isn't risky, but it does have several advantages over its competition.
Bitcoin is the original cryptocurrency, and it has the most name recognition and the most credibility. Few merchants accept crypto as a form of payment, but the ones that do are more likely to accept Bitcoin than other types of digital currencies. Widespread adoption will be key to crypto's long-term success, so Bitcoin has a leg up on its competitors.
In addition, Bitcoin is often referred to as “digital gold” because there is a limited number of tokens available — 21 million tokens, to be exact. This scarcity increases Bitcoin's value, and it can also potentially drive up its price.
Ethereum is the next most popular cryptocurrency after Bitcoin. Technically, Ethereum is a type of blockchain technology, and Ether is the coin hosted on the Ethereum blockchain.
You can invest in Ether by purchasing coins like you would with Bitcoin or Dogecoin. While it's not possible to invest directly in Ethereum blockchain technology, you have other options. You can either buy Ether (since investing in the cryptocurrency also supports the blockchain foundation behind it) or you can invest in companies that use the Ethereum blockchain. If Ethereum continues to grow, those companies could also thrive.
The biggest advantage of Ethereum is that it has applications beyond cryptocurrency. It's the blockchain behind nun-fungible tokens (NFTs), for example, and it's also the foundation for decentralized finance. Blockchain technology has the potential to revolutionize many areas of business, and Ethereum is one of the biggest players in the blockchain space.
Although Ether isn't as popular as Bitcoin, its supporters believe it has a tremendous amount of potential. It may be riskier than Bitcoin because it doesn't have the same track record, but high risk could potentially result in higher rewards, too.
Dogecoin has had an incredible run so far this year. Over the past six months, its price has surged more than 14,500%. In the past month alone, it's up around 350%.
However, Dogecoin is also, by far, the riskiest cryptocurrency on the list. Unlike Bitcoin and Ethereum, Dogecoin doesn't have a significant competitive advantage in the crypto industry. Very few merchants accept Dogecoin, giving it limited utility. It was originally created as a joke based on a meme, which also hurts its credibility.
The main reason Dogecoin's price has been soaring is due to internet hype. Online investors have been pumping up its price to make a quick buck, and celebrity billionaires like Elon Musk have also promoted Dogecoin on social media. But when any investment's price doesn't match its underlying fundamentals, it's only a matter of time before it crashes.
Sure enough, over the past week, Dogecoin's price has dropped roughly 40%. While nobody knows whether it will rebound or continue to plummet, buying Dogecoin right now is more akin to gambling than investing. If you choose to invest in Dogecoin, only invest what you can afford to lose.
Choosing the right cryptocurrency
Which cryptocurrency you choose to buy (and whether you should invest in crypto at all) depends primarily on your tolerance for risk. Risk-averse investors may be better off avoiding crypto altogether because even the “safest” cryptocurrencies are still incredibly volatile.
If you opt to jump on the cryptocurrency bandwagon, consider how much risk you're willing to take on. Bitcoin is by far the biggest player in the game, but Ethereum also has potential — and carries more risk. By doing your research and considering your options carefully, you'll be able to make the best decision for your situation.
10 stocks we like better than Ethereum
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Ethereum wasn't one of them! That's right — they think these 10 stocks are even better buys.
*Stock Advisor returns as of May 11, 2021
Katie Brockman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin. The Motley Fool has a disclosure policy.