For the first time in a long time, the cryptocurrency asset class appears to have a boost. Since the start of 2023, the collective crypto market cap is up about 25% and has regained the $1 trillion mark, a level not seen since November.
Cryptocurrency’s surge in recent weeks has seen just about every cryptocurrency making a profit, but two in particular stand out from the crowd: Bitcoin (BTC -1.01%) and Ethereum (ETH -4.10%).
I don’t get points for originality, but these two cryptocurrencies are the cream of the crop. Together they account for nearly 60% of all cryptocurrency value (Bitcoin 42% and Ethereum 19%). As Bitcoin and Ethereum go, the rest of the asset class often goes too.
The reason why these two tokens occupy a class of their own is actually not that complicated. While cryptocurrencies can sometimes seem overly technical and misunderstood, one of the best ways to maximize potential is generally to keep things simple.
The original cryptocurrency still has it
Bitcoin, the world’s first cryptocurrency, has led the asset class for over 14 years. It dominates in large part due to the fact that for a while there were simply no other cryptocurrencies for investors to buy. This has changed over the past decade, but while there are now thousands of cryptocurrencies to choose from, Bitcoin still dominates.
Its continued leadership is likely due to a handful of reasons, including features such as its unparalleled decentralization and security, and its inherent scarcity, supporting the argument that it should be a great store of value. These traits have put Bitcoin in a league of its own and have led to more than just the average retail investor taking an interest in it.
Since 2021, two countries have made Bitcoin a form of legal tender, the world’s largest asset manager announced it would allow customers to own Bitcoin, and some publicly traded companies hold some Bitcoin instead of cash. If such trends continue, Bitcoin is unlikely to lose its spot as the most valuable cryptocurrency and is likely to become the leader when a bull market returns.
The champion of DeFi
While Bitcoin is the leader, Ethereum remains an unshakable number 2. When Ethereum was invented in 2015, it completely changed the cryptocurrency landscape. The programmable smart contracts allowed developers to create applications that ran on the Ethereum blockchain, something that was not possible with Bitcoin. New use cases were created with these smart contracts, such as non-fungible tokens (NFTs) and decentralized finance (DeFi).
Other blockchains supporting smart contracts have been created in recent years, but none have made any significant progress in overtaking Ethereum’s dominant position in that segment of the crypto world. No metric captures this better than Ethereum’s Total Value Locked (TVL), a metric that quantifies the value supported by blockchains in DeFi applications.
Like a company’s market cap, TVL fluctuates, but at the time of writing, Ethereum’s TVL is just over $27 billion and represents about 60% of all value in DeFi. The next closest blockchain is BNB, with just $4.7 billion.
The huge market share that Bitcoin and Ethereum hold against their competitors are the main reasons why they will be at the helm when a crypto bull market returns. In addition, and most importantly, almost every other cryptocurrency is positively correlated with Bitcoin and Ethereum.
If there’s one thing investors should learn from the 2022 debacle, it’s that not every cryptocurrency is worthy of a spot in your portfolio. Rather than trying to find the next meme coin that could bring an astronomical profit — and then most likely return to zero afterward — investors should keep it simple. Since most of the asset class follows Bitcoin and Ethereum, why not just own the two front runners? Chances are they will continue their dominance.
RJ Fulton has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.