The cryptocurrency market has exploded in recent years. There are now more than 8,620 cryptocurrencies, according to CoinMarketCap.com, and new tokens seem to come into existence daily. More importantly, the collective value of the cryptocurrency market has skyrocketed over 1,000% in the past two years, reaching $2.25 trillion. No other asset class has generated returns that come anywhere close to that figure.
Of course, cryptocurrencies are incredibly volatile, and past performance is never a guarantee of future returns. But if you’re a risk-tolerant investor with plenty of time before retirement, I think it makes sense to add a small cryptocurrency position (maybe 5%) to your portfolio. With that in mind, Bitcoin (CRYPTO:BTC) and Chainlink (CRYPTO:LINK) look like smart long-term investments.
Bitcoin is built on blockchain technology, a database that exists across a decentralized network of nodes (or computers). And that database is secured by cryptography, meaning miners (not banks) are responsible for verifying transactions and preventing fraud. In other words, Bitcoin does make it possible to spend money electronically without the help of a financial institution. But the network is much too slow to make Bitcoin a viable alternative to the existing payments infrastructure.
However, Bitcoin’s source code limits its supply to 21 million tokens, a quality that has drawn comparisons to other finite assets. In fact, Bitcoin is often described as digital gold. And when supply is held constant, economic principles suggest that rising demand will translate into rising prices. So this is the question: Will demand for Bitcoin continue to rise? I think the answer is yes.
Since its debut in 2009, Bitcoin has reached a market value of about $900 billion, a sign of its popularity with investors — and I’m not just talking about retail traders. A recent study from Fidelity published in September suggests that more institutions are putting their money behind digital assets, and that trend is set to continue. Case in point: 71% of those surveyed plan to buy digital assets in the future, but just 52% now own digital assets.
More importantly, Bitcoin is the most widely held digital asset among institutional investors. Assuming that pattern holds, Bitcoin’s price should rise as more institutions adopt cryptocurrency as part of their investment strategy.
Cryptocurrency projects like Avalanche and Solana have contributed to the evolution of blockchain technology, creating use cases that go beyond a simple payments system. Specifically, Avalanche and Solana are programmable blockchains, meaning developers can build self-executing computer programs (or smart contracts) on both networks. And Chainlink was designed to make smart contracts more useful.
In general, blockchains are incapable of interacting with real-world systems, meaning they aren’t privy to the data the rest of us rely on. That’s a problem, because smart contracts form the core of decentralized finance (DeFi) products. And by eliminating intermediaries, DeFi promises to make financial services cheaper and more accessible. However, those products aren’t very useful without real-world data.
For example, imagine a DeFi marketplace that sells artwork, real estate, or other collectibles. The underlying smart contract would need to know the latest market values of those assets. You may wonder: Why not have someone insert the price manually? That’s a good idea, but allowing any single person to set the price would compromise the decentralized nature of the smart contract, creating a single point of failure. Chainlink solves that problem.
Chainlink is a decentralized network of so-called oracles, and it’s powered by the LINK token. Oracles are entities (e.g., application programming interfaces) capable of bringing real-world data onto any blockchain. Likewise, oracle node operators (i.e., people that run the network infrastructure) are required to stake, or pledge, LINK to participate; they are paid in LINK for their services.
Returning to our previous example, let’s say you want to buy a piece of property. The smart contract would request pricing data from Chainlink, then node operators would bid on the job, and the Chainlink protocol would choose operators to fulfill the request. In this case, the operators could gather data from real-estate appraisers, then each would submit the data to Chainlink. The important part is this: Multiple data points are reconciled to obtain an accurate result, maintaining the decentralized nature of the network.
What’s the investment thesis? Chainlink is the largest and most popular oracle network. As more smart contracts are designed to integrate real-world data, demand for Chainlink oracles should rise. And because those oracles are paid in LINK, demand for the LINK token should rise, too, driving its price higher. It’s worth noting that, like Bitcoin, the supply of LINK is fixed, though in this case the cap is 1 billion tokens. More importantly, Chainlink is interoperable with any blockchain, meaning its long-term growth prospects aren’t tied to the success of any single network. That’s why Chainlink looks like a smart buy.
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.