The 3 Types of Cryptos That Could Outperform Bitcoin This Year | The Motley Fool (2024)

Even with its recent pullback from the $30,000 price level, Bitcoin remains one of the top-performing cryptos of 2023. It is up 65% this year, and it's hard to find any large market-cap coins that can top this.

But savvy investors know it's best not to put all your eggs into one basket. If you are looking to diversify your crypto portfolio, here are three types of digital coins that could outperform Bitcoin this year.

1. Potential Ethereum replacements

While Ethereum (CRYPTO: ETH) continues to be the dominant Layer 1 blockchain in the crypto world, there are plenty of up-and-comers that hope to dethrone it. Three rivals that stand out are Solana, Aptos, and Fantom. Both Solana and Aptos are up more than 100% this year, and Fantom is not too far behind, at 93%.

Judging from their performance, investors are not entirely convinced that Ethereum is going to retain its dominant role in so many key blockchain sectors, ranging from non-fungible tokens (NFTs) to decentralized finance (DeFi). While The Merge helped to improve the speed, efficiency, and scalability of the core Ethereum blockchain, these blockchain rivals are still much faster and cheaper. That has huge implications in areas such as DeFi, where users are looking for near-zero fees and near-instantaneous settlement of transactions.

Of these Ethereum rivals, my personal pick is Solana, which has been out-innovating Ethereum of late. For example, Solana recently launched the first-ever mobile phone for a major blockchain network (the Saga) and has been exploring new initiatives to leverage all the hype and excitement around artificial intelligence, including a new plug-in for ChatGPT. For Solana to outperform Bitcoin, it will need to show that mobile crypto and crypto AI are sustainable, long-term growth catalysts.

2. Scaling solutions for Ethereum

If you are looking for a less risky way to outperform Bitcoin, then blockchain scaling solutions for Ethereum could be the answer. Simply stated, these scaling solutions sit on top of the main blockchain and help Ethereum process transactions faster and cheaper.

For that reason, they are referred to as Layer 2 solutions (i.e., they are the second layer on top of the base Ethereum layer). Each scaling solution uses its own form of proprietary technology to accomplish its goals, so it can sometimes be difficult to differentiate among these different solutions.

If you buy into the idea that these Layer 2 coins are essential to the future success of Ethereum, then there are a few key prospects to target, including Immutable, Optimism, and Polygon. The name that's probably most familiar to investors will be Polygon, which has been making waves recently with new NFT initiatives, including a high-profile partnership with Nike to create an entirely new NFT marketplace for digital sneakers.However, if you are craving maximum upside potential, a better pick might be Immutable, which is up a mind-blowing 99% this year.

3. Cryptos that help people stake on Ethereum

Lastly, there are a growing number of cryptos that help people stake on Ethereum. Now that Ethereum has transformed from a proof-of-work blockchain into proof of stake, this is tremendously important. Crypto staking is suddenly big business, and investors are always looking for ways to earn the highest staking rewards possible.

The two big names to watch here are Lido DAO, which is up 95% this year, and Rocket Pool, which is up 157% this year.Both emerged from relative obscurity after The Merge due to the popularity of staking, and both now currently rank in the Top 50 cryptos in terms of market capitalization.

Which of these is the best buy?

The common theme of all three categories of cryptos detailed above is that they somehow involve Ethereum. The first category, for example, includes all those capable of displacing Ethereum one day as the preeminent Layer 1 blockchain. The second category includes all digital currencies helping Ethereum scale bigger and faster. And the third category includes all cryptos that involve staking on Ethereum.

So if the prospect of picking winners and losers in niche areas of the blockchain space seems too daunting, the classic buy-and-hold crypto is Ethereum, which is up a not-too-shabby 52% this year.

But if you're looking for a little extra turbocharging for your portfolio, then my best picks would be Solana and Polygon. I'm long-term bullish on both of them, and I still regard both as best-in-class for their respective blockchain categories.