With Bitcoin (CCC:BTC-USD) still priced above $50,000 despite the severe volatility that has impacted the cryptocurrency sector recently, one of its alternative crypto token (altcoin) rivals Cardano (CCC:ADA-USD) appears as an oddity.
Trading hands at a little over $1 at time of writing, you will be forgiven if you thought that ADA-USD lacked credibility.
However, you’d also be wrong. Leveraging a market capitalization of $32.7 billion, its ranked in fifth place from this valuation perspective. We’ll see where this ends up after the crypto market is done printing red ink. But as things stand now, Cardano can easily compete among mid-cap companies.
Remarkably, the valuation that Cardano commands isn’t just based on dumb speculation. According to its website, the Cardano blockchain project was the first to demonstrate the viability of the proof-of-stake protocol.
Let’s back up for a minute before we start getting too technical. When the programmer or team named Satoshi Nakamoto invented Bitcoin, it sparked myriad opportunities based on peer-to-peer transactions and a self-contained ecosystem driven by digital tokens. In order to create this blockchain economy, though, there had to be some measure of value associated with the underlying tokens.
As you probably know, a collection of nodes or computers determine Bitcoin’s supply through a “mining” process. Essentially, nodes compete to solve complex algorithmic problems. The first to complete the problem receives reward tokens for their troubles. However, as more Bitcoin is mined, the difficulty – and thus the energy consumption – increases exponentially. This protocol is called proof-of-work.
In contrast, Cardano forwarded an alternative solution. Rather than rewarding miners with the most computing power (because as the difficulty increases, so too does the computing power required to mine the target token), proof-of-stake protocols rewards engagement. In other words, miners who have more of the token in question will be able to mine more of it.
Theoretically, this reduces energy consumption and compensates those who actually have a stake in the target blockchain.
The Fate of Cardano Depends on Bitcoin
Logically, you might assume that because proof-of-stake fundamentally clashes with proof-of-work, Cardano should be able to decouple itself from Bitcoin. In other words, even if Bitcoin collapses, the arguably more innovative Cardano should see ADA rise above the muck.
Certainly, if Bitcoin is in a bull market, you can expect ADA to jump higher. Along with the exciting applications of proof-of-stake protocols, Cardano is cheaper – let’s just face facts. And there’s a psychological appeal about buying 1,000 ADA tokens rather than 0.0189 worth of BTC.
As you might imagine, the numbers play this narrative out as well. On a year-to-date basis, Cardano is up 700%. Over the same period, Bitcoin is up around 100%. You can’t complain with either one but 700% is a heckuva lot better than 100%.
But the big question has always been about a possible decoupling. From where I stand, there are some encouraging data. For instance, in a 24-hour period, Bitcoin fell 10% whereas Cardano pared losses, down a much more palatable 3.5%.
Moreover, Cardano is getting some love of its own. In February, rocker Gene Simmons disclosed that he bought $300,000 worth of Cardano. To be fair, he also invested in the bigger names, like Bitcoin and Ethereum (CCC:ETH-USD). But that he plunked down some serious funds on ADA is definitely newsworthy.
Nevertheless, Cardano generally correlates with Bitcoin. Both started to show signs of life late last year. And both have shown signs of a correction, which has had me on edge for some time.
Yes, I believe in the long-term trajectory of cryptocurrencies. But when Bitcoin starts to fail at psychological levels (this time, a little above $60,000), it’s disconcerting. Remember the last big bubble burst for BTC when prices were on the cusp of $20,000.
A Truly Frustrating Market
Of course, this is the cryptocurrency market. Today, Bitcoin could be struggling at $55,000. Tomorrow, the price could be at $155,000. But then, it can also go down to $5. You just never know. Perhaps the scariest part is that I can envision scenarios for each case.
For the extreme upside target, more institutions can pile into the digital markets. Since there are many skeptics remaining, until they capitulate, BTC and others may have a longer pathway.
On the other hand, those same institutions can hurt the crypto market. I don’t think these big boys have seen this kind of volatility before. It can be unnerving, especially when you’re dealing with billions of dollars. One huge sell order can trigger a panic.
Unfortunately, this leaves Cardano in a bit of a conundrum. Personally, I would take a very small position now if you’re a crypto adherent. But keep the powder keg very dry because we could be facing an interesting couple of weeks ahead.
On the date of publication, Josh Enomoto held a long position in ADA, BTC and ETH.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
