May 18 2021 was a day to be remembered in the cryptocurrency market. A huge selloff sent altcoins such as Cardano (CCC:ADA-USD) into a volatile state on an intraday basis. On May 19, ADA had a low of $1.03 and a high of $2.03.
This is a considerable amount of volatility. While some of it comes from outside factors, such as new regulations, ADA’s potential to rise or fall is hard to gauge. The crypto advertises significant advantages over its competitors and has signed some big name deals, but is that enough to make it a buy?
Central Banks and Some Countries Are Averse to Crypto
On May 18, the key factor in the altcoin sell off was a cryptocurrency ban in China. The new restrictions came from three of China’s regulatory bodies: the Payment and Clearing Association of China, the China Banking Association and the National Internet Finance Association of China.
Payment companies and financial institutions are now barred from having any part in transactions or services that use altcoins. The ban is incredibly broad and includes trading, settlement, registration and clearing as restricted activities.
Investors were discouraged from making speculative buys of any cryptocurrencies.
In their announcement of the ban, the three regulatory bodies stated that, “recently, cryptocurrency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order.”
What is interesting, though, is that while the ban prevents new initial coin offerings (ICOs) and exchanges of crypto, individuals are still able to hold altcoins.
The World Economic Forum published a list of countries where cryptocurrency use is most common. In 2020, the percentage of people that said they either used or owned cryptocurrency was 7% for China and 6% for the U.S. If China barred individuals from holding altcoins, the May 18 sell off probably would have been more intense and more severe for the long term.
China has banned further ICOs, and more countries may follow suit soon. Regulatory risks are one of the top threats for cryptocurrencies now, not just locally but globally.
Some Bought the ADA Dip, But Was it a Smart Move?
Early in the morning of May 19, the price of ADA was near $1.80. At one point, it fell to about $1.07, then bounced back to $1.80 before declining to about $1.50. All of this happened within hours intraday. Cryptocurrencies are not for every trader or investor, and Cardano is no exception. Some people who bought at the bottom and sold at the top made money, while some lost almost 40% if they bought ADA near the top when the selloff started.
This goes to show that any ADA predictions are pointless. It’s nearly impossible to know whether Cardano will rise higher now or fall again. And I agree with the Chinese regulatory bodies that speculative crypto trading is too dangerous and stressful.
Cardano’s Business Plan Seems Promising
I see the business potential for Cardano, but I also see plenty of risks. What can someone do with Ada, Cardano’s native coin?
According to Cardano, “every ada holder also holds a stake in the Cardano network,” and those users can receive rewards. Cardano uses proof-of-stake blockchain architecture instead of proof-of-work, which is used by Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD). This means that Cardano is more energy-friendly and efficient compared to BTC and ETH.
Cardano has also been gaining traction over the past couple of years. The Ministry of Education in Georgia and New Balance both signed deals to use ADA in 2019. And just this year, IOHK, the blockchain company that develops the altcoin, made a deal with the Ethiopian government to use Cardano in schools.
The main advantages Cardano claims over Bitcoin and Ethereum are that ADA is faster, scalable, and more flexible. It is often used for smart contracts in the finance world.
A Strong Motto, but I’m Not Yet Convinced
Cardano states that it has a goal of “making the world work better for all.” This is intriguing, but it also seems challenging.
The value tag is much different than the price tag. In 2017, Cardano had a market capitalization of $10 billion. Now it has a market capitalization of over $54 billion.
With a current price of $1.71, compared to just five cents this time last year, this return of over 3,000% seems too stretched for me now.
I would like to see more companies and applications embrace Cardano. Until this happens, I consider it overvalued and suggest that potential investors wait and see before deciding to buy.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.