In prior InvestorPlace articles, my generally cautionary approach to cryptocurrencies undoubtedly annoyed some of the sector’s most ardent supporters. I get it. Plenty of money is involved here and no one wants to lose it. However, my gut feeling has been that speculative activity cannot last indefinitely. At some point, they must correct, which is obviously what happened with cryptos.
At the same time, we’re seeing positive developments in the top-ranked virtual currencies. Against total market capitalization, cryptos fell to around $1.5 trillion on Jan. 24 before roaring back, at least on a percentage basis. As I write this, the global market cap is around $1.67 trillion, which is a significant improvement — a double-digit gain. Still, we need to be realistic about what we’re seeing here.
As you know, the Federal Reserve started to rattle investors of all risk-on asset categories when it signaled deep concerns about soaring consumer prices. With an aggressively hawkish monetary policy expected to debut this year, borrowing costs will likely rise. In turn, this disincentivizes entrepreneurs from attaining capital through financing. As well, investors become gun shy as growth-focused trades — such as cryptos — lose their appeal for stable, income-generating opportunities.
Additionally, we also have a simmering conflict in eastern Europe, with Russia seemingly poised to invade Ukraine. Hopefully, cooler heads will prevail. Nevertheless, it’s interesting that Russia recently proposed a ban on the use and mining of cryptos. Similar to multiple decisions the country has made, it could be a measure to bolster strength in its own finances. Furthermore, a ban could mitigate the impact of volatility in the space.
According to FederalReserveHistory.org, the U.S. central bank during the Great Depression was largely decentralized. This structure stymied the decision-making process, resulting in a lack of coordination. Turns out, our own history is warning about the risks of decentralization, a history that the Russians apparently are leveraging to their advantage. Thus, the story for these cryptos below is not as simple as the perma-bulls would have you believe.
- Bitcoin (CCC:BTC-USD)
- Ethereum (CCC:ETH-USD)
- Tether (CCC:USDT-USD)
- Cardano (CCC:ADA-USD)
- Solana (CCC:SOL-USD)
- Avalanche (CCC:AVAX-USD)
- Shiba Inu (CCC:SHIB-USD)
Having already benefited from the boon in cryptos, I can speak with greater objectivity about both the highs and lows of this sector. Please don’t take my opinions as “hating” on virtual currencies. Rather, I genuinely want you to make the best decision possible. To do that, I cannot be beholden to irrational sentiment, and neither should you.
Cryptos on Red Alert: Bitcoin (BTC-USD)
Few things in this world are as perplexing as wanting something so badly and attaining it, only to realize later that whatever it is that you desired isn’t the end-all, be-all. Although I can’t say for certain, I’m fairly confident that the NFL’s Odell Beckham Jr. understands where I’m coming from.
Last November, Beckham generated headlines when he announced that he would be converting his 2021 salary into Bitcoin. As MarketWatch bluntly noted, the problem with this overture is that Bitcoin has badly plummeted from its highs. Furthermore, here’s an interesting tidbit at the time of the article’s publication (Jan. 24):
“Based on Monday’s bitcoin prices, and assuming that Beckham did convert a lump sum of $750,000 into bitcoin when the deal was made in November, that salary would now be worth about $401,500, and, despite the drop in value, he would still have to pay taxes on income as provided to him at its $750,000 value.”
Ouch and ouch. And this is another reason why people should rethink the future integration of cryptos as mainstream currencies: the wild volatility can create unforeseen consequences, as Beckham just learned. As for price trajectories, the recent uptick in BTC is nowhere near enough to justify confidence.
With all of that in mind, I suspect a dip below $30,000 is coming in the next several weeks.
Ethereum (ETH-USD)
As the backbone of blockchain-based applications, Ethereum represents the exciting evolution of the underlying technology. What started out as a peer-to-peer transactional network has become an opportunity to decentralize multiple business functions thanks to its smart contract innovation. While incredibly impressive, the functionality argument has never really seemed to substantively and consistently affect pricing dynamics.
Otherwise, Ethereum would trade theoretically trade higher on the power of its fundamentals; that is, the network’s utility and popularity. Unfortunately, the latest fallout has demonstrated that with a majority of cryptos, where Bitcoin goes, so too does everything else.
What’s peculiar about the present correction is that leading up to it, more people recognized cryptos as not just vehicles for speculation but for revamping analog institutions with decentralized digital solutions. For instance, trustless mechanisms could potentially improve efficiencies in supply chain protocols or other dynamic, data-intensive industries. Yet, this utility has not exempted Ethereum from its present downfall.
Although the current price of just under $2,600 is a huge discount from its all-time highs, I’m personally not convinced that the fallout is over. Right now, ETH appears to be charting a bearish pennant formation — a pensive horizontal action before tumbling back down.
Cryptos on Red Alert: Tether (USDT-USD)
As a digital asset pegged to the U.S. dollar, stablecoins like Tether are hardly attractive. For instance, if you wager on Bitcoin or Ethereum, you’re hoping that their price rises. If they do, you can cash out if you want. But with Tether, you put in a dollar, you will always get out (theoretically anyways) a dollar.
Again, not enticing stuff, unless all other cryptos are tumbling. That’s when the idea of Tether (and similar stablecoins) makes immediate sense. By securing your profits and holding value in a greenback-pegged asset, you can comfortably sit out the red ink. Should virtual currencies hit a bottom, you can also easily convert USDT to your asset of choice, all the while keeping your transactions within the crypto ecosystem.
Turns out, the Brazilians see another use for Tether, that as an inflation hedge. With the nation’s currency consistently suffering from devaluation, savvy investors have bought up USDT to protect their wealth. Per a Coindesk.com report, “between January and November 2021, locals traded $11.4 billion in stablecoins and almost tripled the total traded in 2020. Stablecoins also traded $10.8 billion in bitcoin last year.”
Admittedly, it’s creative. Still, during times like these, it’s helpful to wonder if Tether legitimately has the paper to back up its assets. If not, it could be catastrophic for cryptos.
Cardano (ADA-USD)
As one of the cryptos that I was most worried about in terms of nearer- and intermediate-term trajectories, Cardano featured robust support from the digital asset community that belied its weakness in the charts. Many investors were dazzled with the Cardano blockchain, the first to implement the energy-efficient proof-of-stake protocol. Once again, though, utility has failed to impart positive price action.
Granted, the concept is incredibly frustrating. Let’s be honest — when it comes to functionality, and to put it in sports terms, Bitcoin is an aging quarterback that basically sits on the bench and is called up only when needed. It’s a store of value and a brand. Even Ethereum has gotten too unwieldy, with its exorbitant transaction (gas) fees skyrocketing, pushing developers into other networks.
Cardano is a natural platform to absorb those developers. With a streamlined, efficient network, it could do Ethereum things better and cheaper than Ethereum. What’s not to love?
Well, I’m afraid that institutional players — and perhaps the vast majority of those participating in cryptos — don’t give a hoot about functionalities and efficiencies. They just want to make money. Well, Cardano is walking a tightrope. And unless something dramatically changes, ADA could easily become a penny stock crypto and stay there for a while.
Cryptos on Red Alert: Solana (SOL-USD)
As one of the latest challengers to Ethereum’s throne for utility-driven blockchain networks, Solana offers plenty of potential. On the scalability and security front, Solana’s proof-of-history protocol adds greater dimensionality to confirming digital asset transactions. To be sure, the SOL network attracted early attention “because of the incredibly short processing times the blockchain offers.”
Therefore, if the valuation of cryptos is primarily centered on its practicality, Solana would be a strong candidate. And sure enough, SOL has jumped through the ranks. At this moment, the underlying coin is ranked number seven in terms of market cap.
Unfortunately, it appears that spitting out magic blockchain words is not enough to bolster the prices of these next-generation cryptos. And yes, I understand that with legitimate projects like Solana, they’re not just words. Time and again, SOL has proven its technical prowess.
However, the point I’m trying to make is that irrespective of a virtual currency’s functional value (or lack thereof), the market will price cryptos based on the market’s logic. That said, this pricing may or may not involve utility and functionality. So if we separate the noise from the jazz, we’re left with Solana possibly printing a bearish pennant formation, much like Ethereum.
Therefore, I’m sitting this one out for now. I see too much downside risk.
Avalanche (AVAX-USD)
According to the network’s description on Coinmarketcap.com, “Avalanche is the fastest smart contracts platform in the blockchain industry, as measured by time-to-finality. Avalanche is blazingly fast, low cost, and eco-friendly. Any smart contract-enabled application can outperform its competition by deploying on Avalanche.”
If you weren’t dazzled with the marketing pitch above, consider the progress that the network has made. “Avalanche launched on mainnet, September 21, 2020. Since then, the platform has grown to secure over 400+ individual projects, $64M+ of AVAX burned (reducing supply), 1,200+ individual block-producing validators, and over 1.3M+ community members around the globe.”
On paper, you couldn’t ask for a better platform to serve your distributed decentralized needs. And yet, AVAX is also not immune to volatility. Over the trailing seven-day period, the coin has dropped nearly 15% of value. And while it recently received a slight bump, I don’t think investors should get too comfortable.
As with other utility-focused cryptos, the market doesn’t seem to respect the potential that the Avalanche blockchain commands. In part, this could be that with more than 17,000 digital assets available for trading, many if not most of their underlying blockchains state the same thing: speed, scalability, security and so on and so forth.
Overall, what I’m worried about is that AVAX is printing some ugly chart patterns, suggesting a continuation of bearishness.
Cryptos on Red Alert: Shiba Inu (SHIB-USD)
Even with all the terrible pain that many HODL-ers (holding on for dear life) suffered in the market, I would argue that there’s still a small case for preferring meme tokens like Shiba Inu over larger-priced assets like Bitcoin. Although BTC relatively facilitates more predictable price trends, its gains are (again, relatively) small.
On the other hand, you have Shiba Inu. In one hour, you could be a prince. In the next, a pauper. However, it’s the freedom of movement that the law of small numbers provides that appeals to certain gamblers. Nominally, you can take a small bet and see big results with it.
It’s nothing to brag about, but the concept also works on the downside. The smaller bet with Shiba Inu acts like a standard call option. If you’re out of the money, you’ll just lose the price you paid for the contract. With buying a whole Bitcoin unit, you could comparatively suffer catastrophic damages.
Moving forward, though, I believe speculators are best served to observe SHIB’s price action. Since Jan. 21, it’s printed what looks to me like a classic bearish pennant formation, which would be a continuation pattern of the overriding trend (bearish, in this case).
Do what you want, of course. But with Bitcoin, utility coins and meme coins all signaling similar pessimistic signs, you might want to wait for further confirming indicators.
On the date of publication, Josh Enomoto held a LONG position in BTC, ETH, USDT and ADA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.
