Lately, I’ve argued why it’s best to focus on higher quality names as cryptocurrencies are under pressure. Examples include Ethereum (CCC:ETH-USD) and Cardano (CCC:ADA-USD). But along with both promising names, you can add Polkadot (CCC:DOT-USD) to that list.
Why? Mainly, because it has a solid catalyst. It’s not riding on “greater fool theory” that memecoins such as Shiba Inu (CCC:SHIB-USD) are dependent upon. Just like how Ethereum has its 2.0 upgrade catalyst, and Cardano has its Hydra upgrade catalyst, the built-out and roll-out of Polkadot’s cross-chain capabilities is its main catalyst.
In the long term, the unique feature of Polkadot’s network could enable its native token to experience above-average price appreciation. That said, long-term is the key word here. As changes in the Federal Reserve’s fiscal policy drives a shift from risk-on to risk-off, we could see more near-term volatility in the digital asset space.
However, if you are a long-term bull on crypto, much like buying Ether and Cardano on weakness could be a shrewd move, doing the same thing with Polkadot may be shrewd in hindsight as well.
What Makes Polkadot a High-Quality Crypto
The crux of what makes DOT-USD a high-quality crypto is its parachain catalyst. What is that, exactly? First off, let’s dive into exactly how this token blockchain works, and why its blockchains’ recent developments and future plans give the token a strong chance of rising in value over time.
The key thing with Polkadot is its focus on cross chain communication. In other words, the ability for transactions across different blockchains. Like I wrote last June, this is one of its key strengths. For decentralized finance (DeFi) to go mainstream, interoperability is key. A platform like this could carve out a niche and become valuable, even if Ethereum, and/or the Ethereum killers, dominate the DeFi economy.
However, Polkadot is still a long way away from becoming the so-called internet of blockchains. For now, the focus is on the initial expansion of its capabilities. First, Polkadot it started off with its main relay chain, i.e., its blockchain. From there, it’s adding parachains. Leased out to third parties, these parachains use the main relay chain to confirm transactions.
As you may have heard, it completed its first round of parachain auctions. Progress like this will increase usage of this network and in turn increase the value of its native token, DOT-USD. Again though, keep one key thing in mind. Long-term upside is more likely than not going to be matched by short-term volatility.
Expect it to Continue Moving Wildly
Crypto remains under pressure due to the Fed’s move from dovish to hawkish fiscal policy as it tries to get inflation under control. In December, the central bank announced it was speeding up the tapering of its bond purchase program and raising interest rates three times over the next year.
With higher interest rates lessening the appeal of risky assets like crypto, names across the board sold off in response. Some may think that the market has already absorbed forthcoming monetary tightening. But based on the latest news, I wouldn’t jump to that conclusion right away.
On Jan 5, cryptocurrencies experienced another sharp sell-off. This was sparked by the release of the Fed’s monthly meeting minutes. Among other things, the minutes revealed that rates could rise even sooner than expected. In short, the full extent of the Fed’s hawkish pivot is unclear. As the market more accurately prices it in, cryptocurrencies could remain under pressure.
What does this mean for Polkadot? While down more than 50% since early November, at around $25 per token today, it could possibly make a trip back down to levels seen last summer (between $10 and $15 per token).
The Verdict on DOT-USD
With its parachain auctions last month, Polkadot is making progress in achieving its internet of blockchains goal. Assuming that it continues to make progress and cross-chain rises in demand as DeFi takes off, DOT-USD could someday be worth many times what it trades for today.
Still, as the Fed grows hawkish in its fight against inflation, risky assets will likely stay under pressure. This may not be a big deal for long-term investors. Yet it’s important to keep this in mind. DOT-USD may make a trip back to as low as $10 before it re-hits its past high, and starts hitting new highs again.
If you’re looking to scoop up high-quality cryptos on recent and future weakness, be sure to include Polkadot on your list.
On the date of publication, Thomas Niel held a LONG position in Ethereum. He did not hold any of the other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.