The beginning of the year has been unpleasant for crypto investors. Bitcoin (CCC:BTC-USD) and altcoins have witnessed a meaningful correction. Very predictably, meme coins like Shiba Inu (CCC:SHIB-USD) have not been spared.
Shiba Inu was already in a downtrend after making highs in October 2021. With the recent correction, Shiba Inu is down more than 60% from all-time highs.
There might be a case for some relief rally after a sharp correction. However, over the next few quarters, I remain bearish on Shiba Inu. Investors can still consider some speculative position. But, in my view, it might be too risky to have a big bag of SHIB coin.
The Impact of Contractionary Monetary Policy
Let’s start the discussion with some monetary perspective. Inflation has been accelerating, and the Federal Reserve is understandably concerned. Goldman Sachs predicts the Fed is likely to increase interest rates four times in 2022.
Even with this, real interest rates will remain negative. However, there is a certain case for liquidity tightening in the financial markets.
This will result in some funds flowing from risky assets to relatively risk-free trades. Even within the cryptocurrency space, meme coins are the ones with the highest risk. Coins with strong utility are likely to be less impacted by the outward flow of funds.
Recently, Goldman Sachs opined that Bitcoin will continue to take market share from gold as a part of the wider adoption of digital assets. This is a classic example of the point I am making.
Big money has the tendency to flow swiftly from one asset class to another. Of course, the cryptocurrency space will continue to grow. However, when there is relative liquidity tightening, investors will be very selective in fund allocation.
Shiba Inu coin might face the intended or unintended consequences of liquidity tightening. This also holds true for other meme coins. However, it’s worth noting that Dogecoin (CCC:DOGE-USD) has a wider adoption based on the number of holders. Additionally, Dogecoin has the big backing of Elon Musk.
Visions Beyond Being a Meme Coin
According to CoinGecko, Shiba Inu “began as a fun currency and has now transformed into a decentralized ecosystem.” It is likely the project will try to become something beyond a meme coin. Shiba has also launched Shibaswap, which is a decentralized exchange.
The exchange currently has a total value locked of $275 million. Shibaswap allows investors to buy and sell non-fungible tokens (NFTs), provide liquidity and swap tokens. However, there are two important points to note.
First, there are pure-play projects that offer the services of a decentralized exchange. I would prefer to invest in over a meme coin that’s looking for a transformation.
Additionally, Rari Governance Token (CCC:RGT-USD) is a Shiba Inu alternative that allows users to earn yield on digital assets. The total value locked in the project is just in excess of $1 billion, and it has a fully diluted valuation of $320 million.
In comparison, Shiba Inu looks overvalued at a market capitalization of $17.6 billion. It’s clear the token gained massively by this measure during the meme coin euphoria. However, even after a big correction in the last three months, it would be hard to justify that market capitalization.
Concluding Views on Shiba Inu
There is no doubt Shiba Inu created massive wealth for holders in 2021. However, it’s very unlikely these returns can be replicated.
SHIB investors still talk about 10x from current levels. That would imply a market capitalization of $176 billion. In my view, that’s unlikely. On the other hand, there are plenty of other projects that have a strong use case and a low market capitalization. These projects can deliver multi-fold returns and are a better alternative to Shiba Inu.
A good example is Buffer Finance (CCC:IBFR-USD). The project is a gamified options trading platform with a current market capitalization of $1.3 million. Scanning through more than 12,000 coins and tokens, there are ample such opportunities flying under the radar.
On Low-Capitalization and Low-Volume Cryptocurrencies: InvestorPlace does not regularly publish commentary about cryptocurrencies that have a market capitalization less than $100 million or trade with volume less than $100,000 each day. That’s because these “penny cryptos” are frequently the playground for scam artists and market manipulators. When we do publish commentary on a low-volume crypto that may be affected by our commentary, we ask that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.
Read More: How to Avoid Popular Cryptocurrency Scams
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.