It’s not been the easiest couple of months for cryptocurrency. The major cryptos have slumped in price as investor sentiment has waned. Meanwhile, it’s a bloodbath in smaller altcoins. Shiba Inu (CCC:SHIB-USD), for example, has slumped from a peak of 0.000080 last summer to just 0.000025 now.
That represents a more than 60% decline for Shiba Inu holders since the peak back in October. Shiba’s decline is hardly extraordinary. Other animal-themed cryptos such as Dogecoin (CCC:DOGE-USD) have suffered painful losses as well.
A general sense of apathy is starting to set in across the crypto ecosystem. El Salvador’s highly-anticipated Bitcoin experiment appears to be struggling. Rating agency Moody’s just downgraded that country’s debt, citing rising risk from its Bitcoin experiment.
This will likely slow adoption by other foreign governments. For another, prominent crypto exchange Crypto.com just got hit with a major hack, and lost $15 million of funds. Those are just two of the various headwinds affecting the crypto market right now.
A Rough Time for Bitcoin and Crypto
Bitcoin has lost roughly 40% of its value since its recent peak. And the carnage is much worse in most of the smaller cryptocurrencies and tokens. Liquidity is drying up across many non-fungible token (NFT) and other such new projects and ecosystems.
This seems to be coming in part due to the huge drop in speculative growth and technology assets. The Federal Reserve has indicated that it will be rapidly tightening monetary policy and is leaning toward imminent rate hikes as well. This should serve as a deflationary force to counteract last year’s rapid climb in both asset and consumer product prices.
In times of diminishing market liquidity, risky assets with minimal profits and cash flows tend to fall the most quickly. Cryptocurrency, inherently, generates very little in economic profit. Much of the interest in crypto, by contrast, is to hedge again runaway inflation and out-of-control central bankers.
With the Fed slamming the breaks on inflation and speculative assets, however, crypto has fallen into a major slump. This slide has spread into crypto-related equities as well. Names such as Microstrategy (NASDAQ:MSTR) and crypto bank Silvergate Capital (NYSE:SI) have plummeted in recent weeks.
During Bear Markets, Stick to Quality
There’s a well-known pattern in investing. During rising bull markets, you see a dispersion across various assets. The concentration of funds in leading assets declines. People sell some of their larger more stable holdings to take a chance on smaller, newer, or riskier plays. As it pertains to stocks, this would be people selling down their FAANG holdings to buy an exciting new electric vehicle or quantum computing kind of stock.
Within crypto, you can see this concentration by looking at the portion of funds in major coins. During good times, the dominance — or market share — of Bitcoin (CCC:BTC-USD), Ethereum (CCC:ETH-USD) and other leaders will fall. People sell some of their BTC and buy hot new emerging projects. Or perhaps even meme tokens.
During bear markets, such as what crypto faces now, however, people return to the safe havens. Anything with a shaky or uncertain future is sold, and the funds are moved back into more secure plays such as Bitcoin or Stablecoins tied to the value of the U.S. Dollar. While Bitcoin is down 40% from its peak, many smaller cryptos are off 70%, 80%, or even more over the same stretch.
A big part of quality, as it pertains to crypto, is utility. Does the coin or token accomplish much actual function for users? Bitcoin is a store of value and has the biggest brand. Ethereum has the most well-known decentralized finance “DeFi” platform with lots of lending applications on it. Solana (CCC:SOL-USD) has emerged as a low-cost alternative for new crypto projects such as NFT collections. But what is Shiba Inu useful for? As of now, there’s almost no utility to the Shiba Inu token.
Cryptocurrency is in a difficult place right now. Liquidity is down. The Federal Reserve is reining in excessive speculation in financial markets. Hackers have hit crypto in recent days. And the list goes on. This is not an easy time to be allocating funds to the cryptocurrency marketplace.
Given that backdrop, traders should stick to high-quality cryptos for the time being. If and when the quality names find their footing, then it might be time to start diving deeper into the lower-tier altcoins. For now, though, tokens such as Shiba Inu that have little value beyond their memetic appeal will remain in the doghouse.
On the date of publication, Ian Bezek 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.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.