Investors in Polkadot (CCC:DOT-USD) can only hope that the recent 15% rally in the DOT price is a sign of better things to come. I’d certainly like to think so. I made a bullish call on DOT in mid-January. But immediately after my article published, the token price dropped 23% before the recent rally.
This reinforces the key concern I’ve had about cryptocurrency in general. Speculators that were driving these asset prices higher were doing so without knowing how they might perform during a market correction. Thus far, DOT like many other crypto assets is plunging in tandem with the broader market.
Does correlation equal causation? It’s too early to tell. I don’t believe this is the beginning of the end for crypto. However, it may be the end of the beginning. Which means that investors may begin to demand more than just hype from cryptocurrency.
If that were to occur, it should benefit Polkadot. But there may be a couple of chapters left to read in this introduction to cryptocurrency.
DOT is Benefiting From a Case of Mistaken Identity
There’s ample evidence to believe that the gains that DOT is making is due to the token riding the coattails of Bitcoin (CCC:BTC-USD). While at this point, any reason that causes tokens to rise is welcome news.
At the same time, Polkadot has more in common with Ethereum (CCC:ETH-USD) than with Bitcoin. So the fact that DOT is rising in tandem with BTC is missing the plot on Polkadot.
And it’s a good plot. A key reason for my positive sentiment about Polkadot centers around its use of parachains. These user-created blockchains connect with Polkadot’s central blockchain. This facilitates cross-chain transfer of any data or digital asset. In layman’s terms, it allows different coins and tokens to communicate with each other.
The benefit of this is speed. That’s because the parachains take the pressure off the main chain. This allows the network to process over 1,000 transactions per second (Ethereum processes about 30). And as more parachains are added, speed will only increase.
Another benefit of parachains is the way they facilitate real-world utility. As I wrote in January, “For example, smart contracts created on the Ethereum blockchain can interact with a parachain that is geared toward a different kind of information. And the transactions can be processed in parallel.”
This is why it’s being said that Polkadot is creating the internet for blockchains. As an investor who is a fan of a value beyond price, you can see why I could get excited about the long-term case for Polkadot.
But the Problem Is …
Investors don’t seem to care. Yes, DOT still holds a place in the top 15 of cryptocurrencies (as measured by market capitalization). But the token isn’t being rewarded for its utility today.
And don’t forget about Ethereum 2.0 which is set to launch this year. The transition to a proof-of-stake (PoS) network will address some of the largest concerns about Ethereum at this time.
If that’s the case, then many investors may simply decide that instead of investing in an alternative to Ethereum they could just invest in Ethereum.
The Bottom Line
The larger problem I have with Polkadot along with several other cryptocurrencies is the very decentralization that makes them attractive also means that there’s nothing to prevent competitors from coming in. And as the number of tokens continues to expand, it becomes more difficult for any single token to stand out.
For example, DOT is not the only token to be labeled the “Ethereum killer.” However, over time, it appears that crypto investors are not giving this benefit their full-throated approval. And as Josh Enomoto points out the recent volatility in DOT is, for now, is steering investors away from the token even as they acknowledge its technological advantages.
On the date of publication, Chris Markoch 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.
Chris Markoch is a freelance financial copywriter who has been covering the market for eight years. He has been writing for InvestorPlace since 2019.
