- Although cryptocurrencies have become mainstream, this status alone hasn’t been enough for the sector to overcome significant economic concerns.
- Bitcoin (BTC-USD): With the lead-off batter of cryptos struggling, Bitcoin is sending a poor signal to the rest of the market.
- Ethereum (ETH-USD): Money outflows may start to negatively affect Ethereum despite its fundamental role as a blockchain backbone.
- Tether (USDT-USD): The high-low spread has widened considerably for Tether this year, perhaps representing a warning sign for investors.
- XRP (XRP-USD): Although XRP’s court battle seemed to be moving in its favor, it’s now facing some potential setbacks.
- Cardano (ADA-USD): Once one of the more promising cryptos, Cardano seems unnecessarily risky at this juncture.
- Tron (TRX-USD): Tron has surprised many people with a strong move higher, although the rally might not be sustainable.
- Dogecoin (DOGE-USD): Although the lovable meme-coin has accomplished much, Dogecoin presents serious market risks right now.
Undeniably, the cryptocurrency sector sparked one of the biggest paradigm shifts in the financial realm, enabling decentralized protocols and the concept of self-sustaining economies. Nevertheless, the blockchain’s myriad innovations alone are not enough to exempt cryptos from the forces of the real economy. That’s where investors should place their focus and unfortunately, the narrative is not necessarily encouraging.
An important factor to consider when assessing cryptos is that the sector’s total market capitalization (cap) generally correlates with the ebb and flow of the inflation rate. Logically, higher inflation tends to lift virtual currencies, but the opposite is also true: decelerating inflation tends to pressure the valuation of digital assets. But then, is it possible for higher prices to wane?
It doesn’t seem so, but the concept can’t be written off entirely. Indeed, worrying financial disclosures suggest deflation could be the next major talking point. For instance, buy now, pay later firm Klarna recently announced that it will lay off 10% of its global workforce. Social media firm Snap (NYSE:SNAP) warned about a revenue guidance miss and a slowing of hiring.
Taken collectively, these and other issues don’t bode well for cryptos, thus necessitating caution. Here are my top seven cryptos to watch as digital assets flirt with danger:
Cryptos to Watch: Bitcoin (BTC-USD)
We need to get right into it and call a spade a spade. Bitcoin (BTC-USD), basically the king of cryptos, has been incredibly disappointing, slipping in and out of the critical $30,000 threshold. Previously, BTC struggled with maintaining the $40,000 level, which by itself was disheartening considering that at its peak, the coin was on the cusp of $70,000.
Just like the inability to hold $40,000 represented an ominous sign, investors need to be extremely careful about placing too many wagers at $30,000. Unless circumstances change dramatically — such as an influx of cash into cryptos — it’s difficult to see how Bitcoin can rise above the muck.
True, cryptos have attracted significant attention since their meteoric rise in late 2020 and early 2021. Additionally, this demand sparked interest among institutional buyers. But now that the big boys face pressure across myriad investment categories, Bitcoin may experience outflows as fear deepens across capital markets.
On paper, Ethereum (ETH-USD) should be better able to weather the storms impacting cryptos since it forms the backbone of various decentralized projects. According to Coinpaprika.com, applications built on the ETH architecture utilize smart contracts or, “computer algorithms which execute themselves when data is supplied to the platform. There is no need for any human operators.”
It’s a fascinating concept. However, the main issue is that as mainstream interest increased in cryptos, arguably most folks bet on coins like ETH not for its underlying utility, but its potential market value. Unfortunately, Ethereum finds itself down heavily relative to prior highs. Indeed, earlier in May, ETH was climbing back toward the $3,000 level.
Just like Bitcoin, Ethereum is now stuck in a no-man’s-land without much reason for upside other than a dramatic shift in the fundamentals. However, institutional investors appear to be taking their money out of cryptos, which implies that ETH is holding on by a thread. Therefore, retail investors need to be careful.
Cryptos to Watch: Tether (USDT-USD)
Although stablecoins like Tether (USDT-USD) don’t really provide capital gains opportunities since they’re pegged to fiat currencies — typically the U.S. dollar, as is the case with USDT — they nevertheless play an important role for cryptos. Primarily, stablecoins provide liquidity for the virtual currency ecosystem, as well as convenience. It’s so much easier to swap stablecoins for cryptos than to buy digital assets with fiat.
However, Tether and its ilk operates heavily on trust. You must believe that the companies undergirding these stablecoins have the paper reserves to back up their underlying valuations. If not — or if issuing firms go bankrupt — this could cause catastrophic disruption in the space.
In the spirit of full disclosure, I simply do not have the faith required to trust USDT, thus converting a majority (though not all) of my holdings to fiat. The high-low spread this year jumping to 6.2% is a sign that investors are starting to get anxious. Frankly, I believe it’s better to be safe than sorry.
Among the cryptos with a strong fanbase despite significant challenges, you’ve got to admire the folks supporting XRP (XRP-USD). Having fielded criticisms for not being “appropriately” bullish on the Ripple Labs creation, there are many people prepared to defend the coin’s honor. But as much as it hurts to say it — being a stakeholder myself — a possibility certainly exists that XRP could tumble, as well.
As you’ve likely heard, Ripple Labs is embroiled in a lawsuit that the U.S. Securities and Exchange Commission (SEC) filed, which alleges that XRP is actually a security and therefore, Ripple is in violation of securities law. Circumstances seemed to favor Ripple, up until disclosures suggested that the case may last until 2023.
What’s worse, the SEC is refusing to disclose emails which reveal former SEC director William Hinman’s views that Ethereum is not a security. Instead, the regulatory agency asserts that the potentially damning email is protected under attorney-client privilege.
While it’s anyone’s guess how the lawsuit will materialize, this is a lesson to not use the courtroom as a foundation for due diligence.
Cryptos to Watch: Cardano (ADA-USD)
A popular digital asset among blockchain fundamentalists and market speculators, Cardano (ADA-USD) first attracted attention for its proof-of-stake (PoS) protocol. Unlike proof of work — which presently undergirds most cryptos — PoS weighs engagement in the network as a basis for consensus-driven operations rather than outright computing power. This makes Cardano more environmentally friendly from an energy consumption standpoint.
Sadly, this innovative prowess hasn’t helped ADA this year. Whereas 2021 represented a coming-of-age party for Cardano, 2022 so far has been an unwinding of market ebullition. In fact, I’ve mentioned previously that ADA has been one of the most disappointing names among cryptos. It stinks because as much as I enjoy participating in the sector, my words have (so far) been proven correct.
But the worst of it all is that the pain may not be over. Cardano appears to be charting a bearish pennant formation, further evidenced by declining volume trends. As with other cryptos, you must approach with extreme care.
Peruse the long list of available cryptos — there are over 19,500 of them — and most of them are heavily in the red over the trailing seven days since the morning hours of May 24. However, some digital assets stand out, particularly Tron (TRX-USD). Ranked number 14 in terms of market cap, Tron has gained around 13% in the trailing week.
According to Coinpaprika.com’s description, Tron is one of the largest blockchain-based operating systems, offering “scalability, high-availability, and high-throughput computing (HTC) support.” The underlying TRX coin also commands strong investor support. In addition, many developers and blockchain users prefer the Tron ecosystem versus Ethereum since the latter features onerous transaction fees (called gas).
Nevertheless, I’m leery about chasing the momentum in TRX. With most cryptos suffering from poor market sentiment, it’s unlikely that Tron can continue moving against the grain. Further, the retail investment community may be tapped out since they usually engage in all-or-nothing wagers.
Cryptos to Watch: Dogecoin (DOGE-USD)
The canine-inspired virtual currency that sparked the meme-coin phenomenon, Dogecoin (DOGE-USD) transitioned from a joke to a cult favorite to an asset that has commanded some mainstream attention, thanks in no small part to entrepreneur Elon Musk. Despite the fanfare, though, Dogecoin remains a speculative venture.
To be fair, that’s not necessarily a bad thing. Because DOGE is largely driven by the emotions of speculation, it can rise for any reason — including no reason at all. When so much of the broader economic news is negative, it’s nice to trade an asset that marches to its own drum.
At the same time, this dynamic hasn’t really helped Dogecoin distinguish itself from other cryptos. Over the trailing seven days, DOGE is down about 8%, which isn’t the worst among digital assets ranked in the top 10 by market cap, but it’s certainly not the best.
Most worrisome, Dogecoin’s chart features the same pessimistic print as its peers. For that reason, investors should stay on the sidelines until DOGE reaches a true bottom.
On the date of publication, Josh Enomoto held a LONG position in BTC, ETH, USDT, XRP, ADA and DOGE. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.