Following a devastating series of trades in the cryptocurrency market, a sharp rise in valuation from the lows has many observers wondering if the bottom is in for cryptos. While it’s certainly not the popular opinion out there, investors should use this time to consider selling virtual currencies into strength. More than likely, additional pain will materialize before stakeholders can smile again.
For one thing, all tradable assets — stocks, commodities, cryptos — follow the ebb and flow of free market forces. To assume that virtual currencies are somehow exempt is an emotionally reckless idea.
More importantly, investors must consider the fundamentals. Primarily, the latest data from the University of Michigan demonstrates that consumer sentiment has slipped to an all-time recorded low. Yes, prices are higher because of inflation, which should bolster cryptos. However, rising costs also incentivize households to zip their wallets closed.
In turn, this deflationary dynamic has forced many companies to cut overhead, which of course includes layoffs. Such pressures force people to cut expenditures even further, evidenced by ultra-low money velocity.
So no, my friends, cryptos will probably hurt first before they get better. Here are the names to consider selling into strength.
Let’s get down to the brass tacks with almighty Bitcoin (BTC-USD) and consider the on-blockchain metrics that could make or break BTC. First up is the ratio of stakeholders making a profit at the current price, which at time of writing is just under $21,000.
From where I stand, 50% are in the money, while 48% are out, with 2% neither profitable nor losing. Essentially, the line between those with positive outcomes and negative outcomes for investing in Bitcoin is 50/50. In my mind, that’s an awfully risky place to be.
Let’s imagine that you’re one of the unfortunate souls who got the pink slip from formerly happening companies like Netflix (NASDAQ:NFLX). Are you going to hold on for dear life (HODL) or are you going to be rational and sell while you can?
Another factor to consider is that overall, a worrying amount of money has been exiting BTC wallets rather than moving in. While this statistic constantly fluctuates, the crack to the narrative of always HODL-ing has materialized. In other words, it’s time to be super-careful about BTC and other cryptos.
Another set of problematic signals comes from Ethereum (ETH-USD), the No. 2 virtual currency in terms of market capitalization. At the current price, 49% of ETH stakeholders are in the money; whereas, 48% are out of the money. Standing in the neutral zone are 3% of investors.
As with Bitcoin above, the risk is significant for ETH as any further bearish shocks risk unsettling the weak hands of the market. Not only that, the weak hands are massive. According to data provided by Coinpaprika, the concentration of the largest holders of ETH amount to 40%.
Let’s think about the market psychology at work here. At least some of these large holders are institutional investors, which are not in the business of HODL-ing for the sake of memes. Rather, they want to make money. Certainly, they don’t want to lose it, which is what might happen if this sector gets more volatile.
Also, as I stand here right now, total exchange outflows away from ETH wallets slightly exceeds inflows, proving that not everybody is holding the line.
While I own some Tether (USDT-USD) and most other cryptos mentioned on this list, the reality — as I explained in prior InvestorPlace articles — is that I’ve been trimming my exposure across certain coins and tokens that I feel are not worth the risk. Tether is one of them.
Frankly, of all the cryptos you can acquire, USDT is the one you should consider jettisoning. For starters, you’re not going to make a profit off Tether in the normal sense. As a stablecoin, it should be pegged to the U.S. dollar. In that sense, you should just hold Federal Reserve Notes.
Second and more importantly, it’s always possible — though “likely” is a debatable term — that Tether could go to zero. Interestingly, ever since May 11 of this year, USDT has never reached a perfect 1:1 relationship with the greenback.
Is that a sign of fundamental cracks to the system? It’s difficult to say. But one thing is certain, it’s better to be safe than sorry when it comes to speculative cryptos.
If you want to take a bold contrarian bet, on-chain metrics compiled by Coinpaprika suggest that Cardano (ADA-USD) could be one of the cryptos that could swing higher, thus moving against the grain. Supposedly, technical signals suggest that ADA is mostly aligned bullishly.
To be fair, I can understand why the investment community is optimistic about Cardano. Compared to other cryptos, ADA’s price action has been relatively stable during the trailing month. That means its present price point is quite close to its 50-day moving average.
Still, I remain skeptical about Cardano’s ability to disassociate from the rest of the competition. First, virtual currencies tend to trade in correlation with each other. Second, there’s no fundamental reason for ADA to outperform other top-ranked digital assets.
Finally, if the big dogs like Bitcoin and Ethereum suffer heavy losses — particularly if the institutional players dump out — that pain will almost surely avalanche down to ADA and other altcoins. Therefore, I would think carefully before making any rash decisions.
Embroiled as the subject of a lawsuit filed by the Securities and Exchange Commission, XRP (XRP-USD) makes for a strange situation. If Ripple Labs — the originator of XRP — emerges from the courtroom battle successfully, its virtual currency will enjoy legal clarity, providing an advantage over other cryptos. It’s just that it’s difficult to project how these cases will turn out.
Also, the SEC appears committed to cause as much pain to digital asset stakeholders as possible. For instance, the regulatory agency filed a complaint against LBRY, Inc., a blockchain-based file-sharing and payment network. With the legal storm likely just beginning for cryptos, this adds complexity not just to XRP but anything associated with the blockchain.
Money flow wise, people are exiting their XRP holdings and moving to cash. At time of writing, the number of asks (sell orders) amount to $137 million compared to $122.51 million in bids (buy orders). While the order book fluctuates constantly, the overall flow indicates that bearish pressure is clouding XRP.
While cryptos have gotten quite ugly recently, not every name in the sector appears so pessimistic. For example, Solana (SOL-USD) has gained nearly 28% in the trialing week since the morning hours of the June 21 session. In comparison, Bitcoin and Ethereum are down 6.5% and 4.35%, respectively. But is this near-term performance alone enough to change the picture for SOL?
In the near term, it’s quite possible for Solana and other cryptos to bounce higher as a reactionary move. The question is whether such impulses are sustainable for the longer term. Again, I have my doubts. Solana has struggled against breaking above its 50 DMA since early December of last year. And it’s well off its 200 DMA.
The other concern I have is in Solana’s order book. As I write this, asks outnumber bids to the tune of $80.74 million to $46.43 million. While there have been instances of over the last several days where bids significantly outgunned asks, the price of SOL itself remains well below its highs. Unless something fundamental changes, I reserve the right to be skeptical.
Although often derided as a memecoin, the ever-lovable Dogecoin (DOGE-USD) is actually ranked as the caboose of the crypto top 10 in terms of market cap. In addition, it has performed very well, gaining 16% in the trailing week. Can the DOGE community pull off another surprise rally?
Interestingly, when you consider the on-chain metrics for Dogecoin, the profile is quite favorable. For instance, stakeholders making money at the current price (6.45 cents) amounts to 51%; whereas, 43% are out of the money. The other 6% are at the money.
Basically, Dogecoin investors have more room to HODL. With a 51-43 gap favoring those in the money, it’s easier to justify holding the line. In that sense, DOGE is worth a look. However, I’m still concerned about possible impacts to other cryptos impugning Dogecoin.
Keep in mind that 66% of the “float” is concentrated in its largest holders. If they feel the pressure to dump, DOGE could fall in a hurry. Personally, I don’t think it’s worth the risk to get heavily involved at the moment.
On the date of publication, Josh Enomoto held a LONG position in BTC, ETH, USDT, ADA, XRP and DOGE. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.