Some of the top cryptos to watch suffered catastrophic losses this year, raising questions about viability. Of course, many if not most of the blockchain market’s ardent supporters believe valuations can rise again. However, it’s important for virtual currency traders to keep an objective view.
Fundamentally, the biggest challenge facing cryptos is arguably the Federal Reserve. When the coronavirus pandemic initially capsized the global economy, the Fed expanded its balance sheet. In other words, it bought back bonds, which in turn introduced mass liquidity into the monetary system. Cynically, that’s helpful to cryptos because of inflationary pressures. Now, the central bank seeks to shrink its balance sheet. Such measures will decrease liquidity in the system, increasing the purchasing power of the dollar along with raising the benchmark interest rates. Therefore, boring government bonds and even sitting on cash present relatively low-risk ventures with sizable returns. This dynamic contrasts sharply with ever-eroding cryptos.
Unfortunately, until this narrative reverses itself, it’s difficult to see how cryptos can recover so soon from their malaise. Still, anything can happen. Therefore, it’s important to consider all sides as we navigate the digital asset market.
The benchmark of all cryptos, Bitcoin (BTC-USD) commands significant attention because wherever BTC goes, so does the rest of the virtual currency complex. Therefore, the present circumstance doesn’t bring much encouragement for investors. On a year-to-date basis, Bitcoin fell more than 59%. And since the beginning of July, BTC sits at parity.
Fundamentally, it’s difficult to imagine that Bitcoin will remain static and rangebound indefinitely. Usually, cryptos feature some directional bias. Therefore, investors may need to think about how they will approach BTC and other key assets. Interestingly, some technical analysts weighed in on Bitcoin’s price action, noting that it could be months before we see a big expansive move in the space. However, investors will do well to exercise restraint regarding technical patterns and other “voodoo” chart magic, irrespective of implications.
It’s not that I don’t believe in the value of technical analysis. However, with the Fed imposing a massive paradigm shift in risk-on asset classes, it’s best to adopt a cautious approach.
Ethereum (ETH-USD) recently underwent a consensus protocol change, shifting from proof of work (PoW) to proof of stake (PoS). Interestingly, Cointelegraph.com noted that many traders anticipated a price increase in ETH because the underlying network became deflationary. In other words, fewer ETH units existed to chase after more goods.
However, Ethereum remains a disappointing investment in 2022. Since the beginning of the year, ETH fell 64%. Since The Merge event, the coin declined by about 8% of its market value. Here, Cointelegraph.com provides a critical lesson.
“Although the mechanism introduced by the Merge and the current state of deflation is technically supposed to drive prices upward, the timing is simply not suitable. The prices of any cryptocurrency are not just based on its supply and burn mechanism — liquidation also plays a significant role.”
Moving forward, investors must recognize that pure risk-on assets like cryptos depend on the greater fool theory. If you don’t believe someone else will buy whatever coins or tokens off you at a higher price, that narrative should be your guiding force, not some magic blockchain jargon.
Increasingly, I have expressed concerns about stablecoins like Tether (USDT-USD) because of the possibility of catastrophic risk. While I don’t believe Tether will outright collapse, we don’t really know whether USDT enjoys full paper backing. Therefore, under the present deflationary ecosystem in cryptos, it’s better to be safe than sorry.
In other words, consider converting at least some of your Tether back to U.S. dollars. Indeed, the Fed is all but incentivizing you to make this move.
According to data from Google Finance, USDT lost about 0.03% of its value since the start of the year. That’s not much, I get that. But here’s the point. With the Fed shrinking the size of its balance sheet, the aggressive action could create a liquidity crunch. Stated differently, your fiat dollars will likely be worth more than your crypto dollars. True, you can always earn interest in your stablecoins via decentralized finance (DeFi) platforms. However, Tether does carry total collapse risk. On the other hand, the dollar probably isn’t going anywhere despite what your favorite doom-and-gloom YouTuber has to say.
While cryptos always carried unpredictable risk-reward projections, XRP (XRP-USD) may be completely divorced from all correlations. Whether you want to look at Fed policy or the gold price or stock market valuations, none of these metrics represent the ultimate arbiter for XRP. Instead, the U.S. Securities and Exchange Commission will likely have the last word.
If you’ve been following cryptos over the last few years, you’ll know that the U.S. SEC accused Ripple Labs (the founding entity of XRP) of skirting securities laws with its XRP distributions. Of course, Ripple denies wrongdoing, asserting that XRP genuinely represents a virtual currency. Depending on the outcome of this court case, XRP may either skyrocket or crater.
According to blockchain news resource Beincrypto.com, the legal battle soon will reach its conclusion. Frankly, I have some concerns. Should Ripple lose, the development may bode poorly for cryptos. But even if Ripple emerges victorious, a possibility exists that, like Ethereum’s The Merge, the news won’t move XRP. Keep this in mind before you bet too heavily on XRP.
While terribly volatile and risky even for virtual currency standards, Dogecoin (DOGE-USD) represents an intriguing angle among cryptos. Generally speaking, the focus on DOGE centers on building communities and making money through speculation. While it might sound crass, I don’t think there’s anything wrong with this ethos. If anything, it warns people upfront about the greater fool theory.
Unlike many other blockchain projects, Dogecoin members don’t obsess about grandiose ambitions such as addressing world hunger. Nor does the broader DOGE community virtue signal about promoting microtransactions and social equity in some far-off land. No, DOGE centers on having fun and perhaps making some scratch while you’re at it. Nothing more, nothing less.
Such decentralization from the core motivations undergirding other cryptos might allow Dogecoin to disassociate from leaders like Bitcoin or Ethereum. That would be helpful considering that the Fed’s monetary policy disincentivizes both assets. Still, it’s an extremely risky hypothesis so caution is warranted.
While most cryptos posted disappointing results in the charts in the trailing week, Aave (AAVE-USD) moved against the grain, returning stakeholders 5.4%. True, it’s not the most robust performance ever. However, in the past three months, AAVE gained nearly 3%. This small but significant upside action suggests that AAVE might continue trending against the sector’s predominant bearishness.
Fundamentally, Aave brings an intriguing framework to the table. According to the crypto wallet service Kraken, Aave is a DeFi platform. Specifically, it’s a “decentralized lending system that allows users to lend, borrow and earn interest on crypto assets, all without middlemen.” Most significantly, “Aave users do not need to trust a particular institution or person to manage their funds. They need only trust that its code will execute as written.”
To be sure, the higher returns stemming from DeFi platforms tempt onlookers. However, investors must also realize that U.S. bonds, or even sitting on cash, present wealth expansion opportunities at lower risk. Therefore, you should engage AAVE and all other cryptos with this framework in mind.
Another name among cryptos that delivered a positive result in the trailing week, Polygon (MATIC-USD) gained just under 2%. Under any other circumstances, such a return would not draw much attention. However, with most digital assets suffering massive double-digit losses so far this year, any hint of sustained upside presents a case for further investigation.
Per Coinmarketcap.com, Polygon “is the first well-structured, easy-to-use platform for Ethereum scaling and infrastructure development. Its core component is Polygon SDK, a modular, flexible framework that supports building multiple types of applications.”
Recently, Polygon grabbed some headlines in the crypto space when Nu Holdings (NYSE:NU) (a financial institution that Warren Buffett’s Berkshire Hathaway (NYSE:BRK-B) backs) confirmed that it selected Polygon’s “Supernets” technology for its blockchain and digital token, known as Nucoin.
While the mention of Warren Buffett makes for an interesting story, investors should exercise due diligence. Remember, the Ethereum Merge was also supposed to be groundbreaking, yet it ultimately didn’t do much for ETH.
On the date of publication, Josh Enomoto held a LONG position in BTC, ETH, USDT, XRP, and DOGE. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.