With some of the top cryptos to watch succumbing to pressures related to unrest in China, one thing stands clear: blockchain-derived digital assets still do not trade independently from broader fundamentals that impact the global equities sector. Should the world’s second-largest economy continue to operate under an ambiguous cloud, the blockchain ecosystem’s total addressable market might fade.
Put another way, for cryptos to succeed, people must obviously buy them. Anything that disrupts this global demand source will likely continue clouding virtual currencies until a resolution is found. In the meantime, investors should prepare for an extended winter for the blockchain. Atop the aforementioned unrest, investors still contend with geopolitical flashpoints, an energy crisis, and inflation.
To be fair, many individual cryptos posted some interesting moves in recent hours. However, it’s best to look at the bigger picture. So long as global central banks remain committed to shrinking the supply of fiat currencies in the monetary system, virtual currencies may struggle against this deflationary forward implication. On that note, below are the cryptos to watch carefully.
Cryptos to Watch: Bitcoin (BTC-USD)
Earlier in Nov., I laid out the case that investors should wait until the $10,000 level (or so) before acquiring a heavy position in Bitcoin (BTC-USD). I still stand by this statement. Even if BTC prices were to jump higher in the near term, the overall fundamentals remain negative for cryptos.
In the aforementioned article, I juxtaposed the real M2 money stock with the Bitcoin price. Sure enough, the two metrics feature a correlation coefficient of 87.81%, which is remarkably strong. Fundamentally, as the Federal Reserve expands the money supply, BTC (and other cryptos) rise. However, when the central bank reduces liquidity, the framework for digital assets turns pessimistic.
With cryptos representing pure risk-on assets, it’s not terribly shocking that Fed policy primarily dictates the blockchain ecosystem’s trajectory. Further, with the Fed showing no signs of reversing its current hawkish policy, it’s just more sensible to be skeptical about Bitcoin. As BTC struggles in the mid-16K range, the sidelines offer a safer position.
Cryptos to Watch: Ethereum (ETH-USD)
While the most ardent blockchain supporters like to assert that individual coin’s trade on their unique fundamentals, the reality is that the major cryptos tend to trade relatively in lock-step with Bitcoin. Indeed, Coinpaprika.com’s blockchain analysis reveals that the Ethereum (ETH-USD) price features a 99% correlation with BTC. Therefore, whatever hesitations exist for Bitcoin, the same can be said about Ethereum.
Please don’t misread these words – I’m not negative about cryptos as a concept. In fact, I’ve been one of the sector’s early proponents. Nevertheless, we do a disservice to ourselves when we ignore facts. And the fact of the matter is that, at least for now, virtual currencies ebb and flow with Fed policy. In all likelihood, once the Fed opens the monetary spigot, ETH can rise again to the forefront.
However, at this juncture, the central bank’s priority centers on controlling inflation. With consumer prices still sky-high, the Fed is not about to relax its protocol. Therefore, Ethereum will lack credibility until the monetary paradigm pivots.
Cryptos to Watch: Tether (USDT-USD)
Although it’s a harsh statement, I’m increasingly convinced that as cryptos continue to suffer, stablecoins such as Tether (USDT-USD) become less relevant, even – brace yourself – pointless. How can I dare utter these words? Frankly, Tether’s relevance aligns mostly with velocity. As people trade various virtual currencies, demand for convenient transactions arises.
However, under a bearish cycle, convenience takes a backseat. After all, what’s the point of quickly converting your USDT into one of your favorite cryptos if those assets you piled into lost significant value in the next month or two? Realizing that the blockchain ecosystem is fading (at least for the time being), many investors simply chose to transfer their assets to cold storage.
Again, how does this help stablecoins? I argue it doesn’t. Without crypto velocity, Tether loses its relevance. Combined with the ever-present fear of a complete platform meltdown, I think folks need to be careful about exposure.
Cryptos to Watch: BNB (BNB-USD)
One of the major cryptos that I haven’t discussed in a while, BNB (BNB-USD) essentially represents the virtual currency of the Binance exchange. According to data from Coinmarketcap.com, BNB features a circulating supply of nearly 160 million BNB coins and a maximum supply of 200 million. Over the last seven days, BNB popped up over 20%, one of the biggest jumps among the majors.
Fundamentally, the coin likely popped higher based on the elimination of a major competitor. As you’ve probably heard by now, rival exchange FTX recently declared bankruptcy. Further, many analysts warned about the fallout stemming from this collapse. So far, Binance has been able to keep its nose clean by simply not being FTX.
Still, I’m not exactly enamored with BNB. While the coin managed to swing substantially higher compared to other cryptos, it’s also down over 42% for the year. Again, until the Fed wishes to cooperate with an inflationary monetary policy, BNB remains fundamentally suspect.
An intriguing name among cryptos because of its broader legal implications, XRP (XRP-USD) popped up around 10% in the trailing week. When it comes to this transactional virtual currency minted by Ripple Labs, seemingly everyone focuses on the lawsuit. About two years ago, the U.S. Securities and Exchange Commission alleged that Ripple skirted securities law through the XRP issuance.
Now, the attractive element of XRP is that should the court favor Ripple, it would lead to legal clarity for the digital asset. Moreover, it would be the only one with such clarity, presumably giving XRP an edge over other cryptos. Nevertheless, it’s the market that has the ultimate word. Unfortunately, public sentiment isn’t cooperating.
True, you can make the argument that over the trailing six months, XRP charted a series of higher lows. While enticing on a speculative level, the broader fundamentals (i.e. the Fed) must materialize favorably. For now, the sector remains weak. Given that XRP is down 54% on a year-to-date basis, healthy skepticism abounds.
While many investors ignore Dogecoin (DOGE-USD) and similar meme-ish cryptos, DOGE has its charms. Fundamentally, as other blockchain projects go about fixing the world’s biggest problems (somehow) through a decentralized distributed ledger, Dogecoin refuses to take itself too seriously. Here, the focus centers on establishing community, having fun, and hopefully making a buck or two.
For the moment, the levity in Dogecoin appears to have attracted broader market sentiment. In the trailing seven days, DOGE popped up roughly 40%. Though an encouraging development, the move likely stems from a pump-and-dump scheme. Even with a meme coin like DOGE, the specter of the Fed carries a strong influence.
Essentially, as borrowing costs rise, investors have less incentive of fooling around with speculation-driven assets and more on established businesses. Indeed, just sitting on cash under a rising interest rate environment offers a smarter choice. Therefore, interest in scheming cryptos like Dogecoin will likely wane in the coming months.
Prior to the malaise that is 2022, Solana (SOL-USD) represented one of the most exciting blockchain projects. While Ethereum serves as the backbone of application-driven initiatives, the ETH network became onerous and expensive. As a result, several blockchain developers migrated out of the platform for greener pastures. One of the alternatives was Solana.
Fundamentally, Solana offered speed, scalability, and security, all at a low transaction cost. In many ways, developers could have their cake and eat it too. Unfortunately, the FTX fallout wiped out almost $700 million in value from the Solana network, per Coindesk.com. FTX founder Sam Bankman-Fried was a prominent backer of the SOL ecosystem.
Ironically, the SOL ticker now aligns with the more common meaning, [stuff] outta luck. Still, the lesson here is that investors can talk themselves silly about a blockchain project’s fundamentals. But at the end of the day, it all comes down to market demand. A crypto coin either has it or it doesn’t.
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.