In Nov., I made the case for why investors should wait for key cryptos to decline significantly before placing massive wagers. Long story short, the fundamentals indicate that virtual currencies share a strong direct correlation with monetary liquidity. In other words, blockchain-derived assets ebb and flow with the Federal Reserve’s guidance and strategy. With the central bank committed to attacking inflation via higher benchmark interest rates, risk-on assets like cryptos tumbled. Unfortunately for current stakeholders, the latest jobs report for November imposes a dark cloud on the blockchain. Employers added 263,000 jobs against an expected 200,000, which ordinarily would be a positive development. However, this result indicates that the Fed’s monetary tightening did not address the core catalysts of inflation. Essentially, job growth means more dollars are chasing after fewer goods. Policymakers clearly want the opposite to be true. Thus, a possibly even more aggressive Fed forces a cautious take on the below cryptos to watch.
Cryptos to Watch: Bitcoin (BTC-USD)
While Bitcoin (BTC-USD) posted a solid performance over the trailing week – gaining a little under 5% – the broader narrative remains questionable for BTC. Again, the issue comes down to the Fed. The juxtaposition of Bitcoin and the real M2 money stock suggests that the supply of dollars represents the biggest driver (or headwind) of cryptos.
Put another way, investors must approach virtual currencies under a realistic framework. For all the pie-in-the-sky storylines about Bitcoin representing true financial freedom from centralized fiat-based authorities, the reality is that the sentiment of cryptos aligns with fiat-based indices as benchmarks. Otherwise, the Fed’s imposition of deflationary forces (i.e. monetary tightening) wouldn’t really impact BTC. Unfortunately, it does, which in my opinion brings up the specter of $10,000 (or lower) Bitcoin. Fundamentally, the Fed appears poised to raise rates next year, which hurts risk-on assets. Still, if BTC were to have a chance, it would need to quickly regain $20,000, then move decisively toward 30K.
Cryptos to Watch: Ethereum (ETH-USD)
When dealing with cryptos, it’s not unusual to come across fantastical price targets. However, you don’t expect a major financial institution like Goldman Sachs to join in on the fun. But in 2021, Goldman told clients that Ethereum (ETH-USD) could eventually overtake Bitcoin as the top digital store of value.
To be fair, the investment firm issued this long-term forecast in the summer season last year. That was of course when embattled cryptos began surging toward meteoric heights, a rally that ended spectacularly in November. Still, Goldman was spot on the money. Nowadays, though, the equities market might impose concerns regarding Ethereum and other digital assets.
Following the closing of Monday’s session, the S&P 500 index found itself down nearly 2%. Again, the culprit centered on the Fed and speculation that it will raise rates aggressively next year. With a robust labor market brushing aside the central bank’s incredibly hawkish posture, policymakers must get serious. Under this environment, neither Ethereum nor other cryptos offer much confidence. Therefore, you’ve got to be extra cautious.
Cryptos to Watch: Tether (USDT-USD)
A critical component of the virtual currency ecosystem, Tether (USDT-USD) is a stablecoin or blockchain asset pegged to a fiat currency, in this case, the U.S. dollar. Fundamentally, Tether and similar cryptos offer convenience to traders. Rather than converting fiat to digital assets every time a transaction is made, traders can store their funds in USDT. From there, they can pounce immediately on any materialized opportunities.
However, under a deflationary cycle, stablecoins lose much of their relevance for buy-and-hold investors. Further, with the Fed determined to reduce the money supply, each dollar in circulation will likely rise in purchasing power. Effectively, hawkish monetary policies pit real cash against their digital representations. It really comes down to a basic economic equation. Why bother holding Tether when you hold dollars that may expand your wealth through simply apathy? In addition, dollars don’t carry the same risk of implosion as fiat-pegged cryptos – irrespective of what YouTube doomsday bunker luminaries may tell you. Just be smart about your exposure to USDT at this time.
Cryptos to Watch: BNB (BNB-USD)
If there’s one fundamental winner among cryptos, it really should be BNB (BNB-USD). Basically, BNB represents the blockchain coin undergirding Binance. Per Coinmarketcap.com, Binance represents the biggest cryptocurrency exchange globally based on daily trading volume. While that status alone merits consideration for BNB, it’s the other news item that warrants attention.
As you’ve probably heard, the crypto platform FTX recently declared bankruptcy. What makes the issue more startling is that the latest developments suggest FTX was nothing more than a Ponzi scheme. Further, it’s possible that, per a CNBC report, that its founder, Sam Bankman-Fried could face years in prison.
Now, Binance initially appeared that it might bail out FTX, only to back out later. Either way, Binance should look like an upstanding enterprise, if only on a relative basis. However, the comparison did little to decisively bolster BNB. To me, this is concerning because it reflects broader skepticism against cryptos. Frankly, folks have every right to be skeptical as FTX is hardly the only blockchain project or platform to implode.
Initially, when the U.S. Securities and Exchange Commission filed a lawsuit against Ripple Labs, the creator of the XRP (XRP-USD) cryptocurrency, more than a few investors exited their positions. However, XRP performed remarkably well given the circumstances. Over the last three months, it’s been among the better cryptos to watch.
During the aforementioned period, XRP gained roughly 22% of its market value. However, Bitcoin suffered a loss of around 10%. Much of the bullish sentiment focuses on legal precedent. Should Ripple emerge victorious, it would be the only blockchain-derived asset to enjoy regulatory clarity. Therefore, many other investors stuck to their guns regarding their XRP holdings.
Per a Reuters article, both sides in the heavily watched proceedings have angled for a quick win. Still, the hurdle longer term may be steeper for XRP. Let’s assume that Ripple wins the lawsuit. Under last year’s ecosystem, XRP might have skyrocketed. However, the biggest issue right now arguably isn’t about legal clarity. Rather, it centers on trust (or lack thereof) regarding blockchain-based enterprises. In other words, investors should prepare for a scenario where a win might not matter.
Once generating excitement as a potential Ethereum killer, Solana (SOL-USD) now finds itself on the back foot. It’s a shame because the fundamental concept brought much intrigue to this next-generation crypto. As the Ethereum network expanded, so too did its underlying transaction fees called gas. With costs becoming onerous, many blockchain developers sought viable alternatives.
At the time, Solana greeted those looking for a change of scenery with a secure, scalable, and low-cost network. Unfortunately, two headwinds eventually materialized. Beginning in November of last year, cryptos melted down, taking virtually every digital asset with it. Second, the FTX bankruptcy particularly affected Solana.
Essentially, the FTX implosion wiped out $700 million from Solana’s decentralized finance (DeFi) platform. If that wasn’t bad enough, Cryptoslate.com reported that the ties between Solana and FTX negatively impacted underlying applications, such as Web 3.0 gaming networks. Unfortunately, pretty much all cryptos suffer from a crisis of confidence. However, SOL’s proximity to FTX may impart lingering dark clouds.
A popular meme coin thanks to incredible celebrity support, Dogecoin (DOGE-USD) represents both a virtual currency and a pop-culture phenomenon. While it might not garner respect among the suits, it’s one of the cryptos to watch. Unlike other digital assets and their underlying networks, Dogecoin doesn’t present itself as the savior of all social ills. Instead, DOGE focuses on community as well as the possibility of making money through speculation.
If I may be completely honest, I find Dogecoin refreshing. There’s no talk about eradicating world hunger or solving social inequities (through a decentralized distributed ledger, seriously?). In this manner, DOGE is disassociated with normal fundamentals. However, it can’t escape the core realities of supply and demand.
True, over the trailing three months, Dogecoin gained about 70% of its market value. However, as the Fed likely stands poised to raise rates throughout 2023, DOGE as a pure risk-on asset presents tremendous risks. Therefore, I would only limit any speculation with loose change under the sofa.
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.