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Peaking Markets, Bad Decisions
Last week, news emerged that decentralized blockchain group Spice DAO had bought a rare edition of Dune for $2.66 million. They allegedly believed doing so would grant them unlimited copyright to the franchise.
It didn’t.
Instead, all Spice DAO got was online ridicule from the peanut gallery.
“You bought a collectible for 100X estimated value. Do you think if you bought a Spider-Man comic you could start making Spider-Man movies as well?” Wrote one Twitter commentator.
The founders of Spice DAO would later assure onlookers that they did indeed already know this. Their purchase was to “show the various stakeholders that there is a massive online interest in making [Dune] more accessible to the public.”
Still, the misguided adventure highlights one fact:
Most bad investment decisions are made when people have too much money (The remaining bad decisions are made when people have too little).
Now that the U.S. Federal Reserve is ending its $5.7 trillion stimulus, many poor investment decisions will soon become apparent.
Today, we’ll take a look at three cryptocurrencies escaping that fate. By pursuing promising applications, these coins are thriving even as DAOs sink money into overpriced books.
The Three Winners of the Crypto Pullback
“Only when the tide goes out do you discover who’s been swimming naked,” famed investor Warren Buffett once quipped.
And it’s true. During good times, everyone looks like a genius when every asset price is going up. It’s only when markets start wobbling that bad investments get shaken out.
Fortunately for crypto investors, there have been some coins that have withstood the initial market impact. With some luck (and management skill), these projects could continue to see prices rise.
Cardano (ADA)
I’ve long had an uneasy relationship with Cardano (CCC:ADA-USD), a promising coin prone to cycles of overhype. Last January, I named ADA a “five-star” cryptocurrency to buy back when prices were hovering around the 30-cent range. Nine months later, I did a 180 degree turn after investor mania pushed the coin to $2.86.
“Look to alternatives rather than focusing on Cardano,” I wrote. “In order to notch another 700% rise… [it] would have to reach a $1 trillion market cap.”
Now that ADA prices are below $1.50, the coin is finally beginning to look interesting again.
When Small Is Beautiful
Cardano has performed well of late compared to Bitcoin (CCC:BTC-USD). Prices are up 25% over the past week, compared to a 2% loss in BTC.
The reason is twofold. Firstly, the coin has already lost so much of its value since peaking in September. Though no cryptocurrency has any “intrinsic value,” many of the larger names do show signs of having floor values.
Secondly, ADA is regaining traction in the real world. On Thursday, SundaeSwap became the first decentralized exchange operating on the Cardano chain. And NFT land prices for Pavia, a Cardano-based metaverse project, are rising fast.
ADA still needs a “killer app” to beat Ethereum (CCC:ETH-USD) in NFTs and other applications. But at 13% of Ethereum’s size, it’s still a decent wager to ride out crypto volatility.
Terra (LUNA)
The crypto “flight to safety” has also benefited Terra (CCC:LUNA-USD), which runs an ecosystem of stablecoins.
I’ve written about Terra before as a hedge against falling Bitcoin prices. LUNA’s see-saw link with stablecoin TerraUSD (CCC:UST-USD) means that it’s Terra that goes up when people rush into stablecoins (LUNA essentially maintains the UST dollar peg by moving in lieu).
Since that recommendation, LUNA has risen 11% while Bitcoin has fallen 13% — proof that countercyclical cryptos do work.
Today, LUNA still looks strong in the face of weakening Bitcoin prices. Though it’s far from a perfect hedge, Terra still provides crypto portfolios with a counterweight to swinging prices.
Fantom (FTM)
Finally there’s Fantom (CCC:FTM-USD), a dark horse Decentralized Finance (DeFi) play that’s risen 13% in the past week.
The reason for FTM’s outperformance is straightforward: much like Hedera Hashgraph (CCC:HBAR-USD), the Fantom Foundation has wisely decided to pursue larger clients. Though these larger customers often require dedicated sales teams, landing them is much like gaining anchor tenants. Fantom already counts Sushi and ShibaSwap as decentralized exchange (DEX) occupants — more names could be on the way as the market grows.
Fantom also has strong underlying technology. The protocol uses asynchronous Byzantine Fault Tolerance (ABFT), the same system used by Hedera and other top cryptocurrencies to secure and scale its network. Even Ethereum2 could theoretically lag behind in security.
That makes Fantom a cryptocurrency to watch. Though I’m even more bullish on Hedera when it comes to corporate-backed coins, FTM will still give other players a run for their money.
The “Ethereum Killers” Getting Left Behind
Not every promising cryptocurrency has held up against Bitcoin’s pullback. This week, Polygon (CCC:MATIC-USD) and Algorand (CCC:ALGO-USD) saw prices drop double-digits as investors rushed to safety. “Ethereum Killers,” it seems, are the ones getting murdered.
The pullback looks eerily similar to the declines of 2018. That year, a crypto “nuclear winter” would send rocketing altcoin prices right back down to Earth. The market share of non-BTC coins dropped from 67% in 2018 to 30% the following year, and Ethereum (CCC:ETH-USD) alone would lose 93% of its value.
This time around, the pullback will be less severe from a percentage standpoint. Cryptocurrencies are more established, and many now have real-world uses (Although critics will rightly ask what’s truly “real-world” about a $500,000 ape NFT).
The dollar amounts, however, will be far greater. Cryptocurrencies are now worth a collective $2 trillion, three times more than their 2018 peak. And with the tide of liquidity going back out, millions of investors will finally realize that many lower-quality tokens haven’t been wearing proper swim attire all this time.
What Happened The Last Time Rates Rose?
Many readers have rightly asked me:
What do the Fed’s actions really mean for cryptocurrencies?
Does the “Money Printer Go Brrr” meme have actual meaning? Or does Keynesian economics (i.e., federal spending) do more for the economy?
It turns out the answer is somewhere in between.
Last week, MarketWatch editor Mark DeCambre pointed out that Fed rate hikes are occasionally a good predictor of high stock market returns. Rises in 1994, 1997 and 2004 came in response to a rebounding economy — the S&P 500 index would subsequently post some of their best single-year returns.
But sometimes, the opposite is true. Rate hikes in 1987 and 1999 to cool overheating markets would coincide with low market returns. When it comes to monetary policy, it turns out there often is a tradeoff between growth and inflation.
Today the Fed has both problems on its hands. Much of the service sector (i.e., restaurants, retail and travel) is only beginning to rebound from Covid-19. At the same time, the physical goods sector — from commodities to real estate — is already overheating. (and if you don’t believe me, the inflation figures back it up).
Fiscal policy certainly isn’t helping. Stalled legislation is only adding uncertainty to how much liquidity investors can expect.
That means crypto investors will have to be selective as ever. When half the market is overoptimistic and the other half is completely fearful, assets will see some wild swings before things settle somewhere in the middle.
P.S. Do you want to hear more about cryptocurrencies? Penny stocks? Options? Leave me a note at moonshots@investorplace.com or connect with me on LinkedIn and let me know what you’d like to see.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.
