Why Shiba Inu and Dogecoin are in the niche

In terms of investment returns, the stock market gave way to cryptocurrencies in 2021 in a very big way. The combined value of all cryptocurrencies soared 186% from $774 billion last January 1 to $2.22 trillion as of December 31. This crushed the return from the open sea S&P500 the stock market index, which stands at 27%.

But controversial meme tokens shiba inus (CRYPTO: SHIB) and Dogecoin (CRYPT: DOGE) took center stage, earning 43,800,000% and 3,500% respectively for the year. In the case of Shiba Inu, an investment of just $2.29 on January 1 would have made you a millionaire by the end of 2021 if you had held on.

While these returns are mind-boggling, they only tell part of the story. Shiba Inu collapsed 74% from their all time high. Dogecoin is down an even bigger 81%. Timing was everything. Investors who bought the tokens early made huge gains, but investors who joined the party later are sitting on painful losses.

Image source: Getty Images.

Unfortunately, none of the tokens have shown any signs of recovering from their previous highs, with the losses only accelerating. Here’s why investors put Shiba Inu and Dogecoin in the niche.

Widespread adoption has not happened

For a token to gain traction as a currency, consumers and businesses need to own it and transact with it. Otherwise, it is just a speculative vehicle. Both Shiba Inu and Dogecoin have struggled in this area, primarily because they are inefficient and expensive as payment mechanisms, but also due to their extreme volatility.

A business cannot accept payments in a currency that could collapse by more than 70% in a short period of time, as this erodes any cash flow certainty. Not to mention that a drop like that would wipe out the trader’s profits from the sale of his goods and services. Likewise, it would be impossible for consumers to track purchasing power on any given day, rendering the token effectively useless as a currency.

The statistics speak for themselves, with only a small number of obscure small businesses accepting tokens as payment worldwide.

Token

Number of merchants

shiba inus

605

Dogecoin

1997

Data source: Cryptwerk.

This leaves both tokens as mere speculative assets, and not a sustainable use case. As time passes and losses persist, old investors grow impatient and new investors are spooked by the constant red ink.

Regulation is around the corner

The Securities and Exchange Commission (SEC) monitors the financial markets in the United States. Currently, she is assessing whether many cryptocurrencies should be categorized as securities and fall under more traditional financial asset rules.

This has serious implications. Cryptocurrency exchanges would have to register with the SEC and be subject to a series of restrictions to prevent market manipulation, similar to the rules imposed on exchanges. They would also be required to record all transactions and ensure they meet strict auditing and compliance standards. In this situation, the days of anonymity for cryptocurrency investors would effectively be over.

But that could soon be the case anyway. In the infrastructure bill proposed by the US government, cryptocurrency brokers and their clients would be required to report to the Internal Revenue Service for tax purposes. This means that anyone who sells, trades or spends their tokens would be liable to pay taxes on the winnings they have made. The change is planned for 2023 and could cause small investors to rethink their cryptocurrency trading business, especially if they have to incur high accounting fees.

The losses are unlikely to stop

The regulatory changes won’t affect Shiba Inu or Dogecoin alone – they will impact the entire crypto industry. Same Bitcoin (CRYPTO: BTC), the largest token with a market value of around $700 billion, has fallen more than 40% from its all-time high. Although its decline is less than the decline of meme tokens, Bitcoin has the first-mover advantage and much wider adoption.

Many of the arguments that have supported the huge gains in cryptocurrencies are collapsing right now. No token has succeeded in replacing traditional currency, and most tokens also fail as an inflation hedge, which was a popular topic of discussion.

Cryptocurrencies are sold side by side with the stock market, but more. Technology-centric Nasdaq 100 The index fell just 13% from its all-time high, while the broader cryptocurrency market lost more than 40% of its value.

Shiba Inu and Dogecoin are losing even more as a testament to investors’ lack of confidence in them relative to other tokens and the market in general. Investors are therefore unlikely to rush to buy them if things pick up, especially in the face of impending regulation and a failure to drive adoption.

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Anthony Di Pizio has no position in the stocks mentioned. The Motley Fool owns and recommends Bitcoin. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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