Patience has paid off immensely over the long run for stock investors. Since 1980, the benchmark S&P 500 has averaged an annual total return, including dividends, of roughly 11%.
However, cryptocurrencies have done a wee bit better in a much shorter time frame. Just since the March 2020 valuation bottom, the aggregate value of all digital currencies has soared more than 1,400% to $2.21 trillion. Over a five-year stretch, the total value of digital currencies has skyrocketed almost 14,800,000%!
But even this jaw-dropping increase has been put to shame by the year-to-date performance of meme coin Shiba Inu (SHIB -1.19%).
If you put $100 to work in Shiba Inu on Jan. 1, you're incredibly rich today
Shiba Inu is an ERC-20 token built on the Ethereum blockchain that effectively came out of nowhere to, at one point, find its way into the 10-largest digital currencies by market cap.
When 2021 began, investors had the opportunity to buy this little-known cryptocurrency for $0.000000000073 per token, according to CoinMarketCap.com. If you're wondering why the price was so low, keep in mind that, when Shiba Inu was launched in early August 2020, it had a circulating supply of 1 quadrillion SHIB.
But as of Dec. 16, these same tokens were changing hands on cryptocurrency exchanges for $0.00003305. Eating up six zeroes after the decimal point means Shiba Inu has delivered a year-to-date return of 45,273,873%!
If you were to have invested $100 into SHIB at the stroke of midnight on Jan. 1, and you held onto that stake throughout the entire year, you'd now be sitting on a position valued at (drum roll) $45,273,973. That would nearly get you into the top 0.1% of the wealthiest individuals in the U.S.
How does an asset appreciate by 45,000,000% in less than a year?
The question likely coming to mind is, "How is it possible for any asset to gain 45,000,000% in less than a year?" The answer has numerous moving parts.
To begin with, the cryptocurrency space is designed with an inherent buy bias. For instance, it's relatively easy for short-sellers (investors who want the price of a security to fall) to bet against publicly listed stocks through an online brokerage. The same isn't true within the less-regulated cryptocurrency space. Although some crypto exchanges do allow investors to short-sell well-known digital currencies, betting on downside in the crypto space isn't common. This provides a natural buy bias, especially for lesser-known coins that are riding a wave of momentum.
To build on this point, social media buzz plays a much larger role in influencing cryptocurrency valuations than it does in the stock market. Since most blockchain projects are still in the development stage, the internet rumor mill and confirmation bias play a key role in pushing valuations higher for digital tokens with a lot of momentum.
Don't overlook the fear of missing out (FOMO), either. Because short-selling isn't commonplace and social media buzz/tweets can be more than enough to send cryptocurrencies to the moon, SHIB investors haven't been the least bit concerned that it was up by as much as 121,000,000% on Oct. 27, which is when it hit its all-time high of $0.00008841.
Other factors that have played a role in Shiba Inu's historic ascent include the launch of decentralized exchange ShibaSwap, new listings on crypto exchanges, a large coin burn event (courtesy of Ethereum co-founder Vitalik Buterin), and the expectation of layer-2 blockchain Shibarium launching in 2022.
Those who don't lock in their gains will regret it
It's quite plausible we won't see a single-year return of this magnitude ever again. But it's also extremely likely that Shiba Inu will undergo an equally epic reversion over the next 12-to-24 months.
Perhaps the biggest enemy for Shiba Inu and its "hodlers" (a term embraced by crypto investors to describe those intending to buy-and-hold a token) is history. Over the past five years, there have been a small handful of payment coins that've rallied anywhere from 24,000% to almost 462,000% in a relatively short time frame (typically 10 months to 30 months). But after these momentum-driven cryptocurrencies peaked, they each went on to lose between 93% and 99% of their value in 26 months, or less.
In terms of aggregate gain, the closest historical comparison I can find to what SHIB produced in 2021 is privacy coin Verge, which gained close to 1,200,000% in a one-year stretch. After hitting its all-time high, Verge would go on to lose 99.6% of its value in about a year. If a nearly 1,200,000% gain produced a 99.6% reversal, imagine what a peak gain of 121,000,000% will yield.
The other glaring concern for Shiba Inu is that it offers no competitive advantages or true differentiation. Although it's one of the buzziest cryptocurrencies on social media, hype always proves fleeting. When push comes to shove, there's nothing about Shiba Inu coin that would coerce businesses to choose to accept it over a sea of other more efficient or unique crypto options. As of Dec. 16, a meager 387 merchants worldwide were accepting SHIB as a form of payment. That's out of more than 500 million entrepreneurs worldwide.
Shiba Inu has already retraced 63% from its all-time high in less than two months. If hodlers don't lock in their gains soon, they could be in for a long and painful ride lower.