Why Shiba Inu and Dogecoin Are in the Dog House

In terms of investment returns, the stock market took a back seat to cryptocurrencies in 2021 in a very big way. The combined value of all cryptocurrencies soared 186%, from $774 billion last Jan. 1 to $2.22 trillion by Dec. 31. That crushed the return of the broad S&P 500 stock market index, which came in at 27%. 

But controversial meme tokens Shiba Inu (SHIB -0.94%) and Dogecoin (DOGE -0.76%) took center stage, gaining 43,800,000% and 3,500% for the year, respectively. In Shiba Inu's case, an investment of just $2.29 on Jan. 1 would have made you a millionaire by the close of 2021 had you held on. 

While those returns are mind-boggling, they only tell part of the story. Shiba Inu has collapsed by 74% from its all-time high. Dogecoin is down an even greater 81%. The timing was everything. Investors who bought the tokens early made enormous gains, but investors who joined the party later are sitting on painful losses. 

Image source: Getty Images.

Unfortunately, neither token has shown any sign of reclaiming its previous lofty highs, with losses only continuing to gather pace. Here's why investors have put Shiba Inu and Dogecoin in the doghouse.

Widespread adoption hasn't happened

For a token to gain traction as a currency, it needs consumers and businesses to own it and do transactions with it. Otherwise, it's merely a vehicle for speculation. Both Shiba Inu and Dogecoin have struggled in this area, mainly because they're inefficient and expensive as payment mechanisms, but also because of their wild volatility. 

A business can't accept payments in a currency that could collapse by over 70% in a short time because it erodes all certainty about cash flow. Not to mention, a dip like that would wipe out the merchant's profits from selling its goods and services. Likewise, it would be impossible for consumers to track purchasing power on a given day, making the token effectively useless as a currency.

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

Data source: Cryptwerk. 

This leaves both tokens as mere speculative assets, and that's not a sustainable use-case. As time goes on and losses persist, old investors grow impatient, and new investors get spooked by the constant red ink. 

Regulation is around the corner

The Securities and Exchange Commission (SEC) oversees financial markets in the U.S. Right now, it's assessing whether many cryptocurrencies should be categorized as securities and fall under more traditional financial asset rules. 

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

But that might soon be the case anyway. In the U.S. government's proposed infrastructure bill, cryptocurrency brokers and their customers would be required to report to the Internal Revenue Service for tax purposes. That means any person who sells, exchanges, or spends their tokens would be liable to pay taxes on any gains they've earned. The change is slated for 2023, and it might cause smaller investors to rethink their cryptocurrency trading activity, especially if they have to incur expensive accounting costs. 

The losses are unlikely to stop

Regulatory changes won't affect Shiba Inu or Dogecoin alone -- they'll impact the entire crypto sector. Even Bitcoin (BTC -0.69%), the largest token with a market value of about $700 billion, has fallen more than 40% from its all-time high. While its decline is smaller than the meme tokens' decline, Bitcoin does have first-mover advantage and much broader adoption.

Many of the arguments that have underpinned the enormous gains in cryptocurrencies are falling apart right now. No token has successfully come close to replacing traditional money, and most tokens are also failing as a hedge against inflation, which was a popular talking point. 

Cryptocurrencies are being sold off side by side with the stock market, only more so. The technology-centric Nasdaq 100 index has fallen just 13% from its all-time high, whereas the broader cryptocurrency market has lost more than 40% of its value.

Shiba Inu and Dogecoin losing even more than that speaks to investors' lack of confidence in them compared to other tokens and the market more broadly. It's unlikely, then, that investors will rush to buy them if things recover, especially in the face of looming regulation and a failure to generate adoption.