Crypto prices have begun showing signs of life after a rough start to the year. Meme coins like Shiba Inu (SHIB -0.34%) have helped lead the charge -- with its market cap soaring by over 50% to $18 billion in just seven days. But despite the rally, Shiba Inu's long-term prospects still look weak.
Let's explore two reasons investors should avoid this volatile token.
1. The community is trying to "fake" growth
Shiba Inu's backers have carefully cultivated an online community, dubbed the "Shibarmy," focused on trading and promoting the cryptocurrency and related non-fungible tokens (NFTs), which are digital records of ownership stored on the blockchain.
Now, they have taken their advocacy a step further by attempting to restrict the SHIB supply.
Image source: Getty Images.
Shiba Inu's recent rally coincides with several tweets from crypto entertainment company Bigger Entertainment, known for hosting cryptocurrency burn parties. These events involve users pooling resources together to buy and send cryptocurrency to an inaccessible address (burning) to make the asset more scarce and boost prices.
The latest event is scheduled for Feb. 14 and will destroy a yet-to-be-determined number of SHIB tokens. This follows earlier burn parties in December and November, which destroyed over 239 million and 400 million tokens, respectively.
But with the total number of SHIB standing at almost 590 trillion tokens, the burning events will scarcely make a dent in token supply. On top of this, burning only tackles the supply side of the supply/demand equation -- it doesn't boost demand. The Shibarmy can destroy as many tokens as it wants, but if demand keeps falling at a potentially higher rate, SHIB prices will keep crashing.
2. Shiba Inu's fundamentals are still weak
At the end of the day, demand is hugely influenced by fundamentals. And Shiba Inu's fundamentals are still quite weak. As a token on the Ethereum network, SHIB doesn't have as much design flexibility as other large cryptocurrencies, causing it to suffer Ethereum's network challenges like soaring fees -- which can reach as high as $30 per transfer.
Shiba Inu's developers will have to wait until Ethereum's planned upgrade (called the consensus layer) to resolve these challenges. And it is unclear when that will actually go live.
In the meantime, Shiba Inu is attempting to expand its functionality through new projects like Shiberse, an immersive metaverse experience for the Shiba Inu ecosystem.
In February, developers announced Shiba Lands, which will be virtual real estate available for purchase. But the land can only be purchased using a token called Doge Killer (CRYPTO: LEASH), which is not the same as SHIB. And it is unclear if this metaverse project will actually boost demand for SHIB -- aside from just creating hype.
Don't take the bait
The Shibarmy and Shiba Inu's developers are trying to reinflate the SHIB bubble through coin-burning parties and a hyped-up metaverse project. But SHIB has a massive number of coins in circulation and weak fundamentals, so these desperate tactics probably won't be enough to end the asset's long-term declines.
Editor's note: This sentence has been corrected to read "These events involve users pooling resources together to buy and send cryptocurrency to an inaccessible address (burning) to make the asset more scarce and boost prices."
