After a rough start to the year, the cryptocurrency market is beginning to show signs of life, jumping 10% to $2.1 trillion in the last 30 days. But not all cryptos are created equal. Let's explore the why the iconic meme token Shiba Inu (SHIB -1.25%) may underperform over the long term.
1. The hype has faded
Shiba Inu's epic rally started in early October 2021, after Tesla's CEO Elon Musk tweeted about his recently adopted Shiba Inu puppy. At its all-time high of $0.00008845, the token had soared more than 100 million percent above its all-time low two years prior. Those are some pretty breathtaking returns. But with no fundamental support, they simply couldn't last.
SHIB relied on the greater-fool theory, a concept suggesting investors will buy a low-quality asset if they can expect to sell it to someone else (the greater fool) for more in the future. But now that SHIB has fallen 70% from its all-time high, the greater fool assumption is broken, and a key driver of token demand has vanished.
2. SHIB brings nothing new to the table.
While cryptocurrency is an inherently speculative asset class because most projects don't generate profits or have significant real-world utility, there are some fundamentals investors should pay attention to. These include scalability and the concentration of token ownership. SHIB struggles with both.
As a token programmed on the Ethereum blockchain, SHIB suffers from Ethereum's network challenges, including a low transaction capacity of just 15 per second, which can lead to bottlenecks and high fees. A transaction on Ethereum (and Shiba Inu by extension) costs just over $2 to execute (rival Solana costs just $0.00025). And Shiba Inu isn't an independent blockchain, so it can't fix these problems on its own.
The developers have to wait on Ethereum's planned upgrade, which is designed to address scalability challenges. But it is unclear when these changes will go live.
Shiba Inu also struggles with concentrated token ownership. According to data from coinmarketcap.com, the top 100 wallets control a staggering 81% of all the SHIB in circulation. To put this number in context, the top 100 Bitcoin wallets only control just 14% of the coin's supply. SHIB's concentrated ownership gives a small number of people outsized control over the asset's price. This could create an enabling environment for rug pulls, which occur when a large holder quickly liquidates their position, tanking the price of a cryptocurrency.
A bursting bubble
SHIB's appeal comes from the fear of missing out (FOMO). Investors who missed last year's life-changing rally want to bet on the next bull run. But with the hype fading and its greater fool thesis broken, SHIB looks unlikely to see such an epic move upward in the future.
Investors should avoid the controversial meme token until its fundamentals improve.