The crypto market skyrocketed during the pandemic as several trends converged to make digital assets more mainstream. Social distancing and stimulus checks left retail traders with some extra time and money. Fintechs like PayPal reduced friction by adding crypto support to widely adopted digital wallets. And meme tokens like Shiba Inu (SHIB -4.24%) and Dogecoin fueled hysteria by generating jaw-dropping returns in a matter of months.
Oh, how the tide has turned. This year, the crypto market sold off sharply as soaring inflation caused many investors to part ways with risky assets. That led to the forced liquidation of heavily leveraged positions, which caused the market crash to accelerate. The collapse of the Terra blockchain and bankruptcy filings by crypto firms like Celsius, Voyager Digital, and Three Arrows Capital also contributed to the chaos.
That being said, investors can take solace in one fact: The crypto market has recovered from every past downturn, and there is no reason to believe this one is any different. That means another bull market is almost certainly on the way.
With that in mind, here is one cryptocurrency to avoid and one to buy now.
Shiba Inu: A meme token with little value
The Shiba Inu developer community is working hard to increase the meme token's value with new use-cases and burn projects. A collection of 10,000 Shiba Inu NFTs, known as Shiboshis, went live last October and sold out in 35 minutes. The Shiba Inu metaverse launched in June, allowing investors to purchase plots of digital land that can be renamed in exchanged for burning tokens.
More recently, the developer community teased a new Shiba Inu-themed game, Shiba Eternity, that will incorporate the Shiboshi NFTs. And in the coming months, the launch of a layer-2 scaling solution (Shibarium) will move Shiba Inu transactions off the Ethereum blockchain to accelerate throughput and reduce gas fees. That upgrade in particular could be a significant catalyst because it reduces friction for investors.
Collectively, those projects have generated quite a bit of buzz. In fact, Shiba Inu is up 45% in the past month and more than 80% in the past year. But the fact remains that Shiba Inu is just an Ethereum-based meme token with very little real utility. It will never support its own ecosystem of decentralized applications (dApps) and decentralized finance (DeFi) services, and it has not been widely incorporated into Ethereum-based dApps and DeFi services.
However, the most alarming problem is the propaganda surrounding burn projects. The concept is straightforward: There are 589 trillion Shiba Inu tokens in existence, and destroying a portion of that supply would increase the value of the remaining tokens. But there is a big problem with that investment thesis. It hinges on the idea that people will literally throw money away.
For all those reasons, I think investors should avoid this cryptocurrency.
Bitcoin: A scarce digital asset with growing institutional demand
Bitcoin (BTC -0.48%) is fundamentally different from other digital assets. It was the first truly scarce crypto ever created -- its source code enforces a supply limit of 21 million tokens -- and that first-mover advantage has translated into immense popularity. Today, Bitcoin is synonymous with cryptocurrency, and its market cap of $458 billion accounts for 40% of the entire crypto market's value.
That popularity has also brought thousands of miners to platform, resulting in a hash rate that is orders of magnitude higher than any other blockchain. That makes Bitcoin the most decentralized and the most secure cryptocurrency on the market, and that value proposition has naturally caught the attention of institutional investors.
Earlier this month, BlackRock (the largest asset manager in the world) launched a Bitcoin private trust for U.S. institutional clients, and big banks like Morgan Stanley and Goldman Sachs have made similar moves. To that end, Bitcoin is the most popular digital asset among institutional investors, according to data from Fidelity. That's particularly noteworthy because institutional investors control over $100 trillion in assets under management, and a fraction of that wealth could send Bitcoin to the moon.
That makes the investment thesis crystal clear: Bitcoin is a finite asset, meaning its price will rise in lockstep with demand. And given its popularity with retail traders and institutional investors, there is good reason to believe demand for Bitcoin will increase as the world becomes more digital. That's why risk-tolerant investors should consider buying this cryptocurrency.