Despite the current slump in the market, cryptocurrency has been one of the best-performing asset classes ever -- returning over 550% over the last five years compared to the S&P 500's measly 45%. But that doesn't mean every digital coin is a good bet. Let's discuss why an investment in Terra Classic (LUNC -1.35%) or Shiba Inu (SHIB 3.60%) could torpedo your portfolio. 

1. Terra Classic 

If Terra Classic sounds familiar, that's because it's the new name for the Terra stablecoin platform, which collapsed spectacularly earlier this year. While the asset is trying to reinvent itself after the crisis, investors shouldn't take the bait. With a shattered reputation and its founder under intense regulatory scrutiny, Terra's future looks as grim as its past. 

Founded in 2018, Terra/Luna (the predecessor of Terra Classic) was a stablecoin platform that used complex algorithms to maintain pegs to real-world currencies. In May, one of its stablecoins, TerraUSD, lost its peg to the U.S. dollar, leading the platform's value to tumble from $60 billion to $1.9 billion at the time of writing. 

Now named Terra Classic, the new project aims to revive Terra by changing its algorithm and gaining independence from its original creator, Do Kwon. But this is easier said than done. 

The platform's new developers, a group called Terra Rebels, claim that Do Kwon has no involvement with the decision-making of the new project. But his negative influence will be hard to shake. In September, South Korea issued an arrest warrant for Kwon related to the TerraUSD implosion. Coindesk reports this news sent Terra Classic down 25% on the day of the announcement, highlighting the influence Kwon still has over the asset's performance. Such legal overhangs make investing in the new platform look much riskier than it's worth. 

Red arrow crashing through the ground.

Image source: Getty Images.

2. Shiba Inu 

Founded in 2020 to capitalize on Elon Musk-related hype, Shiba Inu was one of the most explosive cryptocurrencies in recent memory -- posting a roughly 60,000,000% return by its peak in late 2021. But while some investors might still hold onto Shiba, hoping for a repeat of its past success, a weak competitive moat and tightening global economic conditions make the asset primed for continued underperformance. 

Some might assume cryptocurrency is a good hedge against inflation, but the reality is a little more complicated. With the inflation rate hitting 8.3% in August, the U.S. Federal Reserve has started raising interest rates and tightening monetary policy to restrict the money supply in the economy. When capital is scarce, investors tend to become less interested in speculative assets. And while these challenges affect the entire cryptocurrency market, Shiba Inu is particularly vulnerable because of its meme coin reputation and weak competitive moat.

Meme coins are cryptocurrencies designed to capitalize on hype and momentum instead of fundamentals like speed or transaction capacity. While Shiba Inu is trying to shed this stigma through new projects such as Shibaverse -- a metaverse venture -- this has yet to launch. And so far, its digital land sales have been conducted with Doge Killer (LEASH), a different asset from Shiba Inu (SHIB). 

At the end of the day, Shiba Inu is one of hundreds (if not thousands) of poorly differentiated meme cryptocurrencies that don't introduce any innovations to blockchain technology. Now that its 15 minutes of fame are over, regaining relevance will be an uphill battle. 

Two bad bets

While the cryptocurrency market as a whole is struggling (down roughly 57% to $940 billion since the start of 2022), some assets like Terra Classic and Shiba Inu have a particularly difficult road ahead. Despite past success, legal overhang and weak competitive moats could cause these assets to underperform their peers.