What happened
Altcoins were undergoing a major correction Monday with big names like Dogecoin (CRYPTO:DOGE), XRP (CRYPTO:XRP), and Polygon (CRYPTO:MATIC) down 11.07%, 12.58%, and 11.28% on heavy volume in the past 24 hours as of 11:45 a.m. EDT. Those tokens were at that time trading at $0.21, $0.93, and $1.19, respectively, as fear, uncertainty, and doubt once again plagued the sector.
Over the weekend, U.S. regulators said they were investigating Binance, the world’s largest cryptocurrency exchange, over allegations that it was exploiting customers via insider trades. Binance facilitated close to $32 billion worth of trades in the last 24 hours.
On Sunday, European Central Bank President Christine Lagarde delivered a further punch with a warning that described altcoins as “highly speculative” and “suspicious.”
In addition, cryptocurrencies are trading in tandem with the overall stock market, which was heading lower Monday due to the collapse of China Evergrande Group (OTC:EGRNF), the second-largest real estate developer in that country. As of mid-afternoon Monday, major U.S. indexes were down by between 2.5% and 3.6%. Evergrande reportedly owes creditors over $300 billion and has been liquidating homes at rock-bottom prices in its efforts to gather funds to repay its debts. The current situation highlights the idea that cryptocurrencies are not hedges against stock market pitfalls. Instead, they are up to 10 times more volatile than stocks, with shorter bull-bear market cycles.
Image source: Getty Images.
So what
Of these tokens, Dogecoin is the most at risk of further declines due to its significant volatility and its tendency to attract scrutiny from regulators. This is because of the abundance of Instagram influencers and celebrities who are shilling for the meme currency, either at random or in coordinated attempts.
Meanwhile, Ripple Labs, the developer behind XRP, has been embroiled in a legal battle with the Securities and Exchange Commission (SEC) since December. The SEC alleges that coin offerings conducted by Ripple Labs constituted unregistered offerings of securities. So XRP investors are pretty sensitive to any adverse regulatory developments regarding altcoins broadly.
Lastly, India-based “internet of blockchains” token Polygon isn’t doing so hot either. Developers had hoped to bring that nation’s cryptocurrency technology to the world stage. However, recently, the State Bank of India blocked the flow of funds from crypto exchanges on its payment platform.
Now what
As scary as all this sounds, it’s important to understand that none of these issues will be “finishing blows” to an otherwise burgeoning crypto industry. For example, the collapse of a company as large as China Evergrande Group will probably induce China’s government or its central bank to step up with a bailout. As for Binance, it is merely facing a regulatory inquiry; it‘s not under a criminal investigation. Further, it will be difficult for regulators to take action because its servers aren’t located in the U.S.
Things aren’t looking desperate for altcoins, either. All the big names talking up Dogecoin have done more than boost its price — they’ve led to an increase in its fundamental value. Indeed, more than 1,600 merchants around the world now accept Dogecoin as payment.
As for XRP, its developers and lawyers have decided to go toe-to-toe with the SEC and are refusing to settle the case against them. XRP apparently does not want to set a precedent where crypto developers issue coins or tokens to raise funding, get threatened with legal action by the SEC, and are forced to pay up.
In some ways, the regulator does not have the edge here. SEC Chairman Gary Gensler has said that his agency is underfunded and tied up with over 6,000 projects. Meanwhile, XRP has grown to a market cap of over $44 billion. At the very least, the agency is stuck in a war of attrition where it will have to devote ample time and resources to win.
Finally, Indian investors interested in buying Polygon have found clever ways to bypass the State Bank of India’s regulations. As much as 60% to 80% of all transactions are taking place via decentralized exchanges or peer-to-peer trading, compared to just 10% to 15% a year ago. Overall, the industry is rapidly bouncing back despite the latest round of crackdowns. Unless you need the cash now, don’t sell.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.