What happened
A little air came out of the cryptocurrency balloon today and altcoins are feeling most of the pain. Bitcoin (CRYPTO:BTC) is down nearly 6% as of 3:37 p.m. EDT, but lesser-known coins have fallen more than double digits today.
In the last 24 hours alone, Polkadot (CRYPTO:DOT) has fallen 8.1%, Binance Coin (CRYPTO:BNB) is off 6.4%, Solana (CRYPTO:SOL) has plunged 9.7%, and Cardano (CRYPTO:ADA) is down 9.3%.
Image source: Getty Images.
So what
The move today has largely been blamed on traders taking profits in all cryptocurrencies, which have for the most part had a strong run over the past month. You can see below that each crypto mentioned above, outside of Cardano, is up over 20% in the past month.
Polkadot Price data by YCharts
The move higher has been driven by the launch of a Bitcoin Futures ETF and talk from U.S. regulators about putting formal rules in place for cryptocurrencies, which would give them more legitimacy. What we haven’t seen yet is much action that would increase the utility of any of these coins.
What’s challenging for investors right now is that there was very little fundamental news driving cryptocurrencies higher in October and by the same token there’s little news driving the market lower today. But there’s red across the board and it appears “selling the news” of the Bitcoin Futures ETF has continued this week.
Now what
Days like today are the risk investing in cryptocurrencies. The market can go up and down at a moment’s notice and when there’s momentum in one direction or another it’s hard to stop.
Making things worse for altcoins is that it’s unlikely every coin will have value long-term. Some investors think cryptocurrencies, like Bitcoin, are a store of value, while others think they have utility for buying or selling things. But if people are using a variety of coins it’s hard to have a standard for either.
Right now, this dynamic has meant that speculators are driving the price of cryptocurrencies and altcoins, in particular. Today’s drop is a reminder that these speculators can move in and out of a cryptocurrency quickly, which is why we see so much volatility.
Different cryptocurrencies have different functionality behind them and I think investors need to be clear what their investment thesis is on any given cryptocurrency. That may be as a store of value or as a utility, but buying just because a cryptocurrency is going up or because you like the name is a bad investment thesis. Long-term, it’s the cryptocurrencies that add value in one form or another that will survive, so buyers should beware of buying something they don’t understand.
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.