Bitcoin and Shiba Inu Beat the Nasdaq 100 in 2023, But Will It Continue?

Investors often watch Nasdaq 100 stock market index as a measure of technology sector performance. After plunging 33% last year, it’s off to a more positive start to 2023, up 17% so far.

Cryptocurrencies followed a similar trajectory in 2022, with the total value of all tokens collapsing from a value of $2.2 trillion to just $800 billion. But cryptocurrencies have also ticked higher this year. Investors are beginning to buy riskier assets as they speculate that the pressure on the economy caused by high inflation and rising interest rates may finally be easing.

Bitcoin (BTC -3.72%)the industry’s leading token, has increased by more than 60% in 2023. And the popular meme token Shiba Inu (SHIB -3.11%) — which delivered one of the biggest returns in financial market history in 2021 — has gained 30%. Both are crushing the returns of the Nasdaq 100, but are these runs likely to continue?

Inflation, Interest, and Shortcomings of Cryptocurrencies

Precious metals such as gold and silver have been mediums of exchange for thousands of years. Until 1971, the US dollar’s value was tied to the price of gold, but since the global transition to fiat currencies, metals have served a different purpose. Gold is often used now as a hedge against inflation; investors believe it will always have value, so when inflation ticks higher and the value of the dollar declines, the expectation is that gold will generally gain value in dollars.

Bitcoin has become an increasingly mainstream financial asset in recent years, and it is always the subject of heated debate as investors struggle to value the token. It has no real use case. Bitcoin does not do anything. It provides no income and has not been widely used as a currency. (Only 8,015 businesses worldwide accept it as payment.)

Gold has many of the same shortcomings, but Bitcoin does not have a track record as a store of value going back thousands of years. It also cannot be physically redeemed, so if an apocalyptic event ever occurs, Bitcoin could disappear along with the digital economy.

Still, some investors liken Bitcoin to a digital, modern hedge against inflation. Buying and selling is quick and easy, and blockchain technology acts as a transparent but secure record of ownership.

But there is a problem. When the US CPI (a key measure of inflation) hit a 40-year high in June 2022, the price of Bitcoin was 50% below its all-time high. In fact, it continued to crash for the rest of the year, despite red-hot inflation. Gold, meanwhile, was basically unchanged in 2022 – not a bad performance at a time when markets were entering bear territory.

Speculation may be the only real use of cryptocurrencies

Now let’s take a look at Shiba Inu, the most famous of meme coins. Anyone who bought the token on January 1, 2021 and sold it at the end of that year will tell you that cryptocurrency changed their life. They would have earned a 43,800,000% return over that 12 month period – in other words, had they invested just $2.30, they would have put in over $1 million.

Today, Shiba Inu is 88% below its all-time high, despite a 30% gain in 2023. As a currency for payments, it is even less useful than Bitcoin: only 736 merchants accept it worldwide.

Unlike precious metals, Bitcoin and Shibu Inu have behaved exactly like risk assets recently. They recovered from their 52-week lows almost in sync with the stock market, bottoming out between October and December last year, lending credence to the idea that investors are using the symbols to bet on loosening economic conditions – or a risk – if investment environment.

The fact that these tokens do not generate revenue or add value organically will eventually catch up with them. As a result, they are unlikely to outperform indexes such as the Nasdaq 100 — which is filled with high-quality, income-generating companies — over the long term.

Investors have learned a very valuable lesson this year

There will likely be a place for digital currencies in the future. After all, the rest of the economy is certainly moving further into the online space. But will tokens like Bitcoin or Shiba Inu be the answer, or are government-backed tokens more likely to take the central roles in that arena? The latter outcome seems more likely, and that’s a great thing. Why? Due to the collapse of SVB Financethe parent company of Silicon Valley Bank.

See, thanks to robust banking regulations, a bank holding more than $175 billion in customer funds collapsed this month without a single depositor losing any money. Silicon Valley Bank, which served many startups and technology-centric businesses, mismanaged its portfolio of high-quality bonds and government bonds.

Estimates suggest that the value of these assets will still be large enough to cover all deposits. Nevertheless, the Federal Deposit Insurance Corp. and the federal government deposited and guaranteed customer funds anyway, restoring confidence and ensuring that account holders could access their funds in full as early as the next business day.

It is in stark contrast to the recent collapses of cryptocurrency projects and exchanges such as FTX, or TerraUSD stablecoin, which wiped out tens of billions of dollars in customer and investor money.

It serves as a wake-up call to all cryptocurrency holders. Decentralization is not necessarily better, especially when conditions take a turn for the worse. That’s not to say that leading tokens like Bitcoin won’t rise in value over time, but the case for Bitcoin’s long-term success as anything other than a vehicle for speculation seems fundamentally flawed.