A cryptocurrency crash continues to unfold before our eyes. In just the past few days, two high-flying tokens from last year, Shiba Inu (SHIB 6.19%) and Dogecoin (DOGE 7.60%), have plunged more than 20%.
Both of these meme coins are down nearly 80% below their peaks set last year. Is the worst-case scenario for Shiba Inu and Dogecoin happening now?
Image source: Getty Images.
A dismal environment
I've maintained for a while now that the biggest risk for cryptocurrencies is a prolonged shift to a "risk-off" market. What exactly is a risk-off market? It's when investors become so worried about what's going on in the world that they move their money away from higher-risk assets into lower-risk assets.
There's now no question that we're in a risk-off environment for stocks. Just look at the Nasdaq 100 Index, a good barometer of how growth stocks are performing. The index has fallen more than 16% in a matter of weeks.
But the risk-off mentality for cryptocurrencies began even earlier. Many digital coins began declining in November. Aside from a few exceptions, the crypto market has been dismal ever since.
It's almost impossible for Shiba Inu and Dogecoin to swim against the current in the present environment. Even positive news for the meme coins probably won't be enough to overcome the overall headwinds.
It could get worse
Now for the really bad news: This isn't the worst-case scenario for Shiba Inu and Dogecoin. Unfortunately, it could get even worse.
The big recent drops for these tokens have come although there haven't been any truly catastrophic events take place. The global economy continues to recover. Despite the surge in COVID-19 cases due to the coronavirus omicron variant, many hope that the pandemic is nearing an end. The current risk-off market stems primarily from concerns about what might happen.
There's a real possibility that the overall crypto sell-off could intensify if bad things actually do occur. A Russian invasion of Ukraine, a weak earnings season for companies, or a host of other potential factors could pour fuel on the fire of the risk-off mentality setting in for investors.
It's also not out of the question that negative catalysts specific to the meme coins happen. For example, a significant delay in the launch of the Shibarium layer-2 solution could dampen the prospects of a rebound for Shiba Inu.
A silver lining
Don't think that there's nothing but doom and gloom on the horizon, though. There could very well be a silver lining in the dark clouds currently hovering over Shiba Inu and Dogecoin.
Most importantly, these tokens are much cheaper now than they've been in a while. If you believe in the long-term prospects for either of the two cryptocurrencies, the pullback could present a great buying opportunity at a discount.
Also, there is still a chance that positive catalysts could help boost Shiba Inu and/or Dogecoin in spite of the overall market dynamics. The valuations of cryptocurrencies depend on multiple factors.
It's not hard to envision aggressive burns propping up the prices of the digital coins. Should Robinhood decide to list Shiba Inu, it would almost certainly send the token's price soaring. Elon Musk could spark a surge in Dogecoin's price with a bullish tweet.
These two meme coins aren't in a worst-case scenario at this point. Sure, the picture might get bleaker. However, it could just as easily improve in the near future. Risk-off markets don't last forever.
