Shiba Inu Has Soared 44% to Start 2023, but This Single Issue Could Stop the Rally

Shiba Inu (SHIB 2.13%) is no theme park attraction, but it has taken investors on a roller-coaster ride over the last few years. The meme-token delivered one of the greatest returns in financial market history during 2021, soaring by 43,800,000%. A perfectly timed investment of just $10 in that year would’ve turned into more than $4 million. 

But speculation fever is a double-edged sword, and that euphoria evaporated in 2022, sending the token on a downward spiral that ended in a 76% loss for the year. 

Now that 2023 is upon us, investors might be wondering what Shiba Inu will do next. The token has already jumped 44% in January and reclaimed the $0.00001 level, but is there more upside to come, or will this rally soon fade? There’s one hurdle that has plagued Shiba Inu from the beginning, and it hasn’t gone away.

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Cryptocurrency sentiment has found a spark

Investors have been pessimistic about the cryptocurrency sector for the past year after a cascade of high-profile failures. As a result, the total cryptocurrency market capitalization has crashed from a record $2.9 trillion to $1 trillion as of this writing.

Many investors suffered full, irrecoverable losses in the TerraUSD stablecoin implosion, which wiped out an estimated $60 billion. Then, more recently, cryptocurrency exchange FTX went under owing $3 billion to its creditors, most of whom are its customers. That money is unlikely to be seen again. 

And just last week, one of the largest cryptocurrency lenders, Genesis, filed for bankruptcy with over 100,000 creditors — about $3.4 billion is being claimed from the top 50 alone. The contagion effects of that collapse are already apparent, with customers of the crypto exchange Gemini reportedly exposed to $900 million in potential losses. 

Naturally, investors’ faith in the cryptocurrency industry is near rock bottom. But nonetheless, there is a growing risk-on sentiment forming in the broader financial markets with the major U.S. stock indexes kicking off 2023 comfortably in the green. That has breathed life into leading cryptocurrencies like Bitcoin and reignited the speculative fever in smaller tokens like Shiba Inu. 

But Shiba Inu faces its own unique challenges

The main reason Shiba Inu was unable to maintain its gains from 2021 is because it has next to no utility. When a financial asset becomes a plaything for speculators, upside only comes from the belief that someone, somewhere, someday will pay a higher price for it than you did. This is often referred to as the greater fool theory.

Shiba Inu hasn’t proven its worth as a payment mechanism. After all, businesses can’t transact in a currency that so violently fluctuates in value because it would make cash flow management impossible. As a result, just 714 merchants accept the token as payment globally — for context, there are an estimated 213 million registered businesses worldwide, so Shiba Inu hasn’t even left the starting line in the race to become a widely adopted currency. 

With that said, Shiba Inu developers are working hard to improve the technology behind the token in order to make it a more viable payment option. Its Layer 2 scaling solution called Shibarium is expected to launch around Valentine’s Day (Feb. 14), and it will reduce both the friction and the cost that comes with transacting in the token. The legacy Ethereum blockchain upon which Shiba Inu is built can be incredibly expensive and inefficient. 

The one thing that could stop Shiba Inu from soaring higher

Supply. This has always been Shiba Inu’s greatest problem. There are more than 589.6 trillion tokens in circulation, which is why its price contains so many decimal points, and it serves as a barrier to further upside.

Even at the height of Shiba Inu’s popularity, it had only reached a price of $0.000089. While that’s still eight times higher than where it trades today, the value of all Shiba Inu tokens in existence exceeded $50 billion at that point, and it’s hard to imagine a higher valuation now given it has still made no progress on widespread adoption or utility.

It would be impossible for Shiba Inu to rise to a price of $1 per token, for example, because its valuation would exceed $589 trillion. That means it would be worth more than the combined financial wealth of everybody on Earth, which stood at $463 trillion at the end of 2021. 

The Shiba Inu community has invented different ways to burn tokens, meaning to remove them from circulation forever. Theoretically, if enough were burned it would pave the way for further upside. However, it wouldn’t change the underlying value of anybody’s holding — they’d simply have fewer tokens worth more money, so their net position would remain the same.

While crypto observers might be excited about the 49% bounce in Shiba Inu to start 2023, investors should avoid thinking sustained upside is on the horizon. All of the facts suggest it isn’t.