This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
The recent volatility in the stock market has sent the Nasdaq 100 technology index into bear market territory with a year-to-date loss of 24%, but that pales compared to the wild swings in cryptocurrency markets in 2022 so far.
Crypto-market leader Bitcoin (CRYPTO: BTC) is nursing a 37% loss since Jan. 1, and high-flying meme-token Shiba Inu (CRYPTO: SHIB) is down 62% in the same period. Shiba Inu was the star of 2021, delivering a full-year gain of 43,800,000% -- in other words, it made millionaires out of investors who put in as little as $2.29 on Jan. 1, 2021, and sold on Dec. 31.
Overall, Shiba Inu has lost 85% since hitting its all-time high of $0.000088. It trades at just $0.000013, and there's no telling where the bottom could be. But the token might have one saving grace that could propel it back to its highs (and beyond).
There's no shortage of difficulties
Shiba Inu faces plenty of challenges, both internal and external. Like many cryptocurrencies, the token has failed to garner the adoption it needs to support a higher price. At the moment, only 659 merchants accept Shiba Inu as payment for goods and services, and they're mostly small online businesses. It offers little incentive to consumers to own the token because they simply can't spend it conveniently, which leaves speculation as its primary use.
Wild price swings could be one reason businesses avoid Shiba Inu as a payment method. A currency that swings in price by millions of percentage points in a short period of time could quickly erode a merchant's profit from selling products, and it makes cash flow forecasting really difficult.
Additionally, a wave of regulation could be headed for the entire crypto industry, starting with requirements for exchanges to report their clients' trading activity to the Internal Revenue Service for tax purposes. This would lift the veil of anonymity and erode some of the decentralized features that initially attracted many investors to crypto markets. Investors who remain committed to cryptocurrencies will likely favor the leaders like Bitcoin in this scenario, with speculative bets like Shiba Inu discarded more willingly.
Finally, Shiba Inu has a major supply problem. With 589 trillion tokens in circulation, it makes lofty price targets like $1 (or more) mostly a dream. But there is one catalyst that could change all of that.
Feel the burn
Tackling Shiba Inu's supply challenge has been a point of focus for the token's community. Collectively, at the current price of $0.000013, the value of all Shiba Inu tokens in supply stands at $7.1 billion.
Theoretically, if the 589-trillion supply figure was cut in half, the price per token would have to double to maintain a market capitalization of $7.1 billion.
Therefore, finding a way to remove Shiba Inu tokens from supply could result in an organic increase in price, reversing some of the heavy losses from the last few months. One way developers propose to do this is through a Shiba Inu-themed metaverse called SHIB: The Metaverse. It will contain 100,595 virtual land plots in addition to serving as a virtual meeting place for the community, hosting games and non-fungible tokens (NFTs).
Investors who want to buy virtual land in SHIB: The Metaverse will have to use Ethereum (CRYPTO: ETH), but there will be a unique role for Shiba Inu tokens to play. Landowners will have the ability to rename their plots by paying a fee using Shiba Inu, and upon doing so, those tokens will be burned (removed from the supply) forever.
It might work, but not in the way you expect
Reducing the supply of Shiba Inu will theoretically boost its price. In fact, it could do so by a significant amount depending on how many tokens are burned. If supply is reduced by 90% from 589 trillion tokens to 58.9 trillion tokens, for example, Shiba Inu's price could soar 10-fold from $0.000013 to $0.00013, surpassing its previous all-time high.
But there's a catch. For this to work, basically every investor in Shiba Inu would need to shrink their holdings by 90%, although the value of their tokens would effectively remain exactly the same. Their tokens might be worth 10 times more, but they would only own one-10th as many tokens.
Reducing the supply of Shiba Inu could be described as financial engineering. It doesn't actually make the token worth any more than it already is. To truly boost its value, it would have to actually offer some utility as a payment mechanism or find a way to attract more investors.
But for those looking for a cosmetic lift in Shiba Inu's price, burning tokens is certainly a viable option.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
