Algorand (ALGO-USD) is a very popular DeFi (decentralized finance) cryptocurrency, but its price does not yet reflect this. ALGO had a recent peak on Nov. 11 at $2.34. But by Feb. 17, the cryptocurrency had dropped below one dollar (around 93 cents). That represents a miserable decline of more than 60% in a matter of months. That is a disaster.
But at least it is not alone, as many other cryptos have been hit hard as well. Even Bitcoin (BTC-USD) is not immune as the largest cryptocurrency. Bitcoin is down 39% from its Nov. 9, 2021 peak of $68,790 at around $42,000.
Algorand is puny compared to Bitcoin. Algorand has a market cap of $6 billion, representing less than 1% of Bitcoin’s $781 billion market cap. So its price is highly leveraged to changes in Bitcoin’s price. In this case, Algorand’s 60% drop is down 158% more than Bitcoin’s 39% drop.
This is the same thing as what stock analysts call a stock’s “beta.” Algorand has a 1.58 beta if one assumes that the equivalent of the market return is embodied in Bitcoin.
(For those interested in the technical details, this beta concept comes from the modern portfolio theory equation. This is m times b + a = y, where b is beta, m is the market return, a is alpha or extra return, and y equals total return).
The bottom line is that when Bitcoin falls, ALGO will fall 58% more. One might also expect the opposite to occur — a higher BTC price will lead to an even higher return for ALGO, given its 1.58 beta.
The point is to expect that Algorand has a good chance of rebounding quite quickly here once Bitcoin finds its footing.
Algorand in El Salvador
The big news recently with Algorand is its cooperation with Koibanx, a leading Latin American asset tokenization and blockchain financial infrastructure company. Koibanx is the company that signed a deal on Aug. 31, 2021, with El Salvador.
As The Wall Street Journal reported recently, in September 2021, El Salvador became the first country to adopt Bitcoin as legal tender. This forced local merchants to accept it as payment. The only problem is El Salvador already uses the U.S. dollar as its legal currency.
So there was not much incentive to move to Bitcoin as a legal means of conducting business among merchants. The Journal reports that the Bitcoin craze has not caught on:
“…Its use in day-to-day transactions has been rare, and a recent poll found that about 70% of respondents didn’t trust the government’s move.”
Algorand is the backbone of blockchain infrastructure in El Salvador. A national blockchain-based Covid-19 certification program used it in tracking software. This was very successful as President Nayib Bukele aggressively sought Covid-19 vaccines early, according to the Journal.
Proponents of Algorand are looking for more countries to follow suit with El Salvador, under Koibanx’s leadership. Algorand creator Silvio Macali recently met with government officials in Uruguay and Buenos Aires to discuss adoption of blockchain technology in the region.
What to Do With Algorand
In a prior article, I mentioned that a major hedge fund manager, Anthony Scaramucci, the founder of Skybridge Capital, an NYC-based hedge fund, is pushing Algorand.
He still seems to be behind Algorand as he was quoted in a CNBC interview in January as saying that Algorand and Ethereum (ETH-USD) would do well over time. He said, “I think you’re going to be very well-served long-term in those investments.”
Just remember that ALGO has high leverage in relation to Bitcoin. Its beta is north of 150%, meaning that it will fall at least 50% more than Bitcoin. But it could also rise 50% more on the upside.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.
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