Why Ethereum and Dogecoin Are Recovering, While Terra Plunged Today

What happened

Top-10 cryptocurrencies Ethereum (CRYPTO: ETH), Dogecoin (CRYPTO: DOGE), and Terra (CRYPTO: LUNA) have had very different days.

Ethereum and Dogecoin each traded down as of 12:10 p.m. ET, losing 0.1% and 1.7%, respectively, over the past 24 hours. That said, these tokens both bounced materially off their lows of the day, signaling some resiliency amid market uncertainty. As of 12:10 p.m. ET, the entire crypto market has followed stocks in recovering through late-morning trading, as investors appear to brush off the hawkish tone set by central bank officials earlier this week.

Line chart headed down, overlaid on top of global map.

Image source: Getty Images.

For Terra, today's bounce was much less pronounced. Terra has risen more than 5% from its trough today, however this algorithmic stablecoin play remains 14.6% lower over the past 24 hours, as of 12:10 p.m. ET. This move appears to be related to research showing layer 1 protocols such as Terra may continue to see headwinds via scaling concerns, due to high user growth and market volatility.

So what

The crypto market is starting to provide a divergence of returns among various tokens. Today's relative underperformance seen in Terra suggests investors aren't necessarily all moving in the same direction. In some respects, lower correlation among digital currencies could be a good thing for investors looking to pick the winners over the long term.

However, Terra's underperformance also highlights a potential risk posed by high-growth layer 1 networks looking to scale. Various notable network outages and widespread congestion across key layer 1 networks such as Solana of late provide investors with uncertainty about the true ability of these networks to scale. For Terra, investors appear to be looking to price in these risks today.

Now what

Size matters in the crypto world, and Ethereum remains a top holding for many investors for this reason. The network's massive ecosystem is noteworthy, and largely drives much of the growth we've seen thus far in the decentralized finance space. Thus, the fact that this token is flat today on an otherwise volatile day for altcoins is notable.

For meme tokens such as Dogecoin, this lack of near-term volatility is also surprising, with this token following the broader crypto market quite closely in recent days. Whether this is an indication that Dogecoin's investor base has stabilized or not remains to be seen.

However, for Terra and other altcoins powering layer 1 Ethereum alternatives, today's price action may be worrisome, at least in the near term. Of these three tokens, LUNA is the one I will be watching the closest in the days to come.

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Chris MacDonald owns Ethereum and Solana. The Motley Fool owns and recommends Ethereum and Terra. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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