Algorand (ALGO-USD) is a very popular DeFi (decentralized finance) cryptocurrency, but its price does not yet reflect this. ALGO recently peaked on November 11 at $2.34. But by February 17, the cryptocurrency had fallen below one dollar (around 93 cents). This represents a dismal drop of more than 60% in a few months. It’s a disaster.
But at least it’s not the only one, 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 November 9, 2021 peak of $68,790 to around $42,000.
Algorand is puny compared to Bitcoin. Algorand has a market cap of $6 billion, which is less than 1% of Bitcoin’s $781 billion market cap. Its price is therefore strongly influenced by variations in the price of Bitcoin. In this case, Algorand’s 60% drop is down 158% more than Bitcoin’s 39% drop.
This is the same as what stock analysts call a stock’s “beta”. Algorand has a beta of 1.58 assuming the equivalent of market return is embodied in Bitcoin.
(For those interested in the technical details, this beta concept comes from the Modern Portfolio Theory equation. It is m time b + a = yor b is beta, m is the market return, a is alpha or extra return, and y is equal to the total return).
Ultimately, when Bitcoin drops, ALGO will drop another 58%. One might also expect the opposite to happen – a higher BTC price will lead to an even higher return for ALGO, given its beta of 1.58.
The point is to expect Algorand to have a good chance of rebounding fairly quickly here once Bitcoin finds its footing.
Algorand in El Salvador
The big news recently with Algorand is its cooperation with Koibanx, a Latin American leader in asset tokenization and blockchain financial infrastructure. Koibanx is the company that signed an agreement on August 31, 2021 with El Salvador.
Like 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 that El Salvador already uses the US dollar as legal tender.
So there wasn’t much incentive to switch to Bitcoin as a legal means of doing business between merchants. the Newspaper 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 around 70% of those polled did not trust the government’s decision.”
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 out Covid-19 vaccines early, according to the Newspaper.
Algorand supporters are looking for more countries to follow suit with El Salvador, led by Koibanx. Algorand creator Silvio Macali recently met with government officials in Uruguay and Buenos Aires to discuss the adoption of blockchain technology in the region.
What to do with Algorand
In a previous article, I mentioned that a prominent hedge fund manager, Anthony Scaramucci, the founder of New York-based hedge fund Skybridge Capital, is pushing Algorand.
It still seems to be behind Algorand as it was quoted in a CNBC interview in January saying that Algorand and Ethereum (ETH-USD) would go well over time. He said, “I think you’re going to be very well served in the long run in these investments.”
Just remember that ALGO has high leverage compared to Bitcoin. Its beta is north of 150%, which means it will drop at least 50% more than Bitcoin. But it could also rise another 50% on the upside.
As of the date of publication, Mark R. Hake held no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and execute the Guide to Total Return Value that you can see again here.