Daily Management Review

'Layer Two' Tokens In The Cryptoverse Savour A Fresh Start As Bitcoin Climbs


'Layer Two' Tokens In The Cryptoverse Savour A Fresh Start As Bitcoin Climbs
It's really advanced stuff.
Buoyed by a rising crypto tide, "layer 2" cryptocurrencies, which are local to projects built on top of "layer 1" blockchains like Bitcoin and Ethereum, have found fresh life after a year in the doldrums.
From the summer, cryptocurrency prices have increased due to expectations of lower U.S. borrowing costs and the potential for a U.S. spot bitcoin exchange-traded fund. As of the end of August, market bitcoin had increased by around half.
According to data from CoinMaketCap.com, tokens linked to layer 2 projects—which generally seek to reduce costs and speed up transactions—have a combined market worth of over $14.3 billion, or almost a tenth of the whole cryptocurrency market.
According to CoinGecko, Matic, the biggest layer 2 token with a market capitalization of $6.90 billion, has increased 20% to $0.74 in the last 30 days. It is utilised in the Polygon platform, which lessens Ethereum network congestion.
The next four biggest coins, mantle, arbitrum, immutable, and optimism, have increased in value by 9% to 105% in the last month and are currently trading between $0.5 and less than $2 each.
However, from their all-time highs reached during the previous two years, all five tokens have dropped by 16% to 86%.
The majority of layer 2 tokens are based on the Ethereum blockchain, and ether is the layer 1 token that connects to it. In the last month, ether has increased 13.8% to $2,028.80.
The proliferation of Layer 2 coins in recent years has made them a dangerous venture. They can be extremely volatile and unpredictable due to their small size and thin trading. It's hard to predict long-term winners.
"On average, the growth is not sustainable for those tokens ... 100 try and one wins," said Matteo Greco, research analyst at digital asset and fintech investment firm Fineqia International.
"There's always a bit of thin air behind the moves."
Additionally, price performance varies.
In contrast to bitcoin's 123% and ether's 69% growth, Matic has decreased by roughly 3% in 2023, while the gaming token immutable has more than tripled in value.
In addition to serving as a barometer of public opinion regarding the projects they are associated with, Layer 2 coins are also considered speculative due to their high volatility. When the overall cryptocurrency market rises, they are frequently among the last to place a bid and among the first to sell off when sentiment sourests.
Even if layer 2 tokens are small in comparison to industry leaders like bitcoin, aggressive traders who want to take advantage of market momentum favour them due to their volatility.
"They can be very attractive investments even though they can be very speculative," said Joshua Peck, chief investment officer at hedge fund TrueCode Capital, whose fund invests in matic. "For a token that's down 97%, it doesn't take a lot of capital inflow for it to go three times, four times, five times in price."
"Active trading is the right approach for these tokens because the market is moving so much," Peck added.
It's unknown where layer 2 tokens will end up.
According to some observers, the projects are essential to expanding the real-world applications of blockchains, such as Ethereum, in industries like gaming and finance.
The market is congested, though. The cryptocurrency market surged in 2020, and a lot of projects and tokens were introduced before the market crashed in the 2022 crypto winter.
"The space feels 'unserious' right now ... in terms of being able to point to an example of something you'd like to run your business or family's personal finances on," said Alyse Killeen, managing partner at venture capital firm Stillmark.
It's a widely held belief among investors that ventures with real-world value will survive.
"In these macro phases, the use cases are not really so important. The real difference between assets that have decent use cases and assets that don't is (in) the bear market," said Fineqia International's Greco.
"Assets that have good use cases are able to resist the downtrend even though they get hit hard."