Cryptoverse: ‘Layer 2’ tokens get new life as Bitcoin rises

Cryptoverse: ‘Layer 2’ tokens get new life as Bitcoin rises

Nov 28 (Reuters) – It’s next-level stuff.

The original “Layer 2” cryptocurrencies – projects built on top of “Layer 1” blockchains like Bitcoin and Ethereum – have found a new lease of life after a year of stagnation, fueled by a rising crypto wave.

Expectations of an easing in US borrowing costs and the prospect of a US bitcoin exchange-traded fund have been lifting cryptocurrency prices since the summer, with the market price of bitcoin rising by about half since the end of August.

The combined market value of tokens associated with second-layer projects — which typically aim to speed up transactions and reduce costs — is about $14.3 billion, about a tenth of the total cryptocurrency market, according to data from CoinMaketCap.com.

Matic, the largest layer 2 token with a market cap of $6.90 billion, jumped 20% to $0.74 over the past 30 days, according to CoinGecko. It is used on Polygon, a platform that reduces congestion on the Ethereum network.

The next four major currencies — fiat, cape, arbitrage, and bullish — have jumped between 9% and 105% over the past month and are trading between $0.5 to less than $2 apiece.

However, all five tokens are down between 16% and 86% from their all-time highs over the past two years.

Ethereum, the layer-one token linked to the Ethereum blockchain and on which most layer-two tokens are based, jumped 13.8% to $2,028.80 last month.

Layer 2 codes, which have proliferated in recent years, can be a risky business. They are small in size and thinly traded, which means they can be very volatile and unpredictable. Picking long-term winners is difficult.

“On average, the growth is unsustainable for these tokens… 100 tries and one wins,” said Matteo Greco, research analyst at digital asset and fintech investment firm Fineqia International (FNQ.CD).

“There’s always a little bit of thin air behind the moves.”

Price performance is also patchy.

Matic’s price fell about 3% in 2023, while the immutable gaming token’s price more than tripled, versus Bitcoin’s 123% and Ethereum’s 69% gains.

Reuters graphics

Speculative character

Layer 2 tokens are a measure of sentiment towards the projects associated with them, but their high volatility also gives them a speculative character. They are often among the last to get a bid when the broader cryptocurrency market rises and among the first to sell when sentiment shakes.

While Layer 2 tokens are very small compared to large currencies like Bitcoin, their volatility makes them a favorite among active traders trying to capitalize on market momentum.

“They can be very attractive investments even though they can be very speculative,” said Joshua Beck, chief investment officer at hedge fund TrueCode Capital, whose fund invests in Matic. “For a token that is down 97%, it doesn’t take much capital inflow for its price to go up three times, four times, five times.”

“Active trading is the right approach for these tokens because the market moves a lot,” Beck added.

The future of layer 2 tokens is unclear.

Some analysts see the projects as vital to increasing practical uses of blockchains like Ethereum, in areas such as gaming financing.

However, the market is crowded. Many projects and their tokens were launched as the cryptocurrency market boomed in 2020, before falling during the crypto winter of 2022.

“The space doesn’t seem serious right now… in terms of being able to point to an example of something that you would want to run your business or your family’s personal finances around,” said Alice Killeen, managing partner at venture capital firm Steelmark. .

Many investors agree that only projects with useful practical applications will survive.

“At these macro stages, use cases don’t actually matter that much,” Fineqia International’s Greco said. “The real difference between assets that have decent use cases and assets that don’t is (in) a bear market.”

“Assets with good use cases are able to withstand the downside despite taking a hard hit.”

(Reporting by Lisa Mattakal and Medha Singh in Bengaluru; Preparing by Mohammed for the Arabic Bulletin) Editing by Tom Wilson and

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed, under the Trust Principles, to integrity, independence and freedom from bias.

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