Cryptoverse: ‘Layer two’ tokens enjoy new life as bitcoin soars

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

"Layer 2" cryptocurrencies, native to projects built on top of "layer 1" blockchains like Bitcoin and Ethereum, have found new life after a year of stagnation, fueled by a rising tide of cryptocurrencies.

Anticipation of a reduction in US borrowing costs and possible US bitcoin spot. Investment fund Cryptocurrency prices have risen since the summer, and the bitcoin market has gained about half since late August.

Tokens associated with Layer 2 projects, which typically aim to speed up transactions and reduce costs, have a combined market capitalization of around $14.3 billion, about a tenth of the total crypto market, according to data from CoinMaketCap.com .

Matic, the largest layer 2 token with a market capitalization of $6.9 billion, is up 20% to $0.74 in the last 30 days, according to CoinGecko. It is used on Polygon, a platform that reduces congestion on the Ethereum network.

The next four largest coins (immutable, mantle, arbitrum and optimism) have jumped between 9% and 105% over the last month and are trading between $0.5 and less than $2 each.

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

Ether, the layer 1 token pegged to the Ethereum blockchain on which most layer 2 tokens are based, has jumped 13.8% to $2,028.80 in the last month.

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

“On average, growth is not sustainable for those tokens… 100 tries and one wins,” said Matteo Greco, research analyst at fintech and digital asset investment firm Fineqia International. (FNQ.CD).

"There is always a little air behind the movements."

Price performance is also uneven.

Matic is down around 3% in 2023, while the immutable gaming token has more than tripled in price, versus gains of 123% for bitcoin and 69% for ether.

SPECULATIVE NATURE

Layer 2 tokens are an indicator of sentiment towards the projects to which they are linked, but their extreme volatility also gives them a speculative nature. They are often among the last to grab a bid when the broader crypto market rises and among the first to sell when sentiment falters.

While layer 2 tokens are small compared to big guns 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 Peck, chief investment officer at hedge fund TrueCode Capital, whose fund invests in matic. “For a token that is down 97%, it doesn't take a huge capital influx to drive the price up three, four, or five times.”

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

The future of layer 2 tokens is unclear.

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

However, the market is crowded. Numerous projects and their tokens were launched as the cryptocurrency market grew in 2020, before crashing during the cryptocurrency winter of 2022.

"The space seems 'unserious' right now... in terms of being able to point to an example of something you would like to manage your business or your family's personal finances," said Alyse Killeen, managing partner at the firm. Stillmark venture capital. .

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

"In these macro phases, use cases aren't really that 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 withstand the downtrend even if they are hit hard."

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