This text is signed by Valente ManualDirector of Analysis and Research at Coinhouse.
The crypto-asset market, as we know, is extremely dynamic and volatile. It is therefore always difficult to make predictions and announce which assets will perform best over the next few years. However, it is still possible to identify basic trends, which even when the mood of the market changes durably, remain valid. We offer here some ideas to feed your reflection.
It is of course impossible to conduct a study of the digital asset market without taking a close look at Bitcoin. It currently still represents 42% of the total market capitalization, despite a significant drop in recent months. With the exception of Tether, which is a stablecoin, it is still the asset that sees the greatest volume of transactions on a daily basis, enjoys the greatest notoriety, and is of primary interest to institutional investors.
Above all, it is the asset that still gives the underlying trend to the market. It therefore remains an essential component of a crypto-asset portfolio, and must now represent a significant percentage of it.
Despite everything, we can address a number of criticisms to it, first and foremost a relatively slow technological development. If it seems promising, the latest development called Taproot has still not been deployed, and future developments seem unambitious. The Lightning network, an overlay allowing fast and inexpensive transactions, is still very little used. Finally, it suffers from its reputation as an energy abyss, which worries even the States and leads them to limit mining operations on their territory.
It all counts. It was the technological advancement of the decentralized blockchain that pushed Bitcoin to the helm of a new asset class, and to retain its value, development teams will need to prove they can still demonstrate leadership by terms of innovation.
The main challenger to Bitcoin supremacy is Ethereum. The asset has shown very strong momentum in the market over the past few months, and it’s easy to see why. The most important innovation since the creation of cryptoassets is the notion of smart contract, introduced on Ethereum, and which has enabled the advent of many other projects.
Of the top hundred market valuations, more than a quarter are projects that use the Ethereum blockchain. It is trivial to deploy a project on Ethereum in the form of smart contracts, compared to the effort required to create a new blockchain, mining systems, wallets and so on. All of these projects collectively contribute to the intrinsic value of Ethereum.
But the development teams have not rested on their laurels, and are working daily on new developments, in particular Ethereum 2.0, announced for the end of 2021. This new version should in particular solve the current problems of saturation of the network, and reduce electricity consumption by 99%.
For these reasons, Ethereum is one of the major players in the market today and represents an excellent investment opportunity in the long term.
Decentralized finance (DeFi)
For a long time, investing in cryptoassets was all about trying to buy when the price is low and sell when it’s high. With the advent of decentralized finance projects, a new era has opened, with projects that offer paid services, and which offer their investors remuneration that can be very attractive. These products mainly relate to credit, insurance, derivatives and the provision of liquidity.
Today, these projects have over $60 billion in funds under management, and generated $350 million in revenue during the month of May 2021. Primarily based on Ethereum, they are fully interoperable and many of them allow their investors to take advantage of opportunities on several platforms simultaneously.
Among the leaders of this market, we can mention Aave, Curve, MakerDAO, Uniswap, Sushiswap, or Yearn. There are also a number of projects that operate on the Binance Smart Chain blockchain, such as PancakeSwap or Venus, but the centralized aspect of this platform and the many hacks it has recently undergone are problematic.
We believe that decentralized finance projects, through their economic model and their capacity for innovation, now represent a particularly interesting opportunity and an essential sector of the cryptoasset market.
The success of Ethereum and its decentralized finance ecosystem has not left the market indifferent. A number of competitors have therefore positioned themselves with proposals close to its model, driven in particular by the current saturation of the Ethereum blockchain, which leads to high transaction costs.
And the market reacted positively to it. We have thus seen players like Solana, Cardano and Tezos develop strongly, with attractive offers for investors. However, it is to bet that if Ethereum 2.0 is released on time, without technical problems, it will be difficult for these projects to impose themselves against the market leader.
We can also mention Polygon and to a lesser extent Loopring. These projects, although operating on the Ethereum blockchain, offer the possibility of carrying out transactions on decentralized finance projects with very low costs, using technologies called Layer 2. Equivalent to Bitcoin’s lightning network, they operate through smart contracts in which transactions take place, rather than using the blockchain natively.
Inter-blockchain communication projects
These recent projects attempt to respond to a fundamental problem of the ecosystem: it is currently impossible for conventional blockchains to communicate with each other. They all operate in a vacuum. For example, it would be particularly interesting to be able to use bitcoins on the Ethereum blockchain, and more generally to communicate between the major blockchains on the market.
There are a number of projects that already offer representations of bitcoins on Ethereum, such as wBTC – one percent of bitcoins today are represented as wBTC – but they rely on intermediaries which can pose risks in terms of liquidity or counterparty. A native solution would therefore be ideal.
projects like Polkadot/Kusama, Avalanche and Cosmos therefore aim to achieve this tour de force. Of course, these are complex projects to set up and which require major developments. But if they succeed, they will undoubtedly be able to establish themselves as flagship assets for the entire market.
In this month of June 2021, it is clear that the market revolves mainly around Ethereum and its ecosystem. Whether it is decentralized finance or Ethereum’s direct competitors, both technological and financial innovation is highly dependent on the evolution of these projects, and the market reflects this. Even though Bitcoin may temporarily return to the spotlight this year, we believe that this state of affairs will remain valid at least until the end of 2021. The success or failure of the Ethereum 2.0 project will then clearly determine the evolution of the market, and could once again cause major turbulence and high volatility.
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