Thursday, May 19 2022

Feb 8 (Reuters) – As bitcoin drifts towards mainstream maturity in 2022, bold crypto investors are eyeing new sources of explosive action: the ‘altcoins’ powering games and online worlds.

But, be warned, the foothills of the Unformed Metaverse are no place for the faint-hearted.

Bitcoin, which like the rest of the market had largely sunk since late 2021, rose around 16% in the past two weeks to top $41,000, prompting many market participants to declare the end of “the crypto winter”.

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Still, newer, smaller coins tied to virtual platforms have seen stronger rallies amid the buzz around the metaverse.

Those used on the Axie Infinity gaming platform and the Decentraland 3D virtual environment, for example – the Axie and Mana – have gained 35% and 57% respectively over the same period since January 24. Gaming platform Gala’s token jumped 125%, according to CoinMarketCap.

“When people think of crypto, they tend to think of bitcoin,” said Ed Hindi, chief investment officer of Switzerland-based cryptocurrency hedge fund Tyr Capital. “But that ignores the fact that crypto isn’t a uniquely risky asset class.”

To give a sense of scale, however, the combined market capitalization of Axie, Gala and Mana is around $12.7 billion, a fraction of the $800 billion-plus for bitcoin, which controls 40%. of the market.

Some investors are turning to altcoins to diversify their holdings as 13-year-old bitcoin and No. 2 player ether move increasingly in step with traditional stock markets and become more sensitive to macroeconomic developments.

A possible sign of this momentum, multi-asset funds managing a mix of coins saw inflows totaling $32 million in the week ending Jan. 28, the largest since June 2021, according to data from CoinShares.

Yet the sheer novelty of many of these coins and the resulting lack of track record greatly increases the risks for investors in an already risky and nebulous crypto world. Additionally, the fortunes of Axie and Gala are tied to the success of their gaming platforms, as well as the broader virtual economy.

THE BOTTOM OF THE BLOCKCHAIN

Nonetheless, digging deeper into the virtual plumbing, some market watchers say the growing interest in the metaverse is also benefiting altcoins that sit on the blockchain’s “Layer 1” protocol – the base level on which smart contracts between buyers and vendors are written in code, and upon which virtual games and worlds are built.

They include blockchain ether Ethereum and its challengers Solana and Polkadot, which are up 27%, 28% and 23% over the past two weeks.

“A lot of people see this as a buying opportunity and what they’re buying right now is mostly high-quality blue chip alts versus bitcoin,” said Hany Rashwan, CEO and co-founder of the crypto fund manager. 21Shares based in New York and Zurich, referring to layer 1 blockchain coins, also including Avalanche, Polygon and Terra.

“If you’ve developed a thesis on smart contracts, that’s a wonderful buying opportunity right now.”

WHERE IS BITCOIN GOING?

Back with bitcoin – even though the dominant cryptocurrency is recovering after nearly halving between early December and January 24, its upward trajectory is far from assured, according to hedging indications and other data.

Will Hamilton, head of trading and research at Trovio Capital Management, cites term funding rates, which have remained negative since early December, and suggests people are paying to be short. And he also points to options data showing bitcoin’s put versus buy, put/call ratio, hit 58%, a level last seen in the May-July selloff. 2021.

“Throughout this period of consolidation, changes in the derivatives market indicate that traders continue to bet for further downside,” he said.

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Reporting by Lisa Mattackal and Medha Singh in Bengaluru; Written by Vidya Ranganathan; Assembly Pravin Char

Our standards: The Thomson Reuters Trust Principles.

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