Layer 2 Cryptocurrencies Gain Momentum as Market Surges
Medha Singh and Lisa Pauline Mattackal
“Layer 2” cryptocurrencies native to projects built on top of “layer 1” blockchains such as Bitcoin and Ethereum – have found a new lease of life after a year in the doldrums, buoyed a rising crypto tide.
Crypto Prices Surge Amid Anticipation of Easing U.S. Borrowing Costs
Anticipation of easing U.S. borrowing costs and a possible U.S. spot bitcoin exchange-traded fund have lifted crypto prices since the summer, with market bitcoin gaining about half since the end of August. As a result, tokens associated with layer 2 projects – which typically aim to speed up transactions and cut costs – have a combined market cap of about $14.3 billion, about a tenth of the total crypto market, according to data from CoinMaketCap.com.
Matic Leads the Charge with a 20% Jump in 30 Days
Matic, the largest layer 2 token with a market cap of $6.90 billion, has jumped 20% to $0.74 over the past 30 days, according to CoinGecko. It’s used on Polygon, a platform that reduces congestion on the Ethereum network. The next four largest coins – immutable, mantle, arbitrum and optimism – have leapt between 9% and 105% over the past month and trade between $0.5 to under $2 apiece. However, all five tokens are down between 16% and 86% from their all-time highs hit over the past two years.
Ether, the layer 1 token linked to the Ethereum blockchain on which most layer 2 tokens are based, has leapt 13.8% to $2,028.80 in the past month.
Volatility and Risk Are Key Features of Layer 2 Tokens
Layer 2 tokens have proliferated in recent years, but they can be a risky business. They are small and thinly traded, meaning they can be highly volatile and unpredictable. Picking long-term winners is tough. “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.
Layer 2 Tokens Reflect Sentiment and Speculative Character
Layer 2 tokens are a gauge of sentiment towards the projects they are linked to, but their extreme volatility also lends them a speculative character. While layer 2 tokens are tiny in comparison to big guns like bitcoin, their volatility makes them a favorite among active traders trying to capitalize on market momentum.
Future of Layer 2 Tokens is Unclear
Some analysts see the projects as vital to increasing the practical uses of blockchains like Ethereum, in areas such as finance to gaming. Yet the market is crowded. Numerous projects and their tokens were launched as the crypto market boomed in 2020, before sinking during the crypto winter of 2022. Many investors agree that only projects with useful practical applications 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.
As crypto markets continue to surge, layer 2 cryptocurrencies are gaining momentum. The surge has been attributed to anticipation of easing U.S. borrowing costs and a possible U.S. spot bitcoin exchange-traded fund. Layer 2 tokens are currently estimated to have a combined market cap of about $14.3 billion, accounting for around a tenth of the total crypto market. Matic, the largest layer 2 token, has seen a 20% jump in the past month, reaching $0.74. Ether, the layer 1 token, has also surged 13.8% to $2,028.80. However, layer 2 tokens are known for their extreme volatility and risk and are often considered highly speculative investments. Despite their unpredictable nature, some analysts view layer 2 projects as vital in increasing the practical uses of platforms like Ethereum. Nonetheless, the market for layer 2 tokens is crowded and only projects with useful practical applications are expected to survive in the long run.
I’m a cryptocurrency and blockchain technology journalist. My work has been featured in major publications such as CoinDesk, Bitcoin Magazine, and VentureBeat. I’ve been a respected voice in the cryptocurrency community and my insights into the industry have helped shape its development.
