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December 10, 2021
Fear Holds the Market in Its Grip
As inflation and tapering fears keep the equity markets from coming to rest, we see the expected choppy and negative price action in the crypto markets as bear market vibes spread like wildfire. Are things really looking that bad?
While the risk of a prolonged bearish period is undoubtedly rising given that we have experienced a 2+ bull market, we – and other reputable market analysts – are still of the belief that this bull cycle is not over... Of course, we could be wrong, and it’s certainly wise to hedge your bets.
While crypto prices are dropping, it’s essential not to let short-term uncertainty affect the conviction in your long-term investment thesis. It’s advisable for most people to mentally separate long-term holds from short- to mid-term “swing positions.” This way, you can sleep well regardless of where the markets are heading in the short term.
As we prepared you yesterday, a highly anticipated CPI date release came out today… and it’s not looking good.
While intuitively, one could believe that such high inflation numbers are good for stocks and crypto, but in reality this is not the case:
What makes things a bit more complicated is the fact that stock markets often “price in” news before the fact. In this case, we already saw a stock market pullback last week and yesterday. The question is now: Will the stock markets “look through” this already expected, nevertheless still massive inflation number? Or will panic spread and the sell-off continue?
We’re certainly not out of the woods yet: Next Wednesday’s FOMC meeting will mark another critical test for the markets.
With Crypto Twitter realizing how material the impact of inflation and the stock markets are on crypto prices, it’s no surprise that more and more self-proclaimed “macro experts” appear on the interweb. It’s best to take everything you read with a grain of salt.
With all this (tiring) talk about inflation and the stock markets, it’s essential not to neglect how strongly the crypto space is fundamentally moving ahead… Thus, at some point, prices should – in theory – catch up again.
The L2 Ecosystem Is On a Roll
While crypto prices have not been particularly interesting recently (unless you like choppy price action), there is no lack of exciting developments in the L2 ecosystem:
Starting with Polygon doubling down on its ZK-Rollup strategy and incorporating yet another project, the popular Ethereum scaling project is definitely well-positioned to expand its strong position in the L2 ecosystem.
In contrast to most other L2 networks (e.g., Arbitrum, Optimism, zk-Sync, StarkNet), Polygon already has its MATIC token. While MATIC has already performed very well this year and is not immune to a possible market downturn, MATIC’s fundamentals are certainly among the best in the crypto space.
However, MATIC has yet to break its old all-time high at $2.62 to enter price discovery mode… So there is certainly some risk in the short to mid term.
A critical aspect for L2 adoption are on-ramps. So far, there have only been two options to get tokens to an L2: 1. Bridge tokens from Ethereum (or another L1), which often includes high gas fees, or 2. Send Tokens directly from a CEX like Binance or Coinbase. Unfortunately, CEXes have been relatively slow to adopt L2 transfers so far, but things are improving on that front.
Thanks to Ramp Network, there is now a third option: A direct fiat on-ramp to L2s. Starting with Loopring and soon expanding to other networks, this marks a significant step to fostering L2 adoption.
Another favorite project of ours at the L2 front, StarkNet, is making great progress after its recent launch. Keep your eyes peeled for more news on the evolution of this promising ZK-Rollup solution.
Another Ethereum L2 solution gaining traction is Aztec, a ZK-Rollup-powered protocol focused on private token transfers. Since the project doesn’t have a token (yet) – just like many other L2s – it might be worth opening and funding an Aztec account (which you can do here). The brief time investment might be rewarded with a juicy airdrop…
The Next Airdrop For L2 Early Birds!
If you have been reading this newsletter for a couple of weeks and you share our excitement for L2s, then you will most likely have tried out Hop Protocol – an excellent bridging protocol that allows for quick token transfers between various L1s and L2s. If you did give it a shot, guess what? You’re eligible for another airdrop! 🎉 (thanks to @darshanbaba for giving a hint!)
While it’s not Hop Protocol itself launching a token, cross-chain DeFi protocol Instrumental Finance is distributing a percentage of its token supply to users of various bridging protocols. Besides Hop Protocol, this includes Composable’s Mosaic (which we repeatedly covered!), Celer’s cBridge, and Connext’s bridge!
By the way: History has shown that dumping airdrops in s often a viable short-term but a terrible long-term strategy. Just look at Uniswap’s UNI token: After the initial airdrop dump, UNI became one of the largest DeFi tokens, yielding insane gains for people who held the token long enough.
When it comes to Instrumental Finance, I could definitely see the project do very well in the mid- to long-term as it’s perfectly positioned in the L2 narrative:
Leveraging several key features of the Composable technology stack, Instrumental aims to enable seamless chain- and layer-agnostic transfer, swapping, and liquidity provider APY maximization capabilities in order to provide novel yield generating opportunities on various L2s and L1s for its users.