Cryptocurrencies linked to Layer-2 projects based on Layer-1 blockchains, particularly Bitcoin and Ethereum, are showing strength after a year of decline.
Predictions of the imminent launch of Bitcoin spot ETFs in the U.S., as well as a reduction in U.S. borrowing costs, have significantly boosted cryptocurrency prices. Bitcoin has also experienced a surge since the end of August.
All tokens associated with L2 projects feature faster transaction speeds with reduced transaction costs. The market capitalization of L2 tokens is nearly $14.3 billion, a tenth of the cryptocurrency market, according to Yahoo! Finance.
Matic, the largest L2 token, has a market cap of $6.90 billion. It is based on the Polygon network, a platform that reduces congestion on the Ethereum network. Its price rose 20 percent over the month to $0.74, according to CoinGecko.
Other L2-based tokens, Immutable, Mantle, Arbitrum, and Optimism, rose 9-105% over the month. Their prices range from $0.5 to $2 per token.
At the same time, the tokens have not yet reached the highs of two years ago. Now they are 16-86% below the highs.
Ether is a L1 token, but it is based on the Ethereum blockchain, like most L2 tokens. It's up 13.8% for the month to $2,028.
L2 tokens have become quite common over the past two years while remaining a fairly risky investment. They are inexpensive and have low volume, which makes them very volatile and unpredictable. In this context, it is difficult to choose the best option for long-term investment.
Matteo Greco, analyst at Fineqia International, believes: "On average, the growth of tokens is not sustainable. It can take 100 tries and one win".
Matic's capitalization is down 3% since the beginning of the year, while Bitcoin is up 123% and Ether is up 69%.
Changes in the price of L2 tokens determine investors' attitudes toward token-related projects, but their volatility is speculative in nature. These cryptoassets are characterized by independent movement; they can be the last of all tokens in the wave of growth or the first to participate in the sell-off when investor sentiment changes.
Despite the low value of L2 tokens, many investors prefer them when they want to capitalize on market momentum.
"Tokens can be very attractive to investors, even though they are speculative in nature. Active trading will be the most appropriate approach for these tokens," said Joshua Peck, an investor at TrueCode Capital, a hedge fund investing in Matic.
The prospects of Layer-2 tokens are difficult to predict, but at the same time, analysts are confident in the importance of these projects for the practical use of blockchains, especially Ethereum, in various applications.
It is important to consider that the market is crowded, and many tokens appeared during the crypto boom of 2020 but depreciated during the crypto winter of 2022. Investors believe that only projects with practical applications are viable.
Further reading: Expectations of the approval of Bitcoin ETF fikings sparked large capital inflows.