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As bitcoin drifts toward mainstream maturity in 2022, daring crypto investors are eyeing up new sources of explosive action: “altcoins” that power online games and 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 been largely sinking since late 2021, has risen about 16 per cent over the past two weeks to push above US$41,000, prompting many market players to declare an end to the “crypto winter.”

Yet newer and smaller coins linked to virtual platforms have enjoyed stronger rallies amid the buzz around the metaverse.

Those used on gaming platform Axie Infinity and 3-D virtual environment Decentraland, for example – the Axie and Mana – have gained 35 per cent and 57 per cent, respectively, in the same period since Jan. 24. The token of the Gala gaming platform has jumped 125 per cent, according to CoinMarketCap.

“When people think of crypto they tend to think of bitcoin,” said Ed Hindi, chief investment officer of Swiss-based cryptocurrency hedge fund Tyr Capital. “But this ignores the fact that crypto is not a one-risk asset class.”

To give an idea of scale, though, the combined market cap of Axie, Gala and Mana is about US$12.7-billion, a fraction of the US$800-billion-plus for bitcoin, which commands 40 per cent of the market.

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

In a possible sign of this drive, multiasset funds managing a combination of coins saw inflows totalling US$32-million in the week ending on Jan. 28, the largest since June 2021, according to data from CoinShares.

Yet the sheer novelty of many of these coins and the consequent lack of track records significantly ups the danger stakes for investors in an already risky and nebulous crypto world. Furthermore, the fortunes of the likes of Axie and Gala are tied to the success of their gaming platforms, as well as the wider virtual economy.

BOTTOM OF THE BLOCKCHAIN

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

They include ether of the Ethereum blockchain, and its challengers Solana and Polkadot, which have risen 27 per cent, 28 per cent and 23 per cent over the past two weeks.

“A lot of people are sensing this as a buying opportunity and what they are purchasing is overwhelmingly high-quality blue chip alts over bitcoin right now,” said Hany Rashwan, chief executive officer and co-founder of crypto fund manager 21Shares based in New York and Zurich, referring to coins on the Layer 1 blockchain, also including, Avalanche, Polygon and Terra.

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

WHERE’S BITCOIN HEADING?

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

Will Hamilton, head of trading and research at Trovio Capital Management, cites futures funding rates, which have remained negative since early December and suggest people are paying to be short. And he also points to options data showing options to sell bitcoin versus buying, the put/call ratio, has hit 58 per cent, a level last seen in the May to July, 2021, sell-off.

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

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