Early Investing

Separating Signal and Noise in Crypto Markets

Separating Signal and Noise in Crypto Markets
By Adam Sharp
Date December 10, 2021

Back in September, I wrote a piece called “Beware the Cardano Price Mirage.” In it, I warned that “cheap” tokens like Cardano (ADA) aren’t actually cheap at all. Here’s an excerpt:

So although Cardano does currently trade at “just” $2.21, there are 32 billion Cardano tokens in circulation today. That gives it a market cap of about $70 billion, almost one-tenth that of bitcoin and one-fifth of ethereum… 

Overall I’d say Cardano is vastly overvalued compared to much more established projects like bitcoin and Ethereum. The fact that Cardano trades at one-tenth the market cap of bitcoin is absolutely insane to me.

Since then Cardano has dropped from $2.21 to around $1.26, down 43%. In the same period, bitcoin has risen from around $40,000 to $47,000.

Cardano owners will hate me for saying this, but the project appears to have been significantly overhyped. For years it was sold as a faster and cheaper Ethereum. The Cardano team hired a bunch of academic researchers and claimed to code to a higher standard than the rest of the industry. But the team appears to be stalling on making real world advancements. 

And trust me, Cardano is not alone in being overhyped and overvalued. There are a ton of projects out there with HUGE valuations and very little actual traction. 

Take Gala (GALA), for example. It’s a gaming token that has risen from $0.00027 a year ago to $0.47 today (that’s a 173,000% gain, roughly). 

Gala’s current market cap is around $3.3 billion. But the fully diluted market cap is a whopping $16.7 billion (this accounts for all the tokens currently owned by private investors and the team, which will be unlocked over time). 

Gala is an interesting project. It’s a new kind of semi-decentralized gaming studio. But a $16.7 billion valuation? That seems a bit much.

Higher Quality Coins Will Last

Many of these richly valued crypto projects will almost certainly fail. The speculative mania will end, and only those projects with lots of real world traction will remain.

And that’s the tricky part — figuring out which projects will succeed in the long term. As you all know by now, I’m most bullish on bitcoin because I feel like it’s the safest bet. It also has what I believe to be an extremely strong catalyst that will last for years: inflation. It’s the most robust network, security-wise, and has been battle-tested for more than 10 years. 

But there will certainly be other projects worth taking a shot on over the coming years. For example, the new generation of Ethereum-scaling projects is coming online (zkSync, StarkNet, Polygon). If these projects can truly scale Ethereum to 2,000 to 3,000 transactions per second as claimed, their tokens could be a good bet. I don’t currently own any, but I’m evaluating the various options. It’s highly complex stuff but worth learning about.

And Ethereum itself continues to be extremely promising. It’s certainly got real-world adoption, as we’ve seen with the explosion of NFTs, stablecoins, decentralized finance and decentralized autonomous organizations. And if these new layer 2 scaling solutions like zkSync work well, it could bring Ethereum much closer to mainstream adoption. The price of ethereum has risen significantly over the past few years, but who knows? It could certainly go higher.

Unlike in 2017, there’s a lot more real-world adoption happening right now. But there’s still a lot of incredibly overvalued projects out there. Eventually the market will sort them out, but that could cause some pain in the short term, even for higher quality projects.

This is why I advocate for a long-term buy and hold strategy. I’m convinced that for 99% of people, it’s the only way to go. Trading these markets successfully is unbelievably difficult.

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