Welcome, readers, and thanks for subscribing. The Altcoin Roundup newsletter is now by Cointelegraph writer-in-residence Big Smokey. In the coming weeks, this newsletter will be renamed Crypto Market Musings, a weekly newsletter that provides early analysis and follows emerging trends in the cryptocurrency market.
The publication date of the newsletter will remain the same, and the content will continue to place a strong emphasis on technical and fundamental analysis of cryptocurrencies from a more macro perspective in order to identify key changes in investor sentiment and structure. From the market. We hope you enjoy it!
DeFi has a problem, the “pump and dumps”
When the bull market was in full swing, investing in decentralized finance (DeFi) tokens was like fishing in a barrel, but now that inflows into the sector pale in comparison to the market’s heyday, it’s much harder to identify good trades. in the space.
During the summer of DeFi, the protocols were able to attract liquidity providers by offering three- to four-digit returns and mechanisms such as liquid staking, asset collateral lending, and token rewards for staking. The big problem was that many of these reward offerings were unsustainable, and the high emissions of some protocols led liquidity providers to self-unload (or sell) their rewards, creating constant selling pressure on the price of a token.
Total value locked (TVL) wars were another challenge faced by DeFi protocols, which had to constantly compete for investor capital to maintain the number of “users” willing to lock their funds within the protocol. This created a scenario where mercenary whale capital and other cash-strapped investors essentially airdropped the platforms offering the highest APY rewards for a short period of time, before eventually dumping the rewards into the open market and switch mutual funds to greener pastures.
For platforms that raised serial funding from venture capitalists, the same type of activity occurred. VCs pledge funds in exchange for tokens, and these entities reside in the ranks of the largest token holders in the most lucrative liquidity pools. The imminent threat of token unlocking by early investors, high reward issuances, and the constant auto-bumping of said rewards caused constant selling pressure and obviously stood in the way of any investor who decided to make an early investment. long-term based on fundamental analysis.
Combined, each of these scenarios created a vicious cycle in which the TVL protocol and the platform’s native token basically launched, pumped, dumped, and then fell into obscurity.
Rinse, wash, repeat.
So how do you look beyond the candlestick chart to see if a DeFi platform is worth “investing” in?
Let’s take a look.
But is there income?
Here are two graphs.
Yes, one goes up and the other goes down (LOL). Of course, that’s the first thing investors look for, but there’s more. In the first chart, one will notice that Algorand (ALGO) has a circulating market cap of $2.15 billion and a fully diluted market cap of $3.06 billion. However, his 30-day earnings and annualized earnings are $7,690 and $93,600, respectively. Amazing, right?
Going back to the first chart, we can see that while maintaining a $2.15 billion market capitalization in circulation and supporting a vast ecosystem of various decentralized applications (DApps), Algorand only managed to produce $336 in revenue on October 19.
Unless there is some error in the data or some metrics related to Algorand and its ecosystem are not captured by Token Terminal, this is shocking. If you look at the chart legend, you will also notice that there are no token incentives or bidding fees distributed to liquidity providers and token stakers.
GMX, on the other hand, tells a different story. While maintaining an outstanding market capitalization of $272 million and annualized revenue of $28.92 million, GMX’s cumulative supply-side fees have steadily increased to $33.9 million. from April 24, 2022. Supply-side fees represent the percentage of fees that go to service providers, including liquidity providers.
Emission and inflation
Before investing in a DeFi project, it is advisable to take a look at the total supply of the token, the outstanding supply, the inflation rate and the issuance rate. These metrics measure how many tokens are currently circulating in the market and the expected increase (issuance) of tokens in circulation. When it comes to DeFi tokens and altcoins, dilution is something investors should be concerned about, hence the allure of Bitcoin’s (BTC) supply cap and low inflation.
As shown below, compared to BTC, ALGO’s inflation rate and total projected supply are high. The total supply of ALGO is capped at 10 billion, with data showing 7 billion tokens in circulation today, but given the current revenue generated from fees and the amount shared with token holders, the supply cap and the rate of inflation do not inspire much confidence.
Before taking a position in ALGO, investors should look to further growth and daily active users of Algorand’s DApp ecosystem, and obviously there should be an increase in fees and revenue.
Active addresses and daily active users
Whether revenue is high or low, two other important metrics to check are active addresses and daily active users, if data is available. Algorand has a multi-billion dollar market capitalization and a maximum supply of 10 billion ALGOs, but low annual revenue and few token incentives raise the question of whether the ecosystem’s growth is anemic.
Looking at the chart below, we can see that ALGO’s active addresses are increasing, but overall growth is flat, and spikes in active addresses seem to follow price rallies and selloffs. On October 14, there were 72,624 active addresses on Algorand.
Like most DeFi protocols, the Polygon network has also seen a steady decline in daily active users and the price of MATIC. CryptoQuant data shows 2,714 active addresses, which pales in comparison to the 16,821 views on May 17, 2021.
Still, despite the decline, DappRadar data shows a large amount of activity and user volume spread across various Polygon DApps.
The same cannot be said for DApps on Algorand.
Right now, the cryptocurrency market is in a bear market, which makes trading difficult for most investors. Right now, Investors should probably sit idly by rather than risk every little breakout that turns out to be a bull trap.
Investors would be better served if they sat idly by and followed the data to see when new trends emerge, and then delve into the fundamentals that could support the sustainability of the new trend.
This newsletter was written by Big Smokey, the author of The Humble Pontificator Substack and resident newsletter author at Cointelegraph. Every Friday, Big Smokey will write market insights, trends, analysis, and early research on potential emerging trends within the cryptocurrency market.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. All investments and operations involve risk, so you must carry out your own research when making a decision.