Down 88% in 2022, could avalanches return next year?

Avalanche (AVAX 4.85%) used to be highly touted as an Ethereum killer, but it’s had a terrible 2022. Down 88% year to date, Avalanche is rarely mentioned as a potential Ethereum challenger. In fact, Avalanche was actually one of the worst performing cryptos of the year.

Still, there’s good reason to believe the Avalanche can bounce back next year. Here’s a closer look at three good reasons why AVAX could surprise crypto investors and deliver superior returns in 2023.

The fear of FTX infection is exaggerated

First and foremost, Avalanche had no significant exposure to the failed crypto exchange FTX (FTT 0.64%). As the Avalanche team pointed out in the days following the FTX meltdown, Avalanche had no direct contact with FTX, hedge fund Alameda, or former FTX CEO Sam Bankman-Fried. While Avalanche acknowledges that it had a “limited” amount of funds on the FTX exchange that it may never recover, it was not directly affected by the FTX implosion. For that reason, investors may be unfairly penalizing Avalanche as they continue to be spooked by fears of FTX contagion.

Underlying blockchain fundamentals

Investors have never questioned the underlying technology of Avalanche, which can be considered a faster, cheaper and more scalable version of Ethereum (ETH 2.99%). Avalanche bills itself as the fastest smart contract platform in the world, and it has been superior to Ethereum in terms of transaction processing speeds ever since its launch in 2020.

When Ethereum was still a slow proof-of-work blockchain in 2021, investors were eager to find the “next Ethereum,” and Avalanche always seemed to be part of that discussion. However, Ethereum’s conversion to a faster, more efficient proof-of-stake blockchain this year as part of The Merge appears to have cooled investor sentiment on Avalanche.

Image source: Getty Images.

The good news is that while investors may have abandoned Avalanche, users and developers have not. The overall blockchain activity at Avalanche appears to be increasing significantly. Most notably, overall transaction activity is way up. On November 21 – almost two weeks after the FTX news broke – Avalanche announced that it had passed 450 million cumulative daily transactions. By comparison, a year ago Avalanche processed only 28 million transactions.

Additionally, the Avalanche team continues to provide updates on the significant growth in both daily and monthly active users. Again, the long-term trend is upward. It has directly led to a growth in new partners who will use the Avalanche blockchain in the future. The latest win is the first ever decentralized insurance marketplace for the Avalanche blockchain.

New growth channels

Another positive sign is that Avalanche continues to diversify away from decentralized finance (DeFi), the one area where it has always shown greatest strength. For example, Avalanche is now getting deep into the blockchain gaming world. At least 10 different Avalanche game projects are now showing significant growth. One game, for example, saw a 1,482% increase in new users in just seven days.

Changing market sentiment

Last year, Avalanche became a crypto darling and a highly regarded name in the blockchain world. This year, the Avalanche fell out of favor with investors. So is 2023 the year investors rekindle their relationship with the Avalanche?

Think of it as an early sign of a change in market sentiment towards 2023 Robin Hood (HOOD -2.40%) added support for Avalanche in August, making it one of the cryptos that small retail investors can now buy via the popular trading app. Then, in early December, Avalanche became part of Robinhood’s new “learn-to-earn” crypto program, where investors can earn Avalanche by spending a few minutes reviewing an online presentation. This will inevitably mean more owners of Avalanche, as well as more awareness of what Avalanche can offer.

Is the Avalanche a buy?

Yes, it is a small step forward. But remember — this is still a crypto winter. We can’t expect many splashy new updates or releases at a time when there is little or no investor appetite for risky cryptos (or at least cryptos that are perceived as risky). While Ethereum remains a better long-term investment play than Avalanche, a lot seems to be going right for Avalanche as we turn the page on the calendar and usher in 2023.

For that reason, I am short-term bullish on Avalanche, and I fully believe that Avalanche can surprise investors who have not followed this crypto’s history of sustained, organic growth in very difficult market conditions.