Should You Buy This New Crypto With Explosive Upside Potential?

When the new Arbitration (CRYPTO:ARB) token started trading in crypto markets on March 23, it was arguably the most anticipated token debut of the year. Arbitrum had sparked huge investor interest as well as hype and speculation online after announcing earlier this month that it would distribute more than 1 billion tokens to users, developers and investors within its ecosystem in what is known as a crypto airdrop. As part of this airdrop, if you were an active user or developer of Arbitrum, you had the right to claim free tokens that would be sent to your online crypto wallet.

But in many ways the hype and speculation surrounding the airdrop was Arbitrum’s downfall as soon as the token started trading. Many saw this as an opportunity to become an overnight crypto millionaire. On its first day of trading, Arbitrum fell 90% from its early price of more than $11 as new token holders sold in droves and locked in profits. Arbitrum is now trading at around $1.20.

Nevertheless, despite this early volatility, some Arbitrum bulls are now predicting that the token could double by the end of April. Here is the case for and against buying Arbitrum.

The Ethereum Factor

Arbitrum is a Layer 2 scaling solution for Ethereum (ETH 116.29%)roughly like Polygon (MATIC 124.87%) or Optimism (OP), and was created with one main goal in mind: to make Ethereum run faster, better and more efficiently. Instead of processing individual transactions on a one-by-one basis, Arbitrum “rolls” tens of thousands of transactions into a single batch to reduce congestion on the Ethereum network. Because of this, Arbitrum can handle 40,000 transactions per second, while Ethereum can handle fewer than 40.

As for the outlook, Arbitrum is largely a hedged bet on the future of Ethereum. As a Layer 2 token, Arbitrum essentially sits on top of the Ethereum blockchain. Therefore, if you have confidence in the growth prospects of Ethereum, you should have confidence in the growth prospects of Arbitrum. At some point, Ethereum may not need Layer 2 scaling solutions like Arbitrum. But until Ethereum reaches its long-promised goal of 100,000 transactions per second, there is still a need for Arbitrum.

Growth prospects

Arbitrum already ranks #4 in total value locked (TVL), one of the most important blockchain metrics used to evaluate how much activity is actually happening on a blockchain. In fact, Arbitrum has already surpassed its Tier 2 peers in this regard. While Arbitrum now accounts for 4.48% of all TVL, Polygon can only claim a share of 2.15%. Optimism is even lower, at 1.85%. Even Ethereum rivals such as Solana (SUN 117.24%) and Avalanche (AVAX 58.45%) has lower TVL measurements than Arbitrum.

Image source: Getty Images.

Although it might be tempting to say that Arbitrum was overhyped, the numbers speak for themselves. Developers obviously trust Arbitrum and use it for new blockchain projects. During the first week of trading, Arbitrum’s TVL rose by 20%.

A crowded field

While the long-term growth proposition for Arbitrum is attractive, the big thing to watch out for is that the Layer 2 field is becoming more and more crowded. After The Merge, Ethereum still needs help to get rid of congestion on the blockchain and settle transactions faster and cheaper. One of the biggest misconceptions about The Merge was that transaction speeds on Ethereum would increase dramatically. As a result, new Tier 2 competitors are continually entering the ring. That may be good news for Ethereum, but it could hurt future market share projections for any Layer 2 solution.

Investors are recognizing the importance of these Layer 2 scaling solutions for Ethereum, so their prices are skyrocketing this year. Polygon is up nearly 50% for the year, while Optimism is up 140%.

Early performance issues

Theoretically, Arbitrum, as the newest Layer 2 competitor, should also skyrocket in value. So it is a little worrying that the price of Arbitrum is only $1.20, which is almost 90% below the all-time high of $11.80, which it set in the first hours of trading. If you look at a chart for Arbitrum, it’s easy to see what happened: The price immediately fell off a cliff as everyone who had sold Arbitrum tokens as fast as they could to lock in profits. Since plunging on its first day of trading, Aribitrum has initially traded sideways in the $1.20 to $1.40 range.

To make a stock investing analogy, it would be much like if stocks in a heavily hyped initial public offering (IPO) plunged right out of the gate as insiders dumped everything they owned. For that reason, there are specific IPO lock-up periods to avoid immediate mass selling. However, in the crypto world, lock-up periods are optional and not mandatory. Still, some analysts point to similar experiences with tokens like Polygon as evidence that a price reversal could come sooner rather than later for Arbitrum.

Should you buy Arbitrum?

Right now there is an interesting situation in the Layer 2 market. There are several high profile Layer 2 tokens (Polygon, Arbitrum and Immutable) trade between $1.15 and $1.25. Optimism is an outlier here, trading at around $2.20. All of them do pretty much the same thing — help Ethereum run more efficiently — and their prices seem to have converged in the same range.

If you have to pick winners and losers in this crowded field, it might be easier to invest in Ethereum, which is the base layer blockchain responsible for all this growth. While I’m impressed with all the traction that Arbitrum has made in the Layer 2 market, I’m very struck by how the token traded right out of the gate. When it comes to a crypto that I can buy and hold for the long term, my preference is still Ethereum.