Trading in lesser-known, smaller digital assets may offer clues to the health of the broader crypto market, says one investor.
In a recent research note, Jeff Dorman, partner and portfolio manager at Arca, a crypto-based asset management firm, said a resurgence in certain smaller digital currencies, or “small-cap cryptos” as he puts it, should not be dismissed.
In a call with MarketWatch, Dorman described the recent rally in smaller coins as a “changing of the guard” where investors are flocking to specific utility-based tokens that offer tangible value. “Notably, the last six weeks of gains have occurred without the most well known large-cap tokens and coins contributing, with both bitcoin and ethereum lagging the broader market,” he said.
A utility token is created primarily for functionality, such as a medium of exchange, whereas a security token is created purely as an investment.
Of particular interest to Dorman is Binance Coin (BNB), which is up more than 100% year-to-date.
Binance Coin, which is considered a utility token, was launched by Binance, the world’s largest digital currency exchange by 24-hour volume, according to CoinMarketCap. The exchange enables users to pay their fees using the coin and offers rebates and discounts for those that choose to do so, as do many of the prominent exchanges. Furthermore, the cryptocurrency can be used to invest in initial coin offerings launched on the Binance platform.
An initial coin offering is a crowdfunding tool for crypto-related ventures where companies issue cryptocurrencies in exchange for capital.
Given the dominance of the Binance exchange, many see the coin as a bet on the overall market. “They have a token that is easy to value and easy to use, and they have launched new innovative products that require the use of the BNB token,” Dorman said.
Meanwhile, another trend in small-cap cryptos is unfolding that has Dorman confident the digital currency lull is over. “Thematic investing and relative value strategies are quite common in traditional asset classes like equities and fixed income, but are fairly new in crypto, and speak to the maturation of this asset class,” he said.
Thematic investing is where investors buy similar assets to ones that are outperforming the market.
“It’s piggyback investing. When people see something work they invest and put resources into that sector,” Dorman said, noting the rally in other exchange-linked coins such as KCS and BTMX along with Binance Coin.
The KCS coin is up 16.7% year-to-date while the BTMX coin has surged nearly 400%.
But it isn’t all bad news for the so-called larger cap assets. Dorman said bitcoin’s reduced volatility and growing transaction volumes mean the cryptocurrency is unlikely to relinquish its place atop of the digital-currency list.
has gained 12.1%.
That said, it may mean there will be a growing number of smaller rivals cropping up.
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