2 Highly Undervalued Altcoins

2 Explosive Large Cap Altcoins for the emerging Ethereum L2 narrative

With the BTC spot ETF approvals now behind us, the crypto world can finally start to focus on the next big narrative. We are seeing the early signs of a rotation into ETH and ETH proxies and what appears to be a solid reversal of the ETH:BTC ratio.

Over the course of the 2023 crypto ascent out of the bear markets, ETH price has lagged BTC and other Layer 1s in a big way. The fundamentals, however, are as strong as they have ever been. Bitcoin and alternative Layers 1’s like SOL were the narrative drivers of 2023, but we are seeing the first signs of a huge shift towards Ethereum and ETH Layer 2’s. My expectation is that this new fundamentals-driven narrative will ignite ETH and a handful of other ETH proxies into moon missions, and now is the time to start loading your bags.

Why the ETH Narrative?

Ethereum is the top layer 1 smart contract platform by virtually every metric … market cap (MC), total value locked (TVL), fees generated, stablecoins, protocols and devs, etc.

In addition to the ETH domination in almost all metrics, it is much like a beach ball being held under water … at some point fundamentals will win and the beach ball will come rocketing out of the water on a moon mission. The following catalysts and fundamental value drivers, though largely underappreciated by the markets to date, will be powerful drivers of the the coming price appreciation of ETH and ETH L2s:

• ETH spot ETF applications (deadlines in May 2024)
• Deflationary burn mechanism which since inception in late 2022 has reduced the supply of ETH by 0.21% despite being in a brutal bear market. This burn mechanism scales with gas fees, and will be extremely deflationary in the bull market. At 100 Gwei, Ethereum would burn 10,000 ETH per day!

• ETH price has lagged Bitcoin and L1’s over the last 18 months and is primed both to regain lost ground while accelerating based on fundamentals and narrative. As Ricky Bobby would say “Slingshot engaged!”

• L2’s are proving to be excellent scaling solutions, and protocols like Arbitrum, Optimism, Polygon, Base and others are attracting growing numbers of users and TVL.

• Layer 2’s are simply bulk buyers of ETH blockspace and benefit the ecosystem as a whole.

• Layer 2’s settle natively to ETH and have a much more secure connection that your typical cross chain bridge.

• ETH has effectively been declared a commodity, and is unlikely to face any regulatory attacks from the SEC.

• EIP-4844 will be absolutely huge for ETH layer 2’s. Named “Proto-Danksharding”, it allows for portions of the data settlement from L2s to ETH to be allocated to a separate “temporary” data layer, the result of which is significantly higher throughput AND lower transaction fees.

• Wallet abstraction is not yet fully priced in. It allows for true mass adoption by abstracting away the complexities of interacting with the blockchain. Many protocols are currently building wallets that will yield a user experience more akin to a Web2 application, reducing the friction for new participants and attracting far more users.

Altcoin #1: Polygon ($MATIC)

Polygon 2.0 is a massive innovation in Layer 2 scaling. Essentially, it is a new system of Validium zkRollups that all function on a common interoperability layer that settles to Ethereum.

Without getting too technical, it is a system of ZK rollups (basically Layer 3’s) that all settle to an intermediate ZK rollup called the interop layer (a Layer 2), which then batches all the transactions and settles them to Ethereum. The result is you can have an “infinite” number of chains built with the Polygon CDK, all acting with their own custom parameters, and all connecting back to the same interop layer, sharing liquidity pools, on the same network settings, and settling natively to ETH. Even the existing PoS Polygon we all know and use will be connected to the interop layer.

The beauty of this system is that adding new chains is easy and permissionless, and only requires the prospective chain to incentivize validators with POL tokens (and even USDC or ETH). The same validators can simultaneously validate as many chains as they wish.

The migration from $MATIC to $POL as part of the Polygon 2.0 upgrade is scheduled for the first half of 2024, and is already in testnet. Big name chains and projects like OKX, Astar, Immutable and many more have committed to building with Polygon 2.0 CDK. Given that all token unlocks are complete, and inflation is only 2%, look for the price to really take off when POL 2.0 ramps up in the second half of this year.

I have been adding to my bags over the past few weeks, and will continue to add on dips with the goal of a long term bull run hold. Expectations are a low risk 15–20X this cycle.

Altcoin #2: Arbitrum ($ARB)

Arbitrum is a strong competitor to MATIC, outperforming MATIC on most metrics as an L2. The one caveat for Arbitrum is its poor tokenomics and value accrual. That said, the fundamentals and huge adoption of $ARB way outweigh the shortcomings resulting from the sub-par tokenomics, which in any event are likely to be addressed in the coming 18–24 months.

Arbitrum is arguably the largest chain after ETH and BSC, even beating SOL on multiple metrics. It has the lowest Market Cap to TVL ratio at 1.03. As a comparative exercise, $ARB currently has a MC of $2.7B versus $3.3B for Optimism. Optimism has a third of the stables and TVL, and 1/10th the daily volume.

Arbitrum outperforms any other Layer 2 on ETH by a long shot. Where it falls short vs Polygon is the inflation and token unlocks, as well as the token value accrual. $ARB also has a solid SDK with their Optimistic rollup tech stack, but it is technically inferior to the zkRollups of Polygon, with longer settlements, less throughput and lack of global liquidity.

As a Layer 2, it is THE most undervalued based on the above metrics, but comes in a close second to Polygon as a result of the inflation and tokenomics shortcomings.

I am building a bag as I write, with the goal of building a long term hodl bag for this bull run. My expectations are for a lower risk 10–15X this bull run, and in the event they improve tokenomics, it could push as high as a 20X from today’s prices.

Honourable Mention: Immutable X ($IMX)

Immutable is a Gamefi juggernaut with huge potential. It is difficult to compare to ARB and MATIC, as it is a starkware Zk-rollup with a unique set of technical differences. It has also had a fair sized runup when compared to ARB and MATIC, but has lots of room to run with loads of catalysts on the horizon.

$IMX is transitioning to the Polygon 2.0 CDK this year, and will likely perform very well as it gains the benefits of global liquidity and native interoperability with the existing Polygon PoS. Target here is a 15–20X.

Conclusion

ETH has finally awoken from its slumber, marking a clear reversal against BTC on its march to my bull run targets of 25% ETH dominance and 0.1–0.12 BTC per ETH, effectively a doubling of ETH versus BTC.

Ethereum FUD peaked roughly three weeks ago in frenzy of crypto twitter screeching of ‘ETH is dead”. That cacophony marked the perfect buying opportunity, and while we should never expect to buy those pico-bottoms, we are now at an excellent point in the bull run where ETH is starting a macro trend reversal and will very likely provide outsized low risk returns. For those of you who are more crypto degen like myself, the ETH layer 2’s offer amplified returns as proxies on the ETH ecosystem. Pack those bags and enjoy the ride.