CRYPTO ROUT DEFLATES SOME WEB3 STARTUPS BUOYED BY PUSH INTO DIGITAL TOKENS - Kanebridge News
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CRYPTO ROUT DEFLATES SOME WEB3 STARTUPS BUOYED BY PUSH INTO DIGITAL TOKENS

Users and investors are re-evaluating token-based companies amid the broader cryptocurrency downturn.

By BERBER JIN
Wed, Jul 13, 2022 4:36pmGrey Clock 4 min

The cryptocurrency rout has spread to startups that offer users digital tokens, pushing down digital asset prices and driving away hordes of users.

The startups—part of what has been called Web3—allowed users to play virtual games and collect digital assets, and the companies’ growth was hinged on interest from people eager to wade into blockchain-based assets. The broader cryptocurrency downturn this year is causing a downturn in users in many Web3 companies, and players and investors are re-evaluating the utility of token-based business models.

“Many crypto companies can only exist by engineering speculation,” said Adam Fisher, a Tel Aviv-based partner at VC firm Bessemer Venture Partners. “The utility of Web3 is not clear at all.”

Investors in 2021 poured more than $4.5 billion into blockchain-based gaming, digital media and commerce companies—popular sectors of Web3 investment—compared with $197 million in 2020, according to data from Crunchbase. The increase mirrored the rise of cryptocurrency investing in Silicon Valley: Last year, venture capitalists invested about $17.9 billion into blockchain-related startups, compared with $2.1 billion in 2020, according to Crunchbase.

Axie Infinity is an online game where users can make money by breeding virtual pets and earning other digital assets on the blockchain, which they can then sell for cash on crypto exchanges. Axie Infinity’s parent company, Vietnam-based Sky Mavis Ltd, along with digital-art creator Yuga Labs and fitness app StepN, offered services they said were part of a new iteration of the internet that distributed ownership and power to users in the form of digital tokens. Venture firms such as Andreessen Horowitz and Paradigm raised billions of dollars in new funds dedicated to crypto startups.

Andreessen Horowitz led a $152 million investment into Sky Mavis in October, valuing it at about $3 billion. General partner Arianna Simpson touted Axie Infinity as part of a “play-to-earn revolution,” saying the ability to own and sell in-game digital assets would drive loyalty to the platform. Daily platform users reached a high of 2.7 million in November, according to data from Sky Mavis.

As the crypto boom has crumpled amid inflationary fears and a broader market downturn, the prices of Axie’s in-game tokens crashed, and Axie users fled the platform. As of July 4, the site had 368,456 daily active users, down 86% from November, a drop that came after hackers stole more than $500 million worth of cryptocurrency from the game in March.

Sky Mavis co-founder Aleksander Larsen said the company is in the process of phasing out the older version of Axie Infinity, so future users will have the option of using digital tokens or playing without them.

Proponents of Web3 say the blockchain is a new way to shift economic power from dominant companies such as Facebook parent Meta Platforms Inc. and institutions like central banks. Over the past few years, it has fueled the rise of sectors such as decentralized finance, where people are able to buy and sell cryptocurrencies validated automatically on the blockchain instead of relying on financial middlemen.

StepN is a fitness app that allows people to earn a token called Green Satoshi based on how much they walk or jog. Users, who earn the tokens after they buy a nonfungible token, or NFT, representing a pair of sneakers, flocked to the platform as the price of the Green Satoshi token increased in the first few months of the year.

In the past two months, the token price has crashed, and the number of monthly active users on the platform dropped more than 30% from May to June, according to data from Dune Analytics. A spokeswoman said the data excludes active users who don’t transfer their tokens for other cryptocurrencies and thus “does not represent the full picture for active users of StepN.” StepN, based in Adelaide, Australia, announced in January it raised $5 million from investors including Sequoia Capital India

Some Web3 companies’ difficulty in keeping users amid the plummeting prices of its tokens has validated some crypto sceptics’ beliefs that there aren’t many instances where consumers have a true use for blockchain-based services.

“What subset of things created in this cycle are going to work? A small subset,” said Haseeb Qureshi, a managing partner at crypto VC firm Dragonfly Capital. “That’s normal,” he said. The role of venture capital “is to try and find a lot of big ideas, and a few of them work and end up changing the world.”

Some well-funded crypto startups have introduced tokens before they have developed the products associated with those sales. The approach led to early revenue as users bought and started to trade the tokens, driving up their value.

One-year-old startup Yuga Labs and its partners, including gaming firm Animoca Brands, made more than $300 million in revenue by selling a collection of NFTs at the end of April representing unique plots of land in virtual world Otherside. Yuga Labs still hasn’t released Otherside to the public. Since the launch, the NFT’s floor price, or the cost of the cheapest NFT available for sale, has declined more than 70%, according to data from CoinGecko.

The declining price of the NFT for Otherside tracks a broader selloff in the market for NFTs, which were held out last year as a new way to own digital items but so far have been a way to buy luxury items popular within the crypto community. OpenSea, the world’s largest marketplace for such assets, saw $697 million in trading volume in June, down from $4.9 billion in trades in January, according to Dune Analytics.

“I believe that many of these NFTs are just temporary fads and are going to disappear,” said Marcos Veremis, a partner at Accolade Partners, which invests in crypto venture funds including Andreessen Horowitz. He thinks it will take time for NFTs to mature but remains optimistic.

“The current washout that’s happening is very healthy,” he said.



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These stocks are getting hit for a reason. Instead, focus on stocks that show ‘relative strength.’ Here’s how.

By KEN SHREVE
Wed, Jun 12, 2024 4 min

A lot of investors get stock-picking wrong before they even get started: Instead of targeting the top-performing stocks in the market, they focus on the laggards—widely known companies that look as if they are on sale after a period of stock-price weakness.

But these weak performers usually are going down for good reasons, such as for deteriorating sales and earnings, market-share losses or mutual-fund managers who are unwinding positions.

Decades of Investor’s Business Daily research shows these aren’t the stocks that tend to become stock-market leaders. The stocks that reward investors with handsome gains for months or years are more often  already  the strongest price performers, usually because of outstanding earnings and sales growth and increasing fund ownership.

Of course, many investors already chase performance and pour money into winning stocks. So how can a discerning investor find the winning stocks that have more room to run?

Enter “relative strength”—the notion that strength begets more strength. Relative strength measures stocks’ recent performance relative to the overall market. Investing in stocks with high relative strength means going with the winners, rather than picking stocks in hopes of a rebound. Why bet on a last-place team when you can wager on the leader?

One of the easiest ways to identify the strongest price performers is with IBD’s Relative Strength Rating. Ranked on a scale of 1-99, a stock with an RS rating of 99 has outperformed 99% of all stocks based on 12-month price performance.

How to use the metric

To capitalise on relative strength, an investor’s search should be focused on stocks with RS ratings of at least 80.

But beware: While the goal is to buy stocks that are performing better than the overall market, stocks with the highest RS ratings aren’t  always  the best to buy. No doubt, some stocks extend rallies for years. But others will be too far into their price run-up and ready to start a longer-term price decline.

Thus, there is a limit to chasing performance. To avoid this pitfall, investors should focus on stocks that have strong relative strength but have seen a moderate price decline and are just coming out of weeks or months of trading within a limited range. This range will vary by stock, but IBD research shows that most good trading patterns can show declines of up to one-third.

Here, a relative strength line on a chart may be helpful for confirming an RS rating’s buy signal. Offered on some stock-charting tools, including IBD’s, the line is a way to visualise relative strength by comparing a stock’s price performance relative to the movement of the S&P 500 or other benchmark.

When the line is sloping upward, it means the stock is outperforming the benchmark. When it is sloping downward, the stock is lagging behind the benchmark. One reason the RS line is helpful is that the line can rise even when a stock price is falling, meaning its value is falling at a slower pace than the benchmark.

A case study

The value of relative strength could be seen in Google parent Alphabet in January 2020, when its RS rating was 89 before it started a 10-month run when the stock rose 64%. Meta Platforms ’ RS rating was 96 before the Facebook parent hit new highs in March 2023 and ran up 65% in four months. Abercrombie & Fitch , one of 2023’s best-performing stocks, had a 94 rating before it soared 342% in nine months starting in June 2023.

Those stocks weren’t flukes. In a study of the biggest stock-market winners from the early 1950s through 2008, the average RS rating of the best performers before they began their major price runs was 87.

To see relative strength in action, consider Nvidia . The chip stock was an established leader, having shot up 365% from its October 2022 low to its high of $504.48 in late August 2023.

But then it spent the next four months rangebound—giving up some ground, then gaining some back. Through this period, shares held between $392.30 and the August peak, declining no more than 22% from top to bottom.

On Jan. 8, Nvidia broke out of its trading range to new highs. The previous session, Nvidia’s RS rating was 97. And that week, the stock’s relative strength line hit new highs. The catalyst: Investors cheered the company’s update on its latest advancements in artificial intelligence.

Nvidia then rose 16% on Feb. 22 after the company said earnings for the January-ended quarter soared 486% year over year to $5.16 a share. Revenue more than tripled to $22.1 billion. It also significantly raised its earnings and revenue guidance for the quarter that was to end in April. In all, Nvidia climbed 89% from Jan. 5 to its March 7 close.

And the stock has continued to run up, surging past $1,000 a share in late May after the company exceeded that guidance for the April-ended quarter and delivered record revenue of $26 billion and record net profit of $14.88 billion.

Ken Shreve  is a senior markets writer at Investor’s Business Daily. Follow him on X  @IBD_KShreve  for more stock-market analysis and insights, or contact him at  ken.shreve@investors.com .