What happened

Polkadot (DOT 1.60%) tokens gained 7.3% at the end of the market day on Tuesday, having posted 24-hour gains as high as 11.2% earlier in the day. The token, which plays several important roles in the cross-blockchain communications network also named Polkadot, is preparing to launch its first so-called parachain auctions next week. Cryptocurrency traders are bidding up the price of the Polkadot token as the auction date approaches without any sign of trouble with the technology or the auction process.

At the same time, the Kusama (KSM 0.83%) token rose more than 15% on Tuesday. Kusama is an experimental version of the Polkadot technology, playing an active role in the development of parachains and future Polkadot features.

So what

Polkadot is still a work in progress, albeit at an advanced stage with a real-world market cap of $51.6 billion today. Kusama's market value is a much lower $3.7 billion, which makes sense for a testing version of a product with business-grade ambitions.

When Polkadot is fully operational, it will have launched dozens of independent blockchains known as parachains, which can have their own tokens and be programmed to meet very specific-use cases. The bigger picture here is that Polkadot and its related chains can connect many different blockchains to each other, allowing direct communication between different cryptocurrencies and smart-contract platforms.

Rendering of a steel chain where one link is covered in digital data.

Image source: Getty Images.

Connective platforms like Polkadot will allow other cryptocurrencies to become more specialized over time, letting other digital assets handle features that would be clumsy additions to your favorite cryptocurrency. For example, a Polkadot parachain could add Ethereum smart contracts to the basic value store of Bitcoin. This way, Ethereum won't have to manage asset values and Bitcoin won't need to develop its own smart contracts.

As Polkadot and other chain-connecting systems move closer to full commercial viability, their token values are skyrocketing. Today's price action is a part of that long-term story.

Now what

Many investors won't touch Polkadot until the commercial-launch process is completed, and some will refuse to deal with the red-hot market value of these tokens even then. Polkadot has gained a stunning 1,180% over the last 52 weeks and Kusama's gains extended all the way to 1,420% over the same period.

This skyrocketing price action highlights the volatile and unpredictable nature of cryptocurrencies, in general, at this early stage in the development and marketing of a whole new asset class. Polkadot and Kusama should cool down over time as their long-term role in the crypto market takes form, and as the market itself picks up regulations and broad-based market acceptance.

So far, it's impossible to say exactly how much these digital-connector tools might be worth in the long run. However, Polkadot has attracted a large community of active parachain developers, even in this pre-launch stage of its development. It's one of the most interesting names in my personal portfolio of crypto tokens, and I can't wait to see how the first parachain auctions work out on November 11. Stay tuned.