Avalanche (AVAX -14.26%) used to be highly touted as an Ethereum killer, but it has had a dreadful 2022. Down 88% year to date, Avalanche is rarely mentioned as a potential Ethereum challenger. In fact, Avalanche was actually one of the worst-performing cryptos of the year.

Yet there's good reason to think that Avalanche might be able to rebound next year. Here's a closer look at three good reasons why AVAX might surprise crypto investors and deliver superior returns in 2023.

FTX contagion fears overblown

First and most importantly, Avalanche had no significant exposure to the failed crypto exchange FTX (FTT -12.35%). As the Avalanche team pointed out in the days after the FTX meltdown, Avalanche had no direct dealings with FTX, hedge fund Alameda, or former FTX Chief Executive Officer Sam Bankman-Fried. While Avalanche acknowledges that it did have a "limited" amount of funds on the FTX exchange that it might never recover, it was not directly affected by the FTX implosion. For that reason, investors might be unfairly punishing Avalanche, as they continue to be spooked by FTX contagion fears.

Underlying blockchain fundamentals

Investors have never questioned the underlying technology at Avalanche, which can be thought of as a faster, cheaper, and more scalable version of Ethereum (ETH -5.33%). Avalanche bills itself as the fastest smart contracts platform in the world, and it has been superior to Ethereum in terms of transaction processing speeds ever since its launch in 2020.

When Ethereum was still a slow proof-of-work blockchain in 2021, investors were eager to find the "next Ethereum," and Avalanche always seemed to be part of that discussion. However, Ethereum's conversion into a faster, more efficient proof-of-stake blockchain this year as part of The Merge seems to have cooled investor sentiment on Avalanche.

Family celebrating New Year's.

Image source: Getty Images.

The good news is that while investors might have deserted Avalanche, users and developers have not. Overall blockchain activity at Avalanche seems to be increasing significantly. Most notably, total transaction activity is way up. On Nov. 21 -- nearly two weeks after the FTX news broke -- Avalanche announced that it had passed the 450 million cumulative daily transaction mark. By way of comparison, one year ago, Avalanche was processing only 28 million transactions.

Moreover, the Avalanche team continues to provide updates about the significant growth in both daily and monthly active users. Again, the long-term trend is upward. That has translated directly into a growth in new partners who will be using the Avalanche blockchain in the future. The latest win is the first-ever decentralized insurance marketplace for the Avalanche blockchain. 

New channels of growth

Another positive sign is that Avalanche continues to diversify away from decentralized finance (DeFi), the one area where it has always shown the greatest strength. For example, Avalanche is now getting deep into the world of blockchain gaming. At least 10 different Avalanche gaming projects are now showing significant growth. One game, for example, saw a 1,482% spike in new users in just seven days.

Changing market sentiment

Last year Avalanche became a crypto darling and a highly touted name in the blockchain world. This year Avalanche fell out of favor with investors. So is 2023 the year that investors rekindle their relationship with Avalanche?

As an early sign of changing market sentiment heading into 2023, consider that Robinhood (HOOD -5.42%) added support for Avalanche in August, making it one of the cryptos that small retail investors can now buy via the popular trading app. Then, in early December, Avalanche became part of the new Robinhood "learn-to-earn" crypto program, in which investors can earn Avalanche simply by spending a few minutes looking through an online presentation. This is inevitably going to mean more holders of Avalanche, as well as more awareness of what Avalanche can offer. 

Is Avalanche a buy?

Yes, that's a tiny step forward. But remember -- this is still a crypto winter. We can't expect a lot of splashy new updates or releases at a time when there is little or no investor appetite for risky cryptos (or, at least, cryptos that are perceived to be risky). While Ethereum is still a better long-term investment play than Avalanche, there's a lot that seems to be going right for Avalanche as we turn the page on the calendar and usher in 2023. 

For that reason, I'm short-term bullish on Avalanche, and I am absolutely convinced that Avalanche could surprise investors who haven't been following this crypto's story of sustained, organic growth in very difficult market conditions.