When the new Arbitrum (CRYPTO:ARB) token started trading in crypto markets on March 23, it was arguably the most highly anticipated token debut of the year. Arbitrum had sparked tremendous investor interest as well as hype and speculation online after announcing earlier in the month that it would distribute more than 1 billion tokens to users, developers, and investors within its ecosystem in what is known as a crypto airdrop. As part of this airdrop, if you were an active user or developer of Arbitrum, you were entitled to claim free tokens that would be sent to your online crypto wallet.
But in many ways, the hype and speculation surrounding the airdrop was Arbitrum's downfall as soon as the token started trading. Many saw this as an opportunity to become a crypto millionaire overnight. On the first day of trading, Arbitrum fell by 90% from its early price of more than $11 as new token owners sold en masse and locked in profits. Arbitrum now trades for about $1.20.
Nonetheless, despite this early volatility, some Arbitrum bulls now predict that the token could double by the end of April. Here's the case for and against buying Arbitrum.
The Ethereum factor
Arbitrum is a Layer 2 scaling solution for Ethereum (ETH -3.15%), much like Polygon (MATIC -6.01%) or Optimism (OP -5.88%), and was created with one primary goal in mind: to make Ethereum run faster, better, and more efficiently. Instead of processing individual transactions on a one-by-one basis, Arbitrum "rolls up" tens of thousands of transactions into a single batch to reduce congestion on the Ethereum network. Because of this, Arbitrum can handle 40,000 transactions per second, while Ethereum can manage fewer than 40.
In terms of its prospects, Arbitrum is very much a leveraged bet on the future of Ethereum. As a Layer 2 token, Arbitrum essentially sits on top of the main Ethereum blockchain. Thus, if you have confidence in the growth prospects of Ethereum, then you should have confidence in the growth prospects of Arbitrum. At some point, Ethereum might not need Layer 2 scaling solutions such as Arbitrum. However, until Ethereum reaches its long-promised goal of 100,000 transactions per second, there is still a need for Arbitrum.
Growth prospects
Arbitrum already ranks No. 4 in total value locked (TVL), one of the most important blockchain metrics used to evaluate how much activity is really happening on a blockchain. In fact, Arbitrum has already surpassed its Layer 2 peers in this regard. While Arbitrum now accounts for 4.48% of all TVL, Polygon can claim only a 2.15% share. Optimism is even lower, at 1.85%. Even Ethereum rivals such as Solana (CRYPTO: SOL) and Avalanche (CRYPTO: AVAX) have lower TVL metrics than Arbitrum.
Image source: Getty Images.
Thus, while it might be tempting to say that Arbitrum was overhyped, the numbers speak for themselves. Developers obviously trust Arbitrum and are using it for new blockchain projects. During the first week of trading, Arbitrum's TVL spiked by 20%.
A crowded field
While the long-term growth thesis for Arbitrum is attractive, the big thing to watch out for is that the Layer 2 field is getting more and more crowded. After The Merge, Ethereum still needs help in getting rid of congestion on its blockchain and settling transactions more quickly and cheaply. One of the biggest misconceptions about The Merge was that transaction speeds on Ethereum would increase dramatically. As a result, new Layer 2 competitors are continually entering the ring. That might be good news for Ethereum, but it could hurt future market share projections for any Layer 2 solution.
Investors recognize the importance of these Layer 2 scaling solutions for Ethereum, so their prices are soaring this year. Polygon is up almost 50% for the year, while Optimism is up 140%.
Early performance issues
Theoretically, Arbitrum, as the newest Layer 2 competitor, should also be skyrocketing in value. So it's a bit concerning that the price of Arbitrum is just $1.20, which is nearly 90% below its all-time high of $11.80, which it set in its first hours of trading. If you look at a chart for Arbitrum, it's easy to see what happened: the price fell off a cliff immediately as anyone who had Arbitrum tokens sold as quickly as they could to lock in profits. Since that plunge on the first day of trading, Aribitrum has basically traded sideways in the $1.20 to $1.40 range.
To make a stock investing analogy, it would be much as if shares of a heavily hyped initial public offering (IPO) plummeted right out of the gate as insiders dumped everything they owned. For that very reason, there are specific IPO lockup periods to avoid an instant, mass sell-off. In the crypto world, however, lockup periods are optional, and not mandatory. Nevertheless, some analysts point to similar experiences with tokens such as Polygon as proof that a price reversal could be coming sooner rather than later for Arbitrum.
Should you buy Arbitrum?
Right now, there's an interesting situation in the Layer 2 market. There are several high-profile Layer 2 tokens (Polygon, Arbitrum, and Immutable) trading between $1.15 and $1.25. Optimism is an outlier here, trading at about $2.20. All of them do roughly the same thing -- help Ethereum run more efficiently -- and their prices appear to have clustered in the same range.
If you have to pick winners and losers in this crowded field, it might be easier simply to invest in Ethereum, which is the base layer blockchain responsible for all this growth. While I'm impressed with all the traction that Arbitrum has made in the Layer 2 market, I'm very much turned off by how the token traded straight out of the gate. In terms of a crypto that I can buy and hold for the long term, my preference is still Ethereum.
