Loopring (CCC:LRC-USD) is an open blockchain protocol based on Ethereum (CCC:ETH-USD) designed to help build decentralized exchanges. Recently LRC-USD has moved significantly higher based on its utility to its users. However, it has probably moved too high and is likely in for quite a fall.
One way to measure this utility is through a metric called “Total Value Locked” (TVL). This is a sum of all the deposits that people have made in decentralized finance (DeFi) apps that are based on that cryptocurrency.
People can stake their money or keep their crypto in wallets based on that crypto. So it is then considered “locked” in that cryptocurrency, even though the crypto value can be taken out of the staking contracts and wallets. As a result, TVL has become a measure of the popularity of a particular cryptocurrency.
TVL and Loopring
DefiLlama.com is the best site to keeps track of TVL for blockchains and non-fungible tokens (NFTs). According to DefiLlama, Loopring now has a TVL of $518.8 million, as of Dec. 5, 2021. This is down from its peak of $786 million on Nov. 25.
Moreover, Loopring now has a market capitalization of $2.68 billion at a price of $2.02 for LRC-USD on Dec. 5. That implies that the value of Loopring as a blockchain protocol is worth five times the value of the crypto. This is seen by dividing the market cap of $2.68 billion by the $518.8 million TVL.
However, this is actually a pretty high metric. For example, Ethereum’s market cap compared to its TVL is just three times. That is because its market cap is $490.2 billion and its TVL is 164.67 billion.
Other cryptos operating in the DeFi space have lower market cap/TVL ratios. For example, Avalanche (CCC:AVAX-USD) has a market cap of $20 billion, but its TVL is $11.96 billion. That gives it a low ratio of just 1.67 times.
So, this implies that at a ratio of five times market cap/TVL, Loopring is probably overvalued at this point.
Loopring has shot up dramatically in the past two months since the end of October. For example, on Oct. 27 it was trading for just 38 cents. Then during November, it shot up to a peak of $3.69 per LRC-USD token. Now at $2.02, it is well off of its peak, but it’s still 5.3 times the price where it was at the end of October.
Loopring Investors Could Be In for a Bumpy Ride
Often, when this kind of huge gain occurs, people rush to take their profits. That is what is going on here. Loopring has fallen 45% from its peak price to $2.02.
However, given its very high market cap/TVL ratio I suspect that it could fall at least another 50%. That might give it a 2.5 times ratio, which might be more in line with the ratios of other cryptos in the DeFi arena. However, this assumes that its TVL number stays level.
As a result, investors should probably stay clear of this highly volatile and speculative cryptocurrency. They should at least wait until there is some sort of logical basis to invest in it. Right now, I cannot see one. Its market cap is simply too high compared to the underlying TVL in the cryptocurrency.
If the market cap/TVL ratio falls at least 50% to 2.5 that might give investors a basis to make an investment. Again, this assumes the TVL number remains level.
Which is doubtful.
Where This Leaves Loopring Going Forward
Consider this, let’s say that Loopring’s TVL falls 50% from $518.8 million to just $259.4 million. If investors are going to wait until Loopring’s market cap is only 2.5 times of that TVL, the market value has to drop from $2.68 billion to just $648.5 million.
Therefore, that implies that Loopring will drop by 75.8% (since 648.6 million is just 24.2% of the value of $2.68 billion). This also means that the LRC-USD price will fall from $2.02 to just 49 cents.
So you can see this could be a very bumpy ride for investors in Loopring. Most investors will want to stay away for the time being.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.