At first glance, anybody attempting to make sense of Avalanche (CCC:AVAX-USD) would be forgiven for their confusion. While the cryptocurrency market has proven to be resilient, overcoming many walls of worry over the trailing year, FXStreet.com’s Ekta Mourya warned that the bears might start encircling the AVAX coin.
On paper, the boom in digital assets tied to decentralized finance (DeFi) has encouraged investors to move their funds into this particular category of cryptos. As well, a few months back, the foundation behind AVAX launched the Avalanche Rush incentive program, focused on introducing more applications and assets to its burgeoning network.
Thus, on balance, Avalanche should continue swinging higher. And to be fair, the aforementioned incentive program helped catalyze AVAX to reach its all-time high in late November. But since that peak, the coin incurred a significant correction inline with other cryptos’ volatility. Following a brief spike up around the middle of December, AVAX again looks weak.
Therefore, some observers voiced that Avalanche cannot drop below the $100 level; otherwise, more pain could follow.
On the other hand, FXStreet.com’s Sarah Tran reported a contrasting view from a longer-term perspective. While Avalanche doesn’t look encouraging now, she notes that AVAX could be forming an inverse head-and-shoulders pattern, which has bullish implications. She sees the possibility of a $174 price target (from $106.51 at this writing), setting a fresh all-time high if that were to be the case.
As an outside observer, I don’t know what to make of the contrasting market signals. However, it’s interesting that Avalanche could also, since roughly mid-October of this year, be in the middle of forming a bullish pennant pattern.
If so, AVAX might learn toward Tran’s outlook. Nevertheless, prospective investors should be very cautious.
Fundamentals Might Not Support Avalanche
After introducing more than 16,000 cryptos, you might view the blockchain community as nothing more than a cabal of copy-catters. People already have a tough time navigating the stock market and there aren’t that many choices relative to digital assets. Thus, Avalanche might seem like just another leaf blowing in the wind.
However, the team behind AVAX would beg to differ. For one thing, the Avalanche project has major ambitions: to replace Ethereum (CCC:ETH-USD) as the most popular blockchain for smart contracts. If it’s successful, the Avalanche network would basically represent the backbone of blockchain-based applications.
Now, going after the number-two crypto — and the number-one network for holistic utility — may seem incredibly arrogant until you consider the problem that Ethereum is suffering: high gas prices or network transaction fees. As many other analysts have pointed out, the onerous costs are infuriating ETH users and could be Ethereum’s undoing.
As Coinmarketcap.com mentioned, Avalanche is attempting to solve the blockchain trilemma; that is, the network wants to create a blockchain that is decentralized, secure and scalable. The former two attributes are relatively easy to combine. It’s simultaneously bringing the latter attribute into the mix that has caused problems, such as extremely high fees.
While that’s a problem for Ethereum, the issues present downwind opportunities for Avalanche (and others). Whoever can bring this digital trinity to the forefront could replace Ethereum, boding very well for the rival’s valuation.
Unfortunately, these technological coup d’états are easier said than done. But I think a more critical issue is that the high gas fees for Ethereum (CCC:ETH-USD) may be a reflection of ETH’s demand profile.
In other words, if something is cheap, it’s usually because the underlying product or service is skimping out somewhere.
Trilemma as an Economic Problem
It’s just my hypothesis so feel free to dismiss it. But it’s possible that the blockchain trilemma is not really a function of technical vulnerabilities but rather economic realities. For instance, many people complain that real estate in the metropolitan areas of California is extremely expensive. They will also point out that you can buy bigger, better homes in other states.
They’re absolutely right. But real estate also has a trilemma problem.
For housing valuation, you must consider stability, viability and desirability. How safe is the neighborhood, what is its economic projections and do people want to live there? Many places in California check off all three boxes. But the tradeoff is that you’re going to pay a heck of a lot more money than buying a home in Gap Mills, West Virginia.
You’re not going to pay Gap Mills prices in Beverly Hills — it’ll never happen.
And I think that’s the core dilemma with Avalanche (or any other would-be Ethereum killer). You’re paying high fees because Ethereum is the California of blockchains. Which begs the question, what’s the equivalent of Avalanche? It’s definitely not the West Virginia of blockchains but it’s at least a few steps behind California.
From what the market is saying, AVAX could be the Oklahoma of blockchains: plenty of promise but also plenty of work.
On the date of publication, Josh Enomoto held a LONG position in Ethereum. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.