Forget Hyperliquid: High Beta, Low Conviction

Hyperliquid (CRYPTO: HYPE), the native token of the Hyperliquid decentralized exchange (DEX), has been one of the market's hottest and most volatile cryptocurrencies. It was launched on Nov. 29, 2024, at an initial price of $3.20 per token, but it's now trading at about $41. Let's see why this little token skyrocketed -- and why it's a dangerous play for most investors.

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Why did Hyperliquid's price soar?

Before Hyperliquid was launched, it was already actively used to trade perpetual futures contracts (perps) on its DEX. Hyperliquid also initially distributed its tokens via an airdrop to its DEX traders. While some of those recipients immediately sold their tokens for a profit, a larger share held onto them. As a result, the initial demand for Hyperliquid tokens outstripped supply, driving up its price and attracting even more crypto traders.

At the same time, Hyperliquid's DEX was growing in popularity as a faster, lower-latency alternative to other DEXs, such as dYdX. Most of its trading activity was driven by derivatives, and liquidations on large short positions amplified the token's upward moves.

Simply put, Hyperliquid wasn't just another hyped-up meme coin. Its low float, real trading demand, and its DEX's derivative-driven market structure all drove its price higher. Hyperliquid's real-world applications made it less speculative than other altcoins that couldn't be valued by their utility, and it has a tight circulating supply of 255 million tokens (out of 955 million tokens).

Why isn't it worth buying?

Hyperliquid has generated some massive gains for its early investors, but it's too risky for three simple reasons. First, the Hyperliquid DEX is a new Layer 1 (L1) blockchain that hasn't yet stood the test of a true crypto winter. Second, its rally over the past one and a half years has largely been driven by its tight supply rather than longer-lasting catalysts.

Lastly, Hyperliquid's future is entirely pinned to a single trading platform and a single product category: perp trading. Therefore, if Hyperliquid's trading volume declines in its DEX -- either due to competition from other platforms or macro headwinds -- its token will fizzle out.

That makes it much riskier than Bitcoin (CRYPTO: BTC), which is broadly adopted as a neutral digital commodity, and Ethereum (CRYPTO: ETH), which is used across multiple ecosystems. So while Hyperliquid might have a brighter future than some of the market's more speculative meme coins, it's still a high-beta, low-conviction play that could easily burn greedy investors.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Hyperliquid. The Motley Fool has a disclosure policy.