Could Buying Hyperliquid (HYPE) Today Set You Up for Life?

Hyperliquid (CRYPTO: HYPE) is a relatively new crypto that launched just over a year ago and quickly shot into the top 20 cryptos by market cap. It is the utility coin for the Hyperliquid decentralized exchange (DEX), which boasts considerable trading volumes and more than 1.4 million users.

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At points, Hyperliquid seemed like it might be one of last year's break out cryptos. It started the year at $24.12 and surged to an all-time high of $59.30 in September. However, it had erased many of its gains by the end of December. It has since recovered some ground, and as of Jan. 28, it was up more than 50% in a previous week and is trading at about $33.43.

Whether being down more than 40% from its high makes it a fading star or a buying opportunity depends on how the crypto market evolves. Hyperliquid relies on both trading and leverage -- so it will suffer if there's a prolonged period of crypto lethargy or reduction in leverage trading. More broadly, Hyperliquid will benefit if more traditional financial markets move on chain and use the platform.

Is Hyperliquid worth the hype?

Perpetual futures (perps), a type of derivative contract, are at the heart of Hyperliquid's success. Investors use them to speculate on the prices of crypto and other commodities without owning the underlying assets, often using leverage.

Unlike traditional futures contracts, perpetual futures don't have an expiration date. They allow traders to open continuous positions, which adds flexibility and reduces costs. Hyperliquid offers leverage of as much as 40-fold. That is higher than many of its competitors and means an investor could multiply $1,000 into a $40,000 crypto position.

Hyperliquid is dominating the decentralized perpetual futures race. According to CoinTelegraph, Hyperliquid accounts for almost 70% of perp daily active users. With more than $8 billion in perp open interest, the total value of active contracts, it is miles ahead of its competitors, per DefiLlama.

Leverage via borrowing is fantastic if markets move the way you hope. But when the wind blows in a different direction, losses can multiply quickly. Plus, lenders demand more collateral in sinking markets and there's a risk of liquidation if you down't have it, in which case you can lose everything. This is what happened on Oct. 10, when a record $19 billion in liquidations shook the crypto market.

In addition to eye-watering leverage, there are a few things that make the Hyperliquid exchange stand out. It is a Layer-1 blockchain, which means it isn't reliant on, say Ethereum (CRYPTO: ETH) or Solana (CRYPTO: SOL) for processing. The chain can handle as many as 100,000 orders per second and there are no gas, or user, fees. Hyperliquid's efficiency could help it take share in stablecoins and other on-chain financial activity, though it is a competitive market.

Regulatory and competitive risks

One aspect of Hyperlink that makes me cautious is that it doesn't have a long track record. The exchange began in 2023 and the coin launched at the end of 2024. If it is to attract more of the decentralized finance market, reliability will be key. It's worth noting that the Hyperliquid API was down for almost a half-hour last summer.

Another concern is regulatory. Hyperliquid does not require know-your-customer (KYC) registration and its terms of service prohibit U.S. residents from using the service. Not only is derivative trading closely regulated, the lack of KYC puts it at odds with anti-money laundering rules.

Regulatory crackdowns could reduce usage significantly. Particularly as people can use VPNs to get around any geo-restrictions. A June article from Unchained Crypto reported that about 25% of its total traffic comes from the U.S.

Finally, while perpetual futures are gaining traction in the U.S., Hyperliquid faces stiff competition. Last year, centralized platforms like Robinhood (NASDAQ: HOOD) and Coinbase (NASDAQ: COIN) rolled out perps for U.S. customers. They may have lower leverage rates and fewer cryptos, but Americans can legally access their services. That's before we consider the other DEXs vying for customers.

Hyperliquid is unlikely to set you up for life

Building wealth long-term rarely happens by betting on just one thing. Particularly one very risky thing. Investing in Hyperliquid could help to diversify your crypto holdings, but only as a small part of your wider investments.

Hyperliquid has a lot going for it and perpetual futures trading remains a core part of the crypto industry. It may well perform well as crypto adoption increases and more transactions move on-chain. That said, it is far from the only player and the regulatory clouds are worrying. If you're looking to build wealth long term, more established cryptocurrencies like Ethereum likely have more utility and carry less risk.

Emma Newbery has positions in Ethereum and Solana. The Motley Fool has positions in and recommends Ethereum and Solana. The Motley Fool recommends Coinbase Global and Hyperliquid. The Motley Fool has a disclosure policy.