Is Avalanche About to Have Its Biggest Year Yet?

AVAX (CRYPTO: AVAX), the native token of the Avalanche blockchain, reached its all-time high of $147.50 on Nov. 21, 2021. But today, it trades at about $7. Let's see why this hot altcoin fizzled out, and if it can warm up this year as a few new catalysts kick in.

What sets AVAX apart from other altcoins?

Avalanche was launched in 2020 as a proof-of-stake (PoS) blockchain that supported smart contracts (for developing decentralized apps) and staking (which allowed investors to lock up their tokens to earn interest-like rewards). It was created as a faster, cheaper, and more customizable alternative to Ethereum (CRYPTO: ETH).

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Unlike Ethereum's Layer-1 blockchain, which operates on a single layer, Avalanche runs three interoperable blockchains that handle specific jobs. Its C-Chain (Contract Chain) executes smart contracts and is fully compatible with Ethereum-friendly apps. Its X-Chain (Exchange Chain) handles the creation, management, and trading of digital assets (including AVAX). Its P-Chain (Platform Chain) coordinates validators, tracks active staking, and enables developers to create custom blockchains that are isolated from the rest of the network.

So instead of squeezing every transaction through a single clogged pipe, Avalanche splits them across multiple pipes, allowing the network to scale horizontally. Several high-profile institutions -- including Citi, SkyBridge Capital, and FIFA -- have already run pilots or built platforms using Avalanche's infrastructure. The SEC and CFTC also classified AVAX as a digital commodity rather than a security, and the SEC approved its first U.S. ETFs this year.

Why did AVAX plummet?

AVAX initially attracted significant attention as a potential "Ethereum killer". But as of this writing, it only supports a few hundred developers. Ethereum remains the world's largest PoS blockchain with nearly 32,000 developers as of last October. Solana (CRYPTO: SOL), which is faster than Ethereum and Avalanche, ranked second with more than 11,500 developers.

As developers shunned Avalanche, its token attracted fewer investors. Rising interest rates in 2022 and 2023 also drove investors away from smaller altcoins like AVAX.

Moreover, AVAX's rally in 2021 was amplified by leverage and yield-farming incentives. But when its price plummeted, leveraged liquidations occurred and exacerbated that decline. Its automated protocols then dumped more AVAX into circulation to cover those bad debts.

Could AVAX recover this year?

AVAX's bulls expect three catalysts to kick in this year. First, its recent Avalanche9000 (Etna) upgrade will reduce its transaction costs by up to 99%. Second, more financial institutions are using Avalanche's blockchains to tokenize bonds, real estate, and real-world assets (RWAs). Lastly, AVAX's new spot ETFs and futures contracts on the Chicago Mercantile Exchange (CME) could attract more attention from retail and institutional investors.

I believe those irons in the fire will limit AVAX's downside this year. Still, I don't think it will skyrocket unless it addresses the competitive pressure from Ethereum, Solana, and other faster PoS blockchains. I'd keep an eye on AVAX, but I wouldn't get too excited about it yet.

Citigroup is an advertising partner of Motley Fool Money. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Avalanche, Ethereum, and Solana. The Motley Fool has a disclosure policy.