Will the Metaverse Catch Down to the Internet?

Steve Strazza
December 9, 2021

From the desk of Steve Strazza @Sstrazza

Cryptocurrencies are just more stocks.

In the stock market, we have software, internet, homebuilders, and gold miners. The powers at be do their best to classify all the publicly listed companies into industry groups. This allows us to break them into various baskets and analyze them at the index level.

In crypto markets, there are tokens focused on decentralized finance, the metaverse, smart contracts, and more. But unlike the stock market, the crypto asset class is still in its infancy. As such, there is no industry standard for how to group these different tokens based on what they do.

In our analysis, we'll often discuss what some of these tokens do. We use some indexes that are offered from data providers, as well as create custom indexes of our own as we see fit.

The reason we do this is for information. Aggregating tokens into groups and analyzing them as a whole allows us to glean insights about the strength or weakness of different areas of the crypto market.

One such group that's stood out as a leader all year is multimedia and gaming tokens. These are the cryptocurrencies that are fueling the rise of the metaverse.

VanEck recently took a shot at classifying 200 of the largest tokens into crypto subsectors. Here's what that looks like:

Before we dive into the metaverse, let's be clear on this: These classifications are never going to be perfect.

For example, why aren't names like Sandbox on this list? Isn't that where all the digital land sales have been taking place lately? I'm sure there's a good argument to be made for this. And I'm also sure there's a good reason VanEck didn't include it. What is or isn't included in each basket is not the point.

Remember that Google, Amazon, and even Facebook -- or Metaverse itself -- are not considered technology stocks by the widely accepted GICS industry standards we use in the stock market. Categorizing stocks is not an exact science. There are a lot of gray areas. And the same is true for cryptocurrencies.

But doing our best to categorize them allows us to segregate these assets into groups and get a feel for their collective price behavior. Let's do that now.

The metaverse or "video game" cryptos have been the standouts during the back half of this year, so I was eager to throw them into an equal-weight basket and chart their performance. Here's what that looks like:

After breaking out to fresh highs just a few months ago, price just undercut its breakout level and is now back beneath the first-half highs. Notice how momentum has really trailed off and diverged since October. This kind of lackluster momentum at new highs is usually a solid warning sign.

As we mentioned earlier this week on the crypto blog, there are tokens we want to buy, tokens we want to sell, and tokens we want to stay away from. While the majority fall into the latter two buckets these days, there are always pockets of strength. Metaverse and gaming tokens have been a clear leadership area in recent months and quarters. Seeing this basket of related cryptos fail to hold its new highs and resolve back into its former range is not a positive development for the space.

If the top-performing cryptocurrencies can't sustain their breakouts, what does this suggest about the weaker names? Maybe we're just seeing some rotation and another group picks up the slack. Even so, it's never a good thing to see new highs fail. And when the leaders begin to falter -- like they are now -- we always want to pay extra close attention.

A few nights ago, I was listening to a crypto fund's investor update and the manager pointed out the strong relationship between growth stocks and cryptocurrencies. He was suggesting that Bitcoin and its peers are likely to remain under pressure and continue consolidating until the volatility in growth stocks passes.

To take his idea one step further, it's practical to think there's also a relationship between internet stocks and metaverse tokens on a more granular basis. This is the whole web 2.0 versus web 3.0 theme that's taken financial media by storm since this fall.

Here's one way to visualize the price behavior between the two groups. This is our metaverse index overlaid with the ARK Internet ETF $ARKW:

While we don't have enough history to draw any real conclusions on the intermarket relationship between the two, it's hard to ignore the fact that they've been trending together since the spring. This makes sense. After all, stocks and cryptos are both risk assets.

Now let's focus on the right-hand side of the chart. Notice how the price action between these two groups has diverged significantly over the past month as internet stocks have sold off aggressively? While the metaverse index has made new multi-month lows recently, the damage to these cryptocurrencies is nothing close to what has taken place in the stock market.

This raises the following questions...

Will the metaverse catch lower and end up looking more like internet stocks in the near future?

Or is the resilience from these cryptos telling us that internet stocks are likely to repair the recent damage and catch higher?

Another option is that we're simply overthinking this relationship and there's nothing to see here. That could always be true too.

In our opinion, it's still too soon. We don't have enough data to devise some grand intermarket thesis here, so it would be irresponsible to give this too much weight at all. On the same note, it makes sense to think there is a real relationship here. These assets operate in the same industry. They share similar characteristics, many of the same catalysts drive their performance, and the investors that participate in these markets are only going to overlap more and more as time goes on.

The bottom line is that seeing new highs fail in one of the strongest crypto subgroups is not bullish. When we add the fact that their peers in the stock market have endured some serious damage of late, there is even more reason to approach the space with caution right now.

Can Axie Infinity $AXS, Decentraland $MANA, and other metaverse tokens rip right back to fresh highs from here? Of course. But we'd be much more comfortable making that bet in an environment where their new highs were holding and comparable assets were not selling off.

What do you think? Do you prefer internet stocks over metaverse tokens? Are they really that different?

Allstarcharts Team.

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