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A few days ago, Messari published a report analyzing the demand for security as it relates to crypto assets.
The analysis is based on a previous model, Expected Demand for Security Model (EDSM), according to which the key driver for the price of a native blockchain asset is precisely the demand for security from all present and future infrastructure, applications, assets and users on its network.
According to this model, other metrics such as total value locked (TVL), maximal extractable value (MEV), revenue, productivity, and narrative are useful but to a lesser extent than security.
This model predicts that the demand for security grows as potential new use cases are unlocked, thus creating opportunities for new users to arrive.
The impact of security on the price of crypto according to Messari
This demand for security would have an impact on the market value of the native assets of individual blockchains, but the report released a few days ago adds that it depends on the applications, the users using them, the asset itself, the infrastructure and the network.
So not only does the demand for security vary from crypto to crypto, but it also affects the price differently depending on the native cryptocurrency being considered.
Analyzing some specific cryptocurrencies in detail, Messari’s report concludes that from this point of view Ethereum would be underpriced compared to younger ecosystems such as Avalanche and Solana.
In contrast, cryptocurrencies from these relatively recent projects would be priced more aggressively due to the growth phase of their ecosystem.
Even TRON at this time would be undervalued in this respect, as it has been around for quite some time now and has now been amply proven to perform well.
What Messari seems to be suggesting is that during the early growth phase of a crypto project the price of its native cryptocurrency might be overpriced, until the moment it has demonstrated that it can guarantee high levels of security.
It also seems to mean that this could be the main dynamic behind the price performance of the various native cryptocurrencies of blockchains. Indeed, given that the cryptocurrencies that have now proven over time to be more secure also seem to be the most undervalued, it is possible that the emergence of new projects resulting in the overvaluation of their native cryptocurrencies could somehow drain capital from those that have been in existence the longest.
Speculation vs investment
Underlying this phenomenon could be speculation.
In fact, many speculators are not interested in making gains over the long term, but are instead more likely to look for the “big score” by investing in projects that have apparent great potential but have not yet exploded.
Therefore, they tend to prefer those cryptocurrencies that could give significant returns especially in the short or medium term, forgetting about those that have already made a splash by now.
Given that crypto markets are still very speculative, with more speculation than actual investment, this phenomenon is particularly significant and evident.
For example, Solana in recent months has amply demonstrated that its security levels are still a long way from those of well-established projects such as Ethereum, but SOL’s price remains about ten times higher than its pre-bubble price.
In contrast, the current price of ETH is only just over four times higher, and that of Bitcoin even less than three times higher.
There would therefore be a widespread overvaluation of the market value of native cryptocurrencies of projects that have not yet proven to be secure, and an undervaluation of those that have now amply demonstrated that they are secure.
The cause may be speculators’ preference for newer projects with greater potential for growth over those that are now established and seemingly less likely to make new booms.
On the other hand, projects that have not yet proven to be safe also inevitably have a high level of risk.
What was striking in the past few years was the case of IOTA, for which there were enormous expectations about the project, and which instead then plunged into the abyss precisely because of serious safety problems.
So speculators tend to prefer riskier projects because they hope to make more money from them, but it is not clear whether they are aware of the greater risks they are taking, or not.
Messari’s indications
Nevertheless, Messari’s report suggests that developers of crypto projects should focus on applications, development and, of course, users, and not on speculation.
In fact, in the long run, any lack of security brings big problems to crypto projects, since according to Messari, security is a determining factor in their success.
The goal should be to increase concrete use cases, thus also increase the demand for security that would end up adding value to the base level, i.e., the native cryptocurrency. That is why he also suggests working in order to achieve a harmonious relationship between applications, layer 2 solutions and layer 1.
Messari: the underestimation of security in crypto analysis
Looking at the sentiment in the markets, security does not seem to be one of those features that is taken most into account by investors, and especially speculators.
A lot depends on the time horizon that investors and speculators set as a goal within which to make gains.
Long-term investors also value security among the characteristics that a crypto project must have in order to survive and thrive.
Speculators, on the other hand, do not care about long-term survival, but only about trivial market performance over the short or at most the medium term.
As speculators are probably the majority in crypto markets, sentiment about security does not emerge as particularly relevant, although security itself is very relevant in the long run.
The exemplary case of IOTA should again be cited, since doubts about its security had been circulating long before it had those serious problems that scuttled the project.
At the time, speculators tended to be unconcerned about these risks, hoping simply that the price would surge at some point so that they could sell and collect capital gains.
This was not the case, and both speculators and investors in MIOTA (IOTA’s native cryptocurrency) lost out at some point.
On the other hand, Messari suggests that even with regard to well-established cryptocurrencies, such as Ethereum, Tron, or Bitcoin itself, security is an undervalued feature, as their market value turns out to be lower in proportion to that of younger projects, such as Avalanche or Solana, which still have everything to prove in this respect.