What Should Crypto Investors Should Know About Points Trading

As the bullish sentiment in the crypto marketplace continues to roll forward, even with pullbacks and consolidation causing a pause in upward price movements for bitcoin and ether, the crypto market continues to innovate and deploy new products and services. One such product that has recently attracted investor focus are crypto projects that have deployed over 115 billion points so far. Any product that experiences such rapid growth is worth both additional analysis, and a critical examination; this is especially true in the crypto sector. Bull runs such as the run that has unfolded since the launch of bitcoin spot ETFs can be reminiscent of previous bull markets that helped create many new innovative products, services, and entire organizations.

New products and services, however, are not universally sustainable nor good indications of the health of any asset class. The last bull market, within which bitcoin and other crypto traded at all-time-highs, coincided with the rise of the non-fungible token market, a large number of decentralized finance initiatives, massive growth in staking services, and the rise of FTX. Bull markets in any asset class can obscure faulty business models, allow bad actors to take advantage of overall positive sentiment, and ultimately harm investors.

This is not to say that the crypto point phenomenon is guaranteed to harm investors, but it is definitely worth taking a closer look at these new products. Let’s take a look at a few of them.

What Are Crypto Points

The definition and characterization of crypto points is going to vary from project to project but a working definition is that crypto points are off-chain tokens given to users of a platform or project as a reward for certain activities. Such point rewards are commonly deployed before an airdrop occurs so that users are aware of which specific actions are going to be rewarded, even if the airdrops are not guaranteed. In other words, these points can be compared to rewards points, miles, or other existing offers made by vendors to customers based on usage or other actions.

Several follow-up points that need to be raised include 1) is the issuance of these off-chain points a taxable occurrence, 2) is there a method to verify the total quantity of issued points, 3) does a central repository exist for point recipients to track individual status as well as total holdings like on a permissionless blockchain, and 4) is there a whitepaper or reviewable mapping of how the points are connected to the actions, which in turn are linked to future airdrops? Every project and point issuance system is different, but ambiguity seems to be the dominant trend when attempting to address these items.

Are Points Creating Crypto Volatility

Like every other bull market and rapid upswing in crypto valuations, the rapid rise of the crypto point market has led to trading, secondary markets, and other volatility-driven activities by investors seeking to generate profits in the fast growing space. While not inherently a sign of any unethical activity, traders and the volatility connected with these still-new assets can result in losses and further questions around the stability and business uses of these points.

This pattern builds on previous trends in the marketplace. Specifically, CoinDesk had to shut down its DESK token because traders had set up secondary markets for trading, despite such behavior being in direct violation of the terms of service. Points trading has evolved along similar lines, with the bulk of trading taking place on Whales Market and Pendle Finance. Further complicating these markets are the facts that 1) traders are not always trading for the rights to the points themselves, but oftentimes the tokens that will be issued in connection to the points, and 2) that leverage drives these trading patterns, with some cases of traders achieving 74x leverage in certain cases.

Combining derivative creation in a new asset class with high leverage multiples can create a situation that can leave investors caught short in times of market uncertainty or downturns.

Points Might Repeat Past Mistakes

Another significant concern that crypto investors interested in points should be aware of are the risks that the points market is already showing signs that have existed in previous projects during bull markets. The lack of information available to investors related to issues like total point issuance, redemption ratios for airdrops, or even data connected to what specific actions will drive token issuance create an opaque marketplace. Additionally, the leverage that already exists, combined with the continuous search for yield that has long been an attribute of crypto projects ranging from stablecoins to DeFi has a track record of encouraging increasingly risky behavior.

This is not to say that the points markets are doomed to fail, far from it. Rather, investors should take an objective look at the market trends, what these instruments actually represent, and how to avoid the mistakes of past bull markets.

Crypto points are a fast growing past of the cryptoasset marketplace, but investors should exercise caution to not repeat past mistakes of previous bull markets.

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