In a few years, you will wish you had bought this undervalued cryptocurrency

There’s no denying that the past six weeks have been brutal for high-risk, high-reward cryptocurrencies. Given the crypto “flash crash” at the beginning of August, many of them are now down 30% to 50% on the year.

The key, of course, is identifying which of these cryptocurrencies have been unfairly knocked down in price. In theory, some of them should be trading at attractive valuations right now. And that’s why I recommend it Link (BUNDLE 2.86%) as a significantly undervalued cryptocurrency.

What went wrong with Chainlink?

On the surface, the situation looks dire for Chainlink. The crypto is down 30% on the year. Things were looking better in July when Chainlink reached a price of $15. But then the bottom fell out in August, with Chainlink dropping to just $9.

In part, this helps explain why Chainlink is trading 80% below its all-time high of $52 in May 2021. However, you can’t lay all the blame at the feet of the August “flash crash.” Something seems to be fundamentally wrong with Chainlink, which has failed to gain traction among investors for more than two years despite being the world’s preeminent data oracle blockchain network.

This is likely the result of the global backlash against decentralized finance (DeFi) that has occurred since the cryptocurrency market crash of 2022. Many of the biggest “explosions” of the crash — such as the spectacular collapse of the cryptocurrency exchange. FTX and the implosion of the Terra stablecoin — were the result of decentralized funding gone wrong.

Chainlink’s core functionality, which relies on providing real data to smart contracts, means that it has always been susceptible to the ups and downs of DeFi, given that smart contracts are the building blocks of decentralized finance. Other big-name DeFi players have also declined over the past three years. For example, Uniswap (UNI -0.36%) is down 85% from its 2021 all-time high.

Chainlink needs a new investment thesis. If it can provide one, then it could start to gain traction with crypto investors again.

Asset Tokenization Trend

And here comes a major financial trend known as tokenization of real-world assets (often abbreviated as RWA). Simply put, asset tokenization involves the migration of traditional financial assets (such as stocks and bonds) to the blockchain. Asset tokenization has the potential to introduce more operational efficiencies and could provide a dramatic boost to liquidity for some relatively illiquid assets (such as real estate).

The Boston Consulting Group believes that real-world asset tokenization could be a $16 trillion market opportunity by 2030. Taking a more conservative view, McKinsey & Co. believes it could be a $2 trillion market opportunity.

As a result, some top names on Wall Street are behind this trend. For example, BlackRock (BLK -0.76%) CEO Larry Fink believes that tokenizing real-world assets could fundamentally transform the world of finance. In fact, he is even more bullish on asset tokenization than he is on crypto exchange-traded funds (ETFs).

Image source: Getty Images.

The good news here is that Chainlink could play a significant role in the long-term growth of real-world asset tokenization. It emerged as a thought leader in this space and created a new platform for the transfer of tokenized assets across multiple blockchains. Moreover, Chainlink has already partnered with a number of high-profile names in the financial world, including payments network Swift and Depository Trust and Clearing Corp. (DTCC), in proof-of-concept projects.

When you do some back-end calculations, you can immediately see why Chainlink could be significantly undervalued. If we assume that Chainlink can capture just 1% of a $1 trillion market opportunity, that’s $10 billion. At the moment, Chainlink has a market cap of $6.5 billion, so there is a chance for its value to increase by 250% if it can become even a minor player in this space.

Take the long view on Chainlink

Real-world asset tokenization is a financial trend that may take years, if not decades, to unfold. But it’s almost certain to go ahead in some shape or form, given the backing it has on Wall Street. The trend will most likely take off with financial products — such as mutual funds and bonds — that make the most sense for conversion to digital tokens.

Remember: cryptocurrency remains a volatile and risky market, so it’s important to do your due diligence, especially with a trend as new as asset tokenization. I like what I’m seeing with Chainlink, even though its recent market performance has been ugly. In a few years, you might wish you had bought this undervalued cryptocurrency.