How to Invest in Crypto Layer 1 Networks

What Layer 1 Networks Are

A Layer 1 (L1) network is a base blockchain that processes and finalises transactions on its own native infrastructure without requiring a separate underlying chain for security. Bitcoin and Ethereum are the two dominant L1s by market capitalisation and network effect. Solana is the third-largest established L1, with a significantly different technical architecture prioritising throughput.

The defining characteristic of an L1 is that it provides its own consensus mechanism: the rules by which the network reaches agreement on the valid state of the ledger. This is the foundational layer of the blockchain stack. Everything else, from smart contracts to DeFi protocols to Layer 2 scaling solutions, is built on top of a functioning L1.

Understanding the difference between an L1 coin (the native asset of a base chain) and a token built on that chain is fundamental to portfolio construction. The coin versus token distinction matters here: when you buy Ether, you are investing in the economic utility of the Ethereum L1 network itself, which is a different investment thesis to buying an ERC-20 token that runs on Ethereum but is issued by a specific protocol.

 

The Investment Thesis for Layer 1 Assets

Investing in an L1 asset is a bet on the long-term adoption and utility of that network as a platform. If the network processes more transactions, hosts more applications, attracts more users, and accumulates more total value locked over time, demand for the native asset (which is required to pay gas fees and participate in staking on most L1s) should rise.

The L1 investment thesis has several components. The fee revenue thesis: as network usage grows, fees paid in the native asset increase, creating economic demand for the asset. The staking thesis: on proof-of-stake L1s, native assets must be locked as staking collateral by validators, reducing circulating supply while demand grows. The store of value thesis (applicable specifically to Bitcoin): the 21 million cap and halving mechanism create engineered scarcity that, combined with growing adoption, drives long-term price appreciation.

The Bitcoin as digital gold thesis is the most established L1 investment thesis. Bitcoin is not a smart contract platform; it is primarily a store of value and settlement network. This simplicity is both its limitation (no programmability) and its strength (maximum security through focus and decentralisation). For Australian investors building a long-term crypto portfolio, Bitcoin as the L1 anchor is the most conservative and most historically validated starting point.

The Capital Nexus newsletter covers Layer 1 analysis, network adoption metrics, and investment frameworks for Australian crypto investors each week: Capital Nexus Newsletter.

 

Bitcoin as the Core L1 Holding

For most long-term crypto investors, Bitcoin is the foundational L1 holding. The investment case rests on several pillars: the longest track record of any crypto asset, the strongest network effect in terms of security and liquidity, the most widely held distribution (over 100 million estimated holders globally), the growing institutional adoption through ETFs and corporate treasuries, and the fixed supply enforced by the Bitcoin halving mechanism.

Bitcoin does not require evaluation in the same way as competing L1s. The question is not whether Bitcoin will be displaced as the dominant store of value in crypto; the question is how much of the portfolio to allocate to crypto and specifically to Bitcoin within that allocation. The Bitcoin versus altcoins framework covers the strategic decision between concentrating in Bitcoin and diversifying into other L1s and altcoins.

A core-satellite portfolio strategy in crypto typically designates Bitcoin as the core holding (50-70% of crypto allocation for conservative investors, potentially higher) with other L1s and altcoins as satellite positions. This approach captures Bitcoin upside while allowing targeted exposure to higher-risk, higher-potential assets in the satellite sleeve.

 

Ethereum as the Smart Contract L1

Ethereum is the dominant smart contract platform and the L1 most associated with programmable blockchain. The Ethereum investment thesis centres on network effects in the developer ecosystem: more developers building on Ethereum means more applications, which means more users, which means more demand for ETH as gas and staking collateral.

Ethereum hosts the largest portion of global DeFi activity, the most NFT volume, and the most significant portion of total value locked across all networks. The shift to proof-of-stake reduced Ethereum issuance dramatically; combined with fee burning through EIP-1559, Ethereum has become deflationary (net supply reduction) during periods of high network activity. This tokenomics change strengthened the Ethereum investment case for investors focused on supply dynamics.

The relationship between Ethereum and its Layer 2 networks is important for L1 investors. L2s (like Arbitrum, Optimism, and Base) scale Ethereum by processing transactions off the main chain while inheriting Ethereum security. L2 growth actually strengthens the Ethereum L1 thesis by increasing the overall Ethereum ecosystem without requiring competitors to displace it. Investing in both the L1 (ETH) and selected L2 tokens is a common approach for investors with conviction in the Ethereum ecosystem.

 

Evaluating Alternative Layer 1 Networks

 

Technical Architecture

Each L1 makes different trade-offs in the blockchain trilemma of scalability, security, and decentralisation. Solana prioritises throughput at the cost of hardware requirements for validators, which affects decentralisation. Networks that prioritise maximum decentralisation (Bitcoin, Ethereum) sacrifice throughput. Understanding these trade-offs is essential for evaluating whether a competing L1 has a durable advantage or a temporary one that can be replicated by more established networks.

 

Developer Activity and Ecosystem

The best leading indicator of long-term L1 value is developer activity: the number of active developers building applications on the network. Networks with large, growing developer ecosystems create more applications, which attract more users and more total value locked. Developer activity is more reliable than marketing claims about technology: it reflects actual investment of time and capital into the ecosystem by builders.

 

Network Revenue and Fee Structure

An L1 that generates meaningful fee revenue has a proven economic model. The fundamental analysis framework applied to crypto uses fee revenue as the equivalent of business revenue: a network generating tens of millions of dollars in annual fee revenue has real economic activity, not just speculative interest. The ratio of market capitalisation to fee revenue (the crypto equivalent of a price-to-earnings ratio) helps assess relative valuation across different L1 networks.

 

Risks of Investing in Layer 1 Networks

The primary risk specific to alternative L1 investments is competitive displacement. The L1 space is highly competitive, and the history of crypto includes multiple networks that were dominant at one point and later declined significantly (Ethereum Classic, EOS, TRON in its earlier form, Cardano relative to early expectations). Assessing whether a competing L1 has genuinely solved a problem that Ethereum and Bitcoin cannot, or is simply offering a temporary performance advantage, is the central analytical challenge.

Technology risk is also present. Smart contract blockchain networks have suffered exploits related to consensus mechanism vulnerabilities, client bugs, and network outages. Solana has experienced multiple significant network outages. Evaluating the engineering quality of the team and the track record of network reliability is part of due diligence for any L1 investment.

Regulatory risk affects all crypto assets but may affect alternative L1s more acutely if regulators classify the native asset as a security. Bitcoin and Ethereum have relatively clear regulatory status in most major jurisdictions; many alternative L1s do not. The legal risks of crypto investing in Australia and the global regulatory environment are relevant considerations for alternative L1 allocation decisions.

 

What Happened to the Last Cohort

Every cycle produces a group of Layer 1 networks positioned as the faster, cheaper alternative to the incumbent. Assessing today’s contenders is much easier with the base rate from previous cohorts in front of you, and that base rate is rarely quoted.

The pattern repeats with unusual consistency. A new network launches with better benchmark figures, attracts developers with an ecosystem fund, posts impressive early activity, and reaches a large valuation. A cycle later, most of the activity has gone, the fund has been spent, and the network persists with a fraction of its peak usage and a token well below its peak price. A small number break out of that pattern. Most do not.

The reason is that the thing being competed for is not throughput. It is developers, liquidity and users, and all three are sticky in the same direction: developers build where the tools and users already are, liquidity concentrates where liquidity already is, and users go where the applications they want already run. A network can be technically better and still lose, because the incumbent’s advantage is a network effect rather than a benchmark.

Three things follow for anyone assessing an alternative L1 today.

Separate paid activity from organic activity. Early usage is frequently bought with incentives, and the honest question is what remains when the programme ends. Fee revenue paid by users who are not being rewarded for generating it is the signal; total value locked and transaction counts are the easiest figures to inflate.

Treat the benchmark claim as the least informative thing about the network. Throughput comparisons have been the headline of every cohort, and they have had almost no predictive power over which networks survived.

Ask what would make a developer move. If the answer is only “lower fees”, note that fees have fallen everywhere, including on the incumbent through Layer 2 networks, which removed most of the original reason to migrate.

None of this means alternatives cannot win. It means the prior should be sceptical, position sizes should reflect a low historical success rate, and the evidence that matters is retained organic usage rather than launch-period metrics. Position sizing is where a low base rate gets expressed, and researching altcoins covers the wider checks.

Sizing L1 Exposure in a Portfolio

For most Australian crypto investors, the appropriate L1 allocation concentrates significantly in Bitcoin (and to a lesser extent Ethereum) as the most established, most liquid, and lowest-risk L1 options. Alternative L1s carry more risk and require more active monitoring; they are appropriate as smaller satellite positions rather than core holdings.

A conservative L1 allocation within the crypto sleeve of a balanced portfolio might be 60-70% Bitcoin, 20-25% Ethereum, and 5-15% split across one or two alternative L1s. A more aggressive allocation might reduce Bitcoin to 40-50% in favour of higher Ethereum and alternative L1 exposure. The total crypto allocation within the broader investment portfolio is governed by the how much portfolio in crypto framework and overall risk management approach.

Position sizing for alternative L1s should reflect their higher risk profile. Using the 1% risk rule and position sizing principles ensures that no single L1 position creates excessive portfolio risk. The portfolio diversification strategy for L1 exposure should also consider that Bitcoin and Ethereum prices are highly correlated during market-wide sell-offs, meaning the diversification benefit of holding multiple L1s is limited during stress periods.

For investors who want to invest in the Layer 2 ecosystem specifically rather than only the L1, the Layer 2 investment guide covers the investment thesis, evaluation framework, and risk profile of L2 tokens. For broader altcoin exposure beyond L1s, the guides to DeFi token investing and AI crypto token investing provide sector-specific frameworks.

Shepley Capital Black Emerald membership provides L1 network analysis, ecosystem research, and portfolio frameworks for serious Australian crypto investors: View Membership Options.