‘Crypto Doesn’t Care About Fundamentals.’ Is That Sustainable?

A tiny fraction of cryptocurrencies from the last bull market reached all-time highs this cycle. So, what are they really worth? And why?

article-image

share

key takeaways

  • Cash flows and revenues may be bearish for digital assets, as they place caps on their potential valuations in line with traditional companies with far slower growth trajectories
  • “The nature of crypto is that it cares about growth potential,” one portfolio manager said

Most cryptocurrencies die. 

It’s well known among those who’ve witnessed more than one cycle. Hundreds, if not thousands, of tokens surge, alongside bitcoin and ether, but rarely — or, often never — reclaim all-time highs.

Just 26 of the top 200 digital assets by market capitalization went on to set new highs after the peak of the last bull market in January 2018.

Half were layer-1 tokens, such as litecoin, ether and cardano. Five were governance tokens conferring voting rights powering decentralized finance protocols, such as Gnosis and district0x.

It’s not a rosy picture. But the outlook deteriorates further in denominating how much a cryptocurrency is worth in bitcoin terms, instead of the customary dollar. 

Switch to bitcoin pricing, and only six of those cryptocurrencies exceeded their previous peak over the same time period: dogecoin, binance coin, chainlink, decentraland, vechain and enjin coin.

A small selection of winners, representing just 3% of the top 200 digital assets. There’s no clear trend linking them, either. 

Dogecoin is literally a “to-the-moon” self-parody, while layer-1 token vechain is powered by the “blockchain for supply chains” meme. 

Binance coin boasts some staying power buoyed by enticing burn mechanisms. Chainlink has, arguably, more utility than most, supporting a stretching ecosystem of data feeds and price oracles, which connect various blockchains and smart contracts to execute transactions without third-party validators.

Decentraland and enjin coin’s success, industry participants say, can be explained in part by the metaverse brouhaha and blockchain-powered gaming dapps (decentralized applications) expected to soon grow in popularity. 

Such spurious connections suggest most digital assets inevitably crescendo in a bull market, but quickly go kaput once the hype fades — destined to never revisit their glittery glories to render top-buying bagholders whole.

So, how does one equitably price digital assets? What is crypto worth, really? 

Considering the top 200 coins from the previous bull market are down more than 90%, in dollar terms, from all-time highs, how and why do markets decide how low they go?

Cash flows are bearish for digital assets

Token Terminal is one platform pitching ways to figure it all out. It offers a range of metrics that aim to compare various protocols, echoing traditional company valuation methods in price-to-earning ratios and total revenues.

“Looking backwards, especially comparing the 2018 bull market to what we witnessed in 2021, it’s very difficult to really build any sort of thesis for why certain tokens succeed,” Oskari Tempakka, Token Terminal’s growth lead, told Blockworks.

The platform gauges protocols that generate cash flow alongside blockchain startups that operate entirely on-chain. It wasn’t possible to value protocols based on those factors during the last bull market, Tempakka said, as it was only halfway through 2020 — during DeFi summer — when the first applications built on Ethereum actually started generating positive cash flows to the protocol. 

The conclusion: Analyzing the highest-flying cryptocurrencies from the last bull, whether dollar valuation or bitcoin, on a fundamental basis is essentially impossible.

Still, half of the top 200 digital assets which recorded fresh all-time highs throughout the most recent cycle were layer-1 assets.

Layer-1s, the backbone of digital assets, outperformed this time around on the back of healthy name recognition and the efforts of legions of developers, as well as market makers and deep-pocketed traders favoring assets with more liquidity. 

There has to be a sizable market capitalization for a $1 billion-plus hedge fund to bother trading an asset — or else move the price needle so much in building a long or short leg that profits become obsolete. 

“I’d say the thesis behind layer-1s is that you’re essentially building an infinitely scalable settlement layer for any other applications being built on top,” Tempakka said. “It’s easier to build a more bullish thesis without a valuation cap than it is for a pure application — that’s how we’re looking at layer-1s right now, at least the ones that actually are able to generate cash flow and capture that value.”

Cash flows are actually bearish as they relate to trying to put a price tag on cryptoassets. They’re not bearish in and of themselves as a metric, but industry participants argue that crypto’s rapid growth trajectory demands a different framework. 

Applying convention fundamental stock-picking techniques would never work with venture capital-backed startups, they say — so why should it work when it comes to digital assets?

If it’s possible to value a cryptoasset based on conventional fundamentals, then a relatively apples-to-apples comparison to a real-world company ought to be possible, too. 

“Crypto doesn’t care about fundamentals, traditional sense of cash flows,” Hassan Bassiri, vice president of portfolio management at digital asset manager Arca, told Blockworks. “The nature of crypto is that it cares about growth potential.”

Added Bassiri: “Say something like Aave or Yearn is trading at a 1,000 price-to-sales ratio but its fintech competitor neobank is trading at 200 — is the cryptocurrency worth a 5x multiple on that?”

Tapping cash flows to value digital assets — just like an Amazon or a Tesla stock — implies they can’t go up forever, a notion akin to kryptonite for crypto die-hards. 

The result: a volatile, topsy-turvy market that prioritizes social sentiment and glamor over Econ 101.

Markets driven by fundamentals are on the horizon

If looking to the past doesn’t illuminate how traders appraise digital assets, who’s to say which projects out of a sea of many hopefuls have a realistic shot at outlasting the bear market?

One cause for optimism, according to Bassiri: More and more protocols are working to tie real-world use cases to on-chain yield. Case in point: MakerDAO’s recent move to float a $100 million loan denominated in the token DAI to 151-year old Huntingdon Valley Bank, with the potential to increase the credit revolver to a staggering $1 billion over 12 months. 

Token Terminal’s Tempakka is vying for the prospects of a future in which the majority of top tokens are driven by measurable fundamentals — and they must generate sustainable cash flows to power that model. 

“If you’re a traditional private equity investor, you’re getting to a stage where you can look at the revenue data of crypto protocol and actually build a strong investment thesis around it,” Tempakka said. 

Loading Tweet..

In other words, it’s slowly — then, perhaps, all at once — becoming possible to rationalize crypto plays on something more tangible than hype or belief. 

Many an institutional digital assets-focused trader would argue that world is already here. Crypto hedge fund firms build complicated quant models around social sentiment and ebbs and flows in trading volumes. 

But those players are often the first to admit those convictions that construct strategies change rapidly in cryptoland. Fundamental metrics are, finally, becoming a powerful standby for sophisticated investors — consider the rise of discretionary strategies — but, for now, they’re just one piece of the overall puzzle. 

The remainder is filled in by deep research probing the ins-and-outs of developer teams and their abilities, or lack thereof, to meet the lofty, winding road that lies before them.


Don’t miss the next big story – join our free daily newsletter.

Tags

Upcoming Events

Hilton Metropole | 225 Edgware Rd, London

Mon - Wed, March 18 - 20, 2024

Crypto’s premier institutional conference returns to London in March 2024. The DAS: London Experience: Attend expert-led panel discussions and fireside chats Hear the latest developments regarding the crypto and digital asset regulatory environment directly from policymakers and experts.

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Top Icon.png

Research

Osmosis thrived in H2 2023 on the back of increased DeFi activity deriving from recently launched Cosmos-related projects and better market conditions. With new value accrual mechanisms for the native token, Osmosis is well-positioned to continue its strong performance in 2024.

/

article-image

Individual cryptocurrencies may well jump in value during the next bull run, but the market overall has pumped less and less every time

article-image

After seeing record trading volumes Monday, IBIT trade volumes soar again as bitcoin price rally continues

article-image

Get over it. Of course Bitcoin will survive. The real question: Which miners will thrive?

article-image

Do Kwon may miss the start of the March 25 trial in the SEC’s case against the former executive and Terraform Labs

article-image

Riot Platforms bought 31,500 more mining machines while CleanSpark has begun operating in Mississippi

article-image

Dencun was activated on all testnets, a blog post Tuesday said