“We must beware of needless innovation, especially when guided by logic.”
More Sellers Than Buyers?
On a podcast this weekend, Bridgewater’s Greg Jansen stated that “40% of the US equity market can only survive with new buyers entering the market because they’re not cash-flow generating.”
The host referred to it as a “stunning stat,” and I agree, it sounds scary. But his explanation of how it was calculated didn’t entirely make sense to me — I don’t think companies are obligated to generate cash flow to “offset sellers,” for one thing.
I do think it’s a great metric, though, especially if you can chart it over time: What percentage of the market requires new money to fund itself?
Jansen put a negative spin on the 40% number, saying it’s “near a historic high and right in line with 1999/2000.”
I'm guessing, however, that the 40% refers to the absolute number of stocks, unadjusted for market cap: I’m pretty confident the equities market as a whole is cash-flow positive: Mega-cap tech is, of course. As is the financials sector, energy, utilities…off the top of my head, I’d guess every major sector is generating cash at the moment — a lot of it: US corporate profit margins are at all-time highs.
“Highest since 2000," therefore, seems misleading. And I expect that the cash flow generated by large-cap equities could cover the losses generated by the rest of the equities market many times over.
So, without seeing the detail, I’m going to say that on Jansen’s metric, US equities are looking pretty good.
Let’s do crypto now.
Perpetual Motion Machines
On another recent podcast (I have two dogs that like to walk, so I listen to a lot of podcasts), I was surprised to hear a core contributor describe MakerDAO as “unique” in DeFi because it pays all its expenses with fees earned.
Paying your own bills is a pretty low bar for anyone who’s advanced past adolescence — so that, to me, was an eye-opener: For all the amazing things that have been built in DeFi, it may be that only MakerDAO is earning enough in fees to pay for its developers, staff, office space, etc.
Instead, expenses are being paid with tokens that protocols have issued to themselves — all that free merch you got at Permissionless was most likely paid for with self-issued tokens.
That makes crypto a better target for Jansen’s scary statistic: Those self-issued tokens are only worth what new money is willing to pay for them — which makes crypto unusually dependent on the willingness of new buyers to offset structural sellers.
I don’t know that Maker really is the only protocol paying its own bills, but my scientific poll of three in-the-know people suggests the claim is at least directionally correct: If Maker isn’t unique in covering its own expenses, it's certainly in an exclusive club within crypto.
Bitcoin, for example, is not in the club: Promoted as a store-of-value, bitcoin in fact slowly burns value: For the price of bitcoin to go up, US dollars provided by new buyers have to exceed the dollars continually being burnt on electricity bills, taxes and mining equipment.
Ether is in the same boat for now — post merge, the question is whether usage fees will be greater than inflation rewards.
All other L1s are effectively loss-making: The yield you collect by staking is most likely inflationary.
How about the rest of crypto?
It’s difficult to say, because for all of crypto’s admirable transparency, there is not a lot of easily accessible disclosure on expenses.
MakerDAO, as mentioned, covers expenses from fees. And Yearn Finance is generally profitable (although I’ve read they were loss-making for the first two months of 2022).
But those are exceptions to the rule: an informal search of stakingrewards.com suggests that non-inflationary rewards are hard to come by and, in my estimation, not likely to cover expenses.
Fortunately, we don't have to rely on my estimation — we have Twitter, too, which is where 0xHamZ helpfully shared his work on this subject over the weekend.
By his calculation, crypto requires $102 billion of new money inflows to offset all of the tokens being issued — much of which is generated by innovative, but perhaps needless tokenomics with no obvious path to profitability.
$102 billion is not the exact right number, of course. Some portion of those emissions — maybe most even — will not be immediately sold.
I think it’s best to assume they will eventually be sold, however — although not all at once. This makes the impact hard to quantify.
When a stock pays a dividend, the stock’s price immediately falls by that amount. Typically, the stock then slowly inches back up as it earns the money to pay the next dividend.
The “dividends” in crypto are mostly not earned, however — they are simply issued. So, all else being equal, you’d expect token prices to trade down by the amount of the issuance — and stay down.
Also, unlike a stock dividend, emissions in crypto are not paid to everyone: Some holders will be diluted at the expense of others.
If you are a non-staking/validating holder of any one of the vast majority of cryptos, know that you are constantly being diluted — to make money, you will need new money coming in.
That makes crypto a riskier asset class than equities, which only needs people to stop selling: All else equal, equities will be propelled higher by the cash flow it generates.
Crypto remains an adolescent asset class, so it’s perhaps unfair to compare it to its big brother, equities.
It’s more like venture investing at this point, which means you should be prepared for a lot of zeros — so size your bets accordingly.
You probably are already, but I see a lot of commentary to the contrary, so I thought a cash-flow, supply/demand exercise was worth doing.
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