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"Stocks can't outperform businesses indefinitely."

— Warren Buffett

DAS NYC preview: Valuation metrics come to crypto

In the first 300 years or so of securities investing, stocks were generally considered to be the same as bonds, but worse.

In that time, companies offered little, if any, information about how much money they were making (or losing), so the only measure of a company’s merits as an investment was a company’s ability to pay a dividend.

Investors therefore invested in stocks to collect dividends in the same way they invested in bonds to collect interest payments — it was strictly about the current yield.

But, unlike interest payments, dividends can be cut — and unlike money invested in a bond, money invested in a stock does not have to be paid back.

Investors correctly recognized that this made stocks riskier than bonds (and therefore demanded that dividend yields be significantly higher than bond yields).

But because companies tended to leave their dividends unchanged no matter how much money they were making, investors failed to recognize that stocks (being equity) could be more valuable than bonds (being loans). 

This changed in the early 20th century after a new generation of US conglomerates began issuing detailed income statements (in part to appease anti-trust regulators). 

In 1903, US Steel even took the radical step of publicizing its accounts in the newspaper.

Such disclosure allowed investors to recognize, perhaps for the first time, that there was more to a company’s value than its dividend yield.

With an income statement in hand, they might, for example, suss out that a company is creating value by reinvesting its earnings at a high rate of return, which is far more valuable to shareholders than receiving a dividend is.

To capture that value, investors began using a new metric: the price-to-earnings ratio.

This changed investing forever by encouraging investors to invest based on the future value of a company's equity and not just the current value of its dividend payments.

Investors got a little carried away.

Framing investments in terms of equity rather than yield is what led Irving Fischer to declare on Oct. 22, 1929 that stock prices were "low."

He might have been right, too — a later study found that at the 1929 peak (on Oct. 23), US stocks traded on only about 19x earnings.

But the crash that started on Oct. 24 made investors rethink how they value stocks — the price-to-earnings metric, as used by the value investor Ben Graham, became a way to find stocks that really were priced too low.

Value is primarily what investors continued to look for all the way until the 1990s, and they continued to use P/E ratios to find it.

That wasn’t the only valuation metric they used.

In 1938, for example, John Burr Williams discovered that "a stock is worth the present value of all the dividends ever to be paid upon it, no more, no less."

But it wasn’t until the dotcom bubble that investors started applying Wiliams’ logic, as Janette Rutterford documents in her seminal history of valuation metrics. 

That was partly because it wasn’t until the advent of personal computers that investors had the ability to run a DCF calculation — but also because "companies with negative earnings but good growth prospects could not be valued using P/E ratios."

That, too, did not end well for investors.

But we can’t blame the metrics for that, because valuation is only descriptive.

Metrics are a subjective way to sum up the information in a company’s income statement and compare it to other similar such statements. 

There isn’t one right multiple to do that with — you have to make a subjective judgement as to which metric is the most descriptive for each stock or sector. 

Importantly, those choices determine the types of companies that get funded.

John Malone’s popularization of EBITDA, for example, is what inspired investors to fund the modern cable industry.

For better and worse, DCF valuations financed the buildout of the internet.

For worse and worse, "community-adjusted EBITDA" financed the buildout of WeWork.

Something similar will happen in crypto.

Now that crypto finally has some revenue to measure, investors should be thoughtful about which metrics they choose to measure it with.

Fortunately, I think we’re off to a good start.

Blockworks’ Dan Smith has popularized "REV" as a way for crypto investors to assess the investment merits of revenue-generating blockchains — and it’s already having an impact: Moneyness is out* and making money is in.

(*BTC excepted.)

Dan will be evangelizing for REV at DAS NYC next month, where he will go in-depth on why blockchains with no "revenue" can still be investable:

In short, the idea is that REV "captures what users pay to use the system," including the priority fees and out-of-protocol tips that wouldn’t typically be recognized as revenue.

I think this will make REV as important to crypto as EBITDA was to the cable industry.

But I also think that most crypto investments can be assessed with more traditional valuation metrics, as I’m guessing will be discussed in another DAS panel I’m genuinely looking forward to:

Ultimately, the value of any productive investment — be it a stock, bond, office building or crypto token — is fundamentally a function of the cash it will someday return to holders.

We’ve known that since John Burr Williams explained it to us in 1938.

If we knew with certainty how much capital a stock or token would return (and when), we wouldn’t need metrics — we could just discount it back to its present value. 

We never do, however — especially not in crypto.

But now that crypto protocols are generating substantial amounts of revenue, we can start thinking seriously about which metrics will give us a best approximation of their value.

This may sound optimistic as token prices generally don’t seem to be tethered to any kind of fundamentals.

But, to paraphrase Warren Buffett, tokens can’t outperform the businesses they represent indefinitely.

How we choose to measure those crypto businesses will be important for our returns, of course, but also for crypto itself — because the metrics that crypto investors adopt will determine what kind of crypto projects get funded.

DAS NYC will be a great place to start hashing it out. 

— Byron Gilliam

Morpho is the first and only DeFi protocol integrated by Coinbase. As the go-to infrastructure for onchain loans, Morpho’s immutable code sets the gold standard for decentralization, giving builders full ownership and control.

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1. Stablecoin legislation may be on shaky ground 

2. Copper tariffs, changing timeline position markets for more volatility

3. A glass-half-full look at the market

4. Bitcoin slips to $86K — Is the bull run over?

5. New chart, who dis? Token rebrands might work only once

The Fed’s Balance Sheet Plans Are Kryptonite for Risk Assets

Andy Constan joins the show to discuss quantitative tightening 2.0 and why the Fed wants to change its SOMA portfolio. Get insight into the deficit and DOGE’s anti-growth success.

Listen to Forward Guidance on Spotify, Apple Podcasts or YouTube.

With capital rotating, regulation evolving, and liquidity shifting, the smartest players are already adjusting.

• Paul Brody (EY) on where enterprises are deploying blockchain beyond the headlines.

• Ambre Soubiran (Kaiko) on the market trends that funds are acting on before retail catches up.

• Jake Chervinsky (Variant) on the legal shifts that could create—or kill—new opportunities.

• Rob Hadick (Dragonfly) on the allocation strategies driving institutional plays this year.

Some will watch. Others will act. Which side are you on?

📅 March 18-20 | NYC