Back to the list

Crypto Doesn’t Care About Fundamentals. Can This Last For Long?


coinculture.com 01 August 2022 04:40, UTC
Reading time: ~6 m


  • Cash flows and sales may be harmful to digital assets since they limit their potential values to those of conventional enterprises with far slower growth rates.
  • Growth potential is inherent to cryptocurrencies, a portfolio manager said.

It is common knowledge among individuals who have observed several cycles. Hundreds, if not thousands, of other tokens rise with bitcoin and ether but rarely — or, often, never — recover all-time highs.

Most cryptocurrencies perish.

After the January 2018 apex of the last bull market, just 26 of the top 200 digital assets by market value achieved new highs.

Half of the tokens were layer-1 tokens like Litecoin, Ether, and Cardano. Five coins provide voting rights for decentralised financial systems such as Gnosis and district0x.

It is not a bright outlook. Only six of these cryptocurrencies, Dogecoin, Binance coin, Chainlink, Decentraland, Vechain, and Enjin coin, surpassed their prior high throughout the same time frame compared to the bitcoin price.

Only 3% of the top 200 digital assets are winners, a limited selection of winners. There is also no evident pattern connecting them.

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

Binance coin has durability supported by alluring burn mechanisms. Chainlink supports a vast network of data feeds and pricing oracles that connect various blockchains and smart contracts to execute transactions without needing third-party validators.

According to industry participants, Decentraland and Enjin coin’s success may be partially attributed to the metaverse brouhaha and the predicted rise in popularity of blockchain-powered gaming dapps.

Such erroneous correlations imply that most digital assets will peak in a bull market. Still, they perish as soon as the euphoria subsides – doomed to never return to their glittering heydays and make top-buying bagholders whole.

How can one fairly value digital assets? What is crypto’s true value?

As the top 200 coins from the last bull market are down more than 90% from their all-time highs in dollars, how and why does the market determine how low it will go?

Bearish cash flows for digital assets

Token Terminal is a platform promoting methods to find everything out. It provides a variety of indicators designed to evaluate different procedures, resembling standard firm valuation techniques such as total revenues and price-to-earnings ratios.

According to Token Terminal’s growth lead, Oskari Tempakka, it’s very tough to construct a thesis for why some tokens thrive when looking backwards, particularly when comparing the 2018 bull market to what we observed in 2021.

The platform evaluates protocols that create cash flow with blockchain companies that operate solely on-chain. Tempakka said it was not viable to value protocols based on these determinants during the last bull market. It wasn’t until mid-2020, during the DeFi summer, that the first apps developed on Ethereum began producing positive results and revenue flows for the protocol.

Fundamental analysis of the highest-flying cryptocurrencies from the last bull market, whether dollar value or bitcoin, is impossible.

Nonetheless, layer-1 assets comprised 50% of the top 200 digital assets that reached new all-time highs during the most recent cycle.

Layer-1s, the foundation of digital assets, excelled in this period due to strong brand awareness and the efforts of many developers, market makers and wealthy traders preferring liquid assets.

For a hedge fund with a market capitalisation of at least $1 billion to trade an asset, there must be a substantial market capitalisation; otherwise, constructing a long or short leg would render gains obsolete.

Tempakka said that the theory behind layer-1s is to establish an eternally scalable settlement layer for whatever applications. It’s simpler to construct a positive thesis without a valuation cap than for a pure application – that’s how layer-1s are looked at, at least the ones that create cash flow and capture value.

.@ArweaveTeam currently trading at ~1,000x annualized fees

what’s the growth catalyst that investors have priced in? pic.twitter.com/G2qeNOAC7D

— Token Terminal (@tokenterminal) July 25, 2022

Cash flows are negative when attempting to assign a value to crypto assets. As a gauge, they are not gloomy, but industry players say that crypto’s fast development trajectory necessitates a new approach.

Using conventional fundamental stock-picking approaches to venture capital-backed firms would never work, so why should it work with digital assets?

Evaluating a crypto asset based on traditional fundamentals is viable, then it should also be possible to compare it to a real-world corporation using comparable metrics.

Hassan Bassiri, vice president of portfolio management at Arca, said that crypto does not care about fundamentals or conventional cash flows. Cryptocurrency prioritises growth potential.

If a cryptocurrency such as Aave or Yearn sells at a 1,000 price-to-sales ratio and its fintech rival nNeobank is trading at 200, is it worth a 5x multiple?

Using cash flows to value digital assets — similar to valuing Amazon or Tesla stocks — suggests that they cannot increase indefinitely, akin to Kryptonite for crypto purists.

Cash flows are one approach for assessing digital assets, which implies they cannot increase indefinitely, a concept comparable to Kryptonite for cryptocurrency investors.

The outcome is a turbulent, chaotic market in which social opinion and fashion precede Econ 101.

Fundamentally driven markets are impending.

Who can identify which projects out of many aspirants have a realistic chance of surviving the bear market if looking to the past does not clarify how traders value digital assets?

According to Bassiri, many protocols are attempting to link real-world use cases with on-chain yield. MakerDAO’s recent provision of a $100 million loan denominated in the token DAI to the 151-year-old Huntingdon Valley Bank, with the possibility to raise the credit revolver to a stunning $1 billion over the next 12 months, serves as an example.

Token Terminal’s Tempakka seeks a future in which quantifiable fundamentals drive most top tokens, and they must provide sustainable cash flows to support this model.

If you’re a typical private equity investor, you can now examine the revenue data of crypto protocol and construct a solid investment thesis around it, said Tempakka.

In other words, it is gradually becoming easier to explain crypto bets on something more substantial than hype or belief, maybe all at once.

Many institutional traders concentrating on digital assets claim that the world has arrived. Crypto hedge fund businesses use complex quantitative models based on social sentiment and trade volume fluctuations.

However, these individuals are often the first to acknowledge that beliefs about strategy construction in crypto land shift swiftly. Fundamental measurements are now becoming a reliable resource for skilled investors — witness the emergence of discretionary strategies — but for the time being, they’re just a tiny part of the total picture.

The rest consists of an in-depth study of development teams and their capacities, or lack thereof, to traverse the steep, twisting route that lies ahead.

Back to the list