December 30, 2024 | Read Online

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"Price is what you pay, value is what you get."

— Warren Buffett

Crypto investing isn't just about price anymore

One of the best stock pitches I ever heard came from a salesperson I worked with who had the original thought that Porsche was not an automaker but a maker of luxury goods.

That mattered because automakers typically trade on a single-digit multiple of earnings whereas luxury goods companies often trade on a multiple of 30x or more.

So just by reframing the narrative around Porsche, the salesperson could argue that its shares were 3x undervalued.

He was right: The luxury-goods narrative caught on and the shares re-rated as such, making Porsche one of the best-performing stocks of the early 'aughts.

More importantly, this is what makes investing fun, in my opinion: Endeavoring to understand both the substance of a business and the narrative investors will use to value it.

From that point of view, I'd argue that investing in the nascent asset class of digital assets has been a little too fun — historically, it's been all narrative, no substance.

But it feels like this is changing: More crypto projects are generating revenue, and investors are increasingly using those earnings to assess the value of their tokens.

Consider, for example, the new crypto exchange and nascent layer-one blockchain Hyperliquid, which has been generating roughly $1 million in fees per day.

That puts Hyperliquid's HYPE token on about 70x fees (which are effectively earnings). That is pretty expensive relative to other crypto exchanges like Drift or dYdX, which trade on about 25x fees, as noted on a recent 0xResearch podcast.

But 70x is pretty cheap relative to some emerging layer-one blockchains like Sui and Aptos, where the fees are so low the tokens trade on effectively infinite valuation multiples.

So, much like debating whether Porsche is a maker of cars or luxury goods, we can now have an investment debate about whether Hyperliquid is a crypto exchange or a layer-one blockchain.

What adds real weight to the debate is that 50% of Hyperliquid's fees are allocated to buying HYPE tokens.

In equities, shareholders typically don't urge companies trading at 70x earnings to buy back their stock, because that's roughly like reinvesting earnings at a yield of only about 1.4% — and shareholders never ask early-stage companies to return capital at all.

But crypto is different, as evidenced by the eye-popping rally in HYPE, which is up 650% since its late-November launch.

That performance is at least partly attributable to Hyperliquid's price-insensitive commitment to use half its earnings to buy its native token — and this, I think, has captured the emerging zeitgeist in which crypto investors are looking for real, measurable value from their tokens (as opposed to the memetic value of memecoins and governance tokens that can only be measured by price).

Further evidence of this trend is Dan Smith's metric of "real economic value" (or REV), which has been winning mindshare as a way to value layer-1 blockchains — REV gives crypto investors something to debate beyond memetics and the equally intangible "monetary premium."

I'd also cite Bitget's BGB token, which recently rocketed into the top 25 by market cap after the exchange promised to return 20% of its profits to tokenholders by buying its token.

Even the hottest, most speculative crypto trend — AI agents — has an element of traditional value to it.

The largest AI-agent coin by market cap is VIRTUAL, driven in part by the fact that the Virtuals Protocol generates real revenue.

In its short, two-month existence, the platform for launching AI-agent tokens has already earned $57 million in fees. And that, I think, makes it seem like a safer bet than buying the AI-agent tokens themselves — a classic picks-and-shovels play that any traditional investor would understand.

What traditional investors probably would not understand is that the VIRTUAL token is up about 6,700% over the past three months, but still only trades on about 11x fees (if you're willing to annualize its first three months of results).

That may not turn out to be "value" because it's unclear whether the craze for AI-agent tokens will last, and even if it does, token launchpads like Virtual may not have any sort of a moat.

But that makes for a familiar-looking investment debate and there are many more such debates to be had.

Blockworks Research recently highlighted Metaplex, for example. The Solana-based token launchpad's token, MPLX, trades on about 7.2x earnings, with half of those earnings used for buybacks.

That multiple is again an extrapolation of recent results, but Marc Arjoon thinks it may prove conservative: "The token's current market valuation may not fully reflect the potential for future growth," he wrote in a recent note with an attention-grabbing title: Metaplex: Criminally Undervalued.

"Undervalued" is not a term generally associated with crypto tokens to any degree, let alone "criminally," so that feels like something new to me.

Another recent Blockworks Research note that got my attention was on the AAVE-like lending protocol, Suilend — "A fundamental play on Sui DeFi with a good risk/reward profile," according to Carlos Gonzalez Campo.

Suilend's SEND token, I learned, trades on about 21x earnings, which seems to me like a reasonable growth premium relative to AAVE's 11x multiple — seeing as everyone is excited about the SUI ecosystem at the moment and Suilend should presumably grow a lot faster than AAVE, I'd have guessed the valuation disparity would be bigger.

That's not investment advice, because I don't know very much about either Suilend or SUI, but these are the kinds of developments that make me think crypto could finally evolve into an investable asset class, rather than just a tradable one. Debating the value of a profit-generating protocol is far more compelling than speculating on the price of a profitless memecoin.

Not that this will make things any easier, because investing is hard, too: Porsche shares now trade on just 3x earnings.

— Byron Gilliam

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Game @game_for_one

In case you've been living under a rock or just haven't noticed:

Infra for agents is shaping up to be the L1 trade of this cycle.
It's the same playbook as L1s in 2021:
"We need more block space for all these consumer apps coming in the future."
As we now know, the promised… x.com/i/web/status/1…

7:32 PM • Dec 30, 2024

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8 Replies

Noelle Acheson @NoelleInMadrid

Something going on here – it's rare to see such a divergence between the US 10yr yield and the oil price, because a low and stable oil price SHOULD, all else equal, imply low and stable inflation expectations and therefore yields. /1