The absurdity of valuation in crypto
Figured I would try and start finishing draft ideas I’ve had saved on my substack. Wasn’t able to get nearly as much writing done over spring break as I’d hoped, but I enjoy the act of publishing something on substack and tacking on another article to the collection. I was inspired by an article I’d read from Cobie a few months ago (link here) and my recent experiences in trying to find the next SPELL or JOE.
Making a push for 5,000 subscribers on here and would like to see it happen by the end of this semester, so figured the best way to gravitate more attention to my substack would be to post more often than not. Let’s get this money! Just kidding, there’s no monetization on my substack *yet* and it’s something I’ve considered for a while. Who knows if I’ll ever do it, but just like any other American, I’m a money hungry pig and prefer eating things other than ramen noodles and chipotle; so maybe one day I’ll implement a five or ten dollar monthly subscription, possibly this summer.
Hopefully you enjoyed the article I posted yesterday (link here) and found it useful in some sort of way. Maybe this one will be much longer, though I think it’ll end up shorter as I’m running low on coffee and have had a very busy day. Either way, I hope my thoughts are somewhat coherent and keep you engaged enough to enjoy the words that follow. Hope everyone has had a good weekend and have taken advantage of this tiny weekend pump. I think it’s going to be a big week, so make sure to turn on 100x leverage and gamble away your trust fund.
Dirty FDVs and all of that
Cobie discussed the phenomenon of fully diluted valuations (FDVs) in his articled titled ‘On the meme of market caps & unlocks’ which I linked in the intro. Give it a read before you dive into this, as most of what he discusses is much more eloquent than anything I have to say. I’ve hardly even been in crypto a whole year, whereas Cobie has spent the better part of the last decade involved in this shitshow.
FDVs have recently been popping up in conversations more often, for better or worse. GCR even released a document outlining the emission schedules and token unlocks for a wide range of coins, sharing that he’d been shorting many as the sell pressure was simply too high to warrant any green candles - this was obviously a home run series of trades, as we’ve seen many alts taken behind the barn and slaughtered over recent months. Even CT fan favorites like JEWEL have performed very poorly throughout 2022, highlighting the overwhelming control of the market in dictating token price action. If we have a nuclear war looming over all our heads, it doesn’t matter how innovative your P2E game is or how efficient your AMM can be - token going to go down hard and fast.
In regards to the private markets, it’s well known that VCs get nice and comfortable multiples on investments due to the frothy nature of crypto markets. Even though alts can get destroyed and go -85% or lower, VCs often still cash in 5-10x, if not more - and this is the bear case. In a bull market pretty much everything new and exciting goes up, in addition to the current top 100 which see an increase in valuations as well. Buy pressure and hyper attention on the space in a bull market outweighs selling from insiders and emission schedules, leading many into a lull where they avoid to see the writing on the wall before it’s too late. Recent projects have been attempting to improve tokenomics, but it is often not enough. Buying something on the market at a 25-50x multiple over what a VC paid is unattractive and absurd, yet it’s become an increasingly well known tidbit of info that has led to a lack of bidding.
The title of this article was inspired by my recent foray into the world of Austrian Economics, a subset of Economics dedicated to studying human nature and decision making instead of prioritizing extreme amounts of data and inaccurate models. Economics is a very interesting social science, one that I’ve unfairly trashed on in prior articles. While I still believe we’re a long way from seeing an economic renaissance in regards to research that fits current market conditions, Austrian Economics has explored many of the ideas that I have about markets.
Methodenstreit is a term that refers to the conflict that occurred between the Austrian School and the German (or historical) School back in the late 19th century. Economists had failed to incorporate enough historical experiences into their models, and the Austrian School had become fed up. One prominent Austrian economist at the time - Carl Menger - spoke out against traditional economic theory, stating that social interactions were much too complex to warrant any kind of statistical model. Human brains are extremely complex and scientists are still uncovering secrets of the intricacies of this weird pink matter. Why should economists be able to box our vastly different minds and personalities to fit into their models?
Menger’s words and writings angered another economist at the time - Gustav von Schmoller - and prompted Schmoller to argue back against Menger’s contrarian thoughts. Over 150 years later, Austrian Economics have managed to intertwine with current economic theory, with various Austrian economists along the way earning awards for their discoveries and writings. While economics is still imperfect and we have a long way to go until we truly discover how a market participant can and will act (see GME and WSB) I believe crypto can help reveal many of the blind spots current statistical models face. As I’ve said before, no market participant is perfectly rational - we’re all insane people trying to make our way into an early retirement or stumble upon a lottery ticket in the form of an OHM fork or dog coin 1000x opportunity.
Cobie discussed the concept of attention economies in this article, outlining the various aspects of crypto and markets that make it tricky for any coin to stick and gain the cultural relevance of Bitcoin or Ethereum. Discussing everything from 10K PFP projects, alternative L1s and overwhelming levels of froth in our internet economy, Cobie was able to condense many of the ideas we often have but can’t put to paper. It’s absurd trying to do fundamental analysis on any coin over the long term, as a very small handful of coins have survived a full cycle, let alone half a cycle. Valuations get propped up by VCs looking to turn a profit on their bags, touting X or Y coin as Uber on-chain or the definitive solution to scaling an L1 blockchain. This leads to hype, a nasty chart and eventual oblivion. No coin or new blockchain technology is safe from the tens of millions of dollars belonging to a fund manager trying to please their LPs.
When choosing an article for this title, ‘Methodenstreit’ stuck out to me as I found it perfectly suited for crypto’s current landscape. We’re stuck in a mindset of doing DCF models and analyzing a coin’s P/E, P/S and P/EG while we should be focusing on long-term applications and minimizing token dilution. FDVs will only continue to curse us retail investors (looking at LDO) as we get infinitely diluted while venture firms celebrate their most recent 150x.
I’m not trying to shame the current incentive alignment in crypto; this is akin to any financial market, as tiny fish swimming in a monstrous pond are bound to get gobbled up. However, I’m in a position where I am not yet a whale or giant squid, so it’s in my best interest to raise concerns when I’m putting my own money on the line. In a bear market, I’m certain almost everything will look like a good buy - the tricky part comes in measuring the future value a protocol might hold down the line, or how a protocol might fall out of favor in the ever increasing pool of innovation.
Because of how fast things have been moving over recent months and how swiftly the current big thing gets tossed to the curb, I believe ony 10-15 of the top 100 coins by market capitalization will remain on the list come 2024. Yeah, not exactly a contrarian take, except crypto is much more evolved than it was previous cycles. We may not ever see BTC below 25k or three digit ETH ever again - but we will continue to see a slew of new tokens and an increase in market participants. Everyone wants the shiny new thing, and while majors may be resistant to this behavior, alt L1s and DeFi fossils will prove to see the opposite. Why long Compound or Sushi when you can get into the next big protocol at a much lower valuation while the iron is still hot?
Digging for gems in a tiny sandbox
If you’ve been one of the many who have unsuccessfully attempted to uncover hidden gems in the current crypto market, I sympathize with you. Aside from a few coins (LUNA, APE, JUNO, RUNE, XIDO), nothing has really gone up the way we’ve grown accustomed to. Sure, some coins have pumped in isolation and attempted to spark mini narratives (ZEC and the privacy coin wave) but nothing has stuck. Whether this can be attributed to general uncertainties around macro conditions or an overall downtrend in the capital inflows directed toward crypto, things have been very dry as of late.
If you’d been lucky enough to nail SPELL, OHM, JEWEL or JOE in 2021, you were one of the many. Opportunities like this are now few and far between, with narratives ending before they can even come to fruition. Maybe by EOY we’ll look back and realize how narrow minded we were in ignoring X or Y coin, but nothing really looks appealing at the moment. It’s hard to call a coin in the top 200 a “gem” or a steal, as the market cap is more than likely already high enough to warrant that increased attention and shows that market participants have caught onto it. Regardless, I think coins like FXS and SYN will prove to be winners over the coming months but it’s hard to say.
Frax is dependent on DeFi regaining the collective support of CT, which hardly ever occurs unless there’s a hot new ponzi leading the charge. Synapse is seeing an increase in competition and a lack of incentives to make market participants want to bridge, as there’s nothing to buy on most chains that isn’t already complete PvP or dogshit. New protocols are coming up on the horizon, which may or may not bring interesting new tokens to long and try our luck with - but as I mentioned previously, FDVs may end up too damn high for the right curvers to hop into unless they’re absolutely certain on the protocol’s success, which none of us can be in an environment like what we’re currently seeing.
There are resources which can help you scout hidden gems, like Nansen or the art of scrounging through the more intellectual CT accounts, but it generally feels like sentiment is reaching peak lows and nothing is attractive. Maybe I’m biased and maybe I’m just a shitty trader, but there are very few coins that look like a decent long here, no matter the time horizon. I’m willing to suck it up and stomach drawdowns on some of my longer term bags, but I’m still not nearly as exposed as I’d like to be.
I will continue to hold out my dwindling hope that we’ll see the fabled “Golden Bullrun” discussed ad nauseum on /biz/. Thanks for reading my ramblings, and as always, follow me on Twitter @knowerofmarkets if you want to get a taste of my writings in a much more condensed and degenerate format.