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How we look at crypto will change it

In crypto, previous bull markets have mostly been “beta” rallies, where seemingly everything went up. 

The important thing was simply to be long —- which individual tokens you chose to own didn’t matter so much, only the type of token.

As the rallies progressed, you wanted to be long increasingly risky types — the typical pattern was bitcoin that made new highs, then the other layer-1 tokens, and then everything else.

This time around, having recognized the pattern, people skipped straight to everything else: Bitcoin was still 50% below its all-time highs when memecoins exploded higher in February. 

That preemptive move may explain why bitcoin and ether are now languishing and everything else is collapsing — because a pattern observed in markets is not likely to remain a pattern.

Much like the observer effect of quantum physics, in which the observation of photons and electrons changes the behavior of the particles observed, the observation of financial markets changes the behavior of the markets observed.

This is why quantitative hedge funds are constantly changing their strategies: Once they observe a pattern in the data, they trade the pattern out of existence. 

It’s also why technical analysis doesn’t work: The idea that patterns like the Fibonacci sequence would persist over time defies financial logic.

It might also explain why this crypto bull market has so far disappointed our lofty expectations: The established pattern of altcoins following bitcoin higher was so easily observed, there was a tidal wave of sellers lined up to stop it from happening.

This is forcing a rethink throughout the industry as traders, investors, and builders come to recognize that the old playbook is no longer working — it’s not as simple as just finding the riskiest tokens to be long this time around.

So what’s the new playbook going to be?

It’s too early to say for sure, but there are emerging signs that the crypto industry’s very worst fear may be realized:

We may have to learn some fundamentals.

We’ll get the tokens we deserve

The inexplicable valuations that crypto investors have assigned to memecoins, governance tokens, and ghost chains has understandably led to a belief that, in crypto at least, valuation is a meme.

To me, however, the lesson of this current cycle is shaping up to be that “valuation is a meme” is itself a meme.

I say that because, with nearly all tokens going down, the number of valuation-based investment pitches seems to be going up.

Previously, it was enough to be slightly early to whatever the newest buzzwords would be — re-staking, modular money, AirBnB for GPUs, etc.

But VCs have provided too many of those theme-based tokens for the limited pool of crypto investors to possibly absorb.

So, for the first time in crypto, we now need some way to differentiate between all the tokens on offer and the only way to differentiate between potential investments is to find some metrics to judge them on.

This is also known as “fundamental investing.”

That does not, however, mean that crypto is about to get less fun — just the opposite. 

Crypto is now entering the phase where the market begins agreeing on what valuation metrics to use and, for people that enjoy investing, that is where the fun starts.

Consider ETH, for example, where the investment case has always been slogan-based: “world computer” and “ultra-sound money” are good elevator pitches, but unquantifiable and therefore not useful as investment criteria. 

This is now being challenged by those who think layer-1 blockchains should be valued strictly by the fees and MEV they generate. 

Multicoin Capital looks at those fees and thinks ETH is $340 billion overvalued (relative to SOL).

Van Eck, however, looks at those same fees and thinks ETH is $2.4 trillion undervalued (on a five-year view).

I find that very fun because you just don’t get that magnitude of disagreement in traditional finance.

It gets funner.

Van Eck also has a bullish investment thesis on GEODNET, a decentralized GPS service whose GEOD token they think could increase by 50x by 2030.

50x!

I don’t think anyone in traditional finance has ever put a 50x price target on a stock. 

(Except maybe Ark on TSLA, but that’s more marketing stunt than investment analysis.)

It gets even funner, too.

M31 Capital recently published a piece on the blockchain data provider Subsquid, whose SQD token they think has 250x upside.

250x!

I’d normally dismiss such a forecast as hyperbole, but M31 shows their work, including assumptions on market size, market share, margins, and multiples — all of which they lay out in admirable detail.

“Subsquid’s best liquid token comp,” they write, “is GRT which trades at 18x FDV premium to SQD.”

18x!

I’m confident that no two comparable equities have ever traded at a valuation discrepancy of 18x — a number I cite mostly as a measure of how much more fun crypto investing can be than traditional investing.

(Intellectually, at least — whether the returns will be any fun is TBD.)

The SQD token is absurdly illiquid, so even if I were sold on M31’s thesis, I couldn’t really buy it. 

But that’s part of the fun, too: In crypto, we’re starting to get investment bank-quality research notes on VC-like investments — an entertaining mashup of things that don’t normally belong together.

Many more such notes can be found on the BidClub website, an invitation-only “investment club for thinkers” where members share their best crypto ideas in a format that looks a lot like the Value Investors Club, where members have long done the same for stock ideas.

The BidClub is full of traditional-looking P/E multiples and comp tables, but also memecoins and micro-cap tokens — another entertaining, only-in-crypto mashup. 

The real fun, however, is knowing that these are the kinds of notes that will increasingly shape the crypto industry — if we start judging crypto tokens on P/Es and comp tables, we’ll start being given tokens that look good on P/E and a comp table.

That, at least, is what the great physicist Werner Heisenberg would expect: “We have to remember that what we observe is not nature itself but nature exposed to our method of questioning.”

If so, how we observe and question crypto tokens will change what they are.

I expect that will be much for the better.

— Byron Gilliam

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Why Solana will eventually flip Ethereum

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