This issue is brought to you by:

“Price is what you pay, value is what you get.”

- Warren Buffett

Thursday Valuable Mailbag

Q: Why do people buy altcoins?

That eternal question is front of mind again following yesterday’s huge airdrop of JUP tokens to users of Jupiter, a decentralized exchange on Solana.

JUP is trading at $0.60 this morning, which gives it a fully diluted valuation of $6 billion.

By “it,” I mean the tokens themselves and not the Jupiter protocol, because the tokens are not equity in Jupiter — they have no claim on any of the fees that the exchange is already earning in impressive amounts.

Meow, the free-speaking, free-loving co-founder of Jupiter, has been clear about this: “The initial value of JUP will be as a symbol for Jupiter.”

$6 billion is a lot to pay for a symbol!

Normally, this is where I would patiently explain that price and value are two different things: “Price is what you pay, value is what you get.”

But Meow has preempted my argument in a recent blog post: “Value is created just because people want something.”

So, contra Buffett, Meow believes that price and value are one and the same: “If someone, anyone, wants something — that something has value.”

JUP is being priced at $6 billion, so by his logic, it’s worth $6 billion too.

This begs the obvious next question, which is why people are paying that price. 

You wouldn’t normally buy a stock unless you think the value of the utility it offers (a claim on a company’s earnings) is more than what you’re paying — so, if price and value are the same, why would you bother?

Meow has preempted that one, too: “I believe that most people could care less about utility, but rather they care about value.”

Argh!

This is the kind of circular logic that makes me dizzy: People care about value and value is determined by the price people pay, so whatever price people pay is the value they receive.

It’s impossible to dissuade someone of a tautological, closed-loop line of reasoning like that.

Fortunately, the loop is not quite hermetically sealed. Meow has also written that he expects JUP to be valued as a symbol “much as the value for UNI is a symbol for Uniswap DeFi 1.0, not from any utility.”

Gotcha! Invoking the UNI example unravels his entire argument (I think).

Meow is correct that UNI has no utility now. But what about later?

The UNI token, in my opinion, is perceived to have value because most holders expect they will someday receive a portion of Uniswap’s future earnings — why else the long-running debate over the fee switch? 

I think that’s what the buyers of JUP are doing here as well (even if they don’t know they’re doing it). 

Consider the fact that Jupiter looks much more like a company than Uniswap does — it’s already earning substantial fees (while the Uniswap protocol still earns none) and Meow seems to have big ambitions for what they will be building (Jupiter might end up looking more like Coinbase than Uniswap).

Looking more like a company will make tokens look more like equity to people.

JUP holders presumably think Jupiter will be a big success and that people will pay much more for the JUP token when it is one — but that reasoning only makes sense if future JUP token holders have a stake in that success.

People are buying JUP now, I think, because they hope to sell it to someone who thinks that it will be equity later.

Meow can warn all those people that JUP has no utility until he’s blue in the face, but if they believed it will never have utility, I can’t imagine they’d give it a multi-billion valuation.

For all his protestations, Meow himself has given them reason to hope: “It is my view that the max possible gains for the next couple of years will not be to focus on JUP utility.”

The next couple of years?

Nothing in crypto is expected to pay off in the next couple of years — you wouldn’t even want it to!

As a JUP holder, you’d want Meow to reinvest all of Jupiter’s earnings into building new products, so that JUP’s informal claim on earnings will be worth much more later (just as you would do as a holder of equity in any young company).

That is exactly what they’re doing and is why, I believe, the buyers assign so much value to JUP.

But Meow is the one in the trenches and I’m just chirping from the sidelines, so I’ll let him have the last word: 

“Why is a coin worth something? It’s really just collective belief.”

Q: What difference does it make why people buy things?

Crypto is even more of a Keynesian beauty contest than equities are. 

To make money over any reasonable time frame, you shouldn’t be trying to figure out which protocols will be the big winners, you should be trying to figure out which protocols everyone else thinks will be the big winners. 

So, understanding what other people think is obviously important.

But here’s what’s much more important: Crypto is a financial system and the purpose of financial systems is to allocate capital to where it will be most productive. 

A financial system that allocates capital based on nothing will do nothing productive.

Meow’s belief that things are simply worth what people think they’re worth is a form of financial nihilism that might prove to be correct — maybe valuation really is nothing more than a meme in crypto. 

But if so, crypto will never be anything more than a casino. 

Lots of people think crypto is nothing more than a casino, of course, and asserting that valuation is a meme is to make their case for them.

The good news, however, is that Meow and his colleagues have built something useful — the Jupiter exchange is an excellent product! 

So, whatever capital it took to build, it seems to have been allocated productively.

But if we keep conflating prices with value, most of it won’t be.

Q: I thought you were giving Meow the last word?

I really, really tried.

― Byron Gilliam

This issue is brought to you by:

A curated series of open edition drops, available exclusively to RARI Chain via Rarible.

Arbitrum is the leading Ethereum layer-2 scaling solution, home to 600+ apps and the most customizable tech stack for launching Orbit chains.

Explore Orbit chains like RARI Chain, a layer-3 with royalties built on the node level, built to empower creators. To celebrate, check out TEN by RARI — 10 days of open edition drops from a diverse set of artists exclusively to RARI Chain via Rarible.

We're Watching

Mike is joined by our season co-host Hart Lambur, co-founder of Across Protocol and UMA Protocol. Join them as they explore the emerging multichain endgame.

Watch or listen to Bell Curve on Youtube, Spotify or Apple.

We’re Hosting

Regulatory Horizons: Unraveling the Future of Crypto Compliance

Wondering how to navigate the ever-changing and oftentimes ambiguous crypto regulatory environment? Join us to hear from the experts on best practices when approaching compliance and how to stay ahead of the complicated legal requirements. We will also discuss how recent and ongoing court cases, enforcement actions and legislation can change the landscape in the US going forward.

Daily Insights