This episode tackles the contentious debate on crypto valuation, contrasting traditional financial metrics with crypto-native factors like market flows, token 'moneyness,' and inflation dynamics, offering critical perspectives for investors navigating this complex landscape.
Speaker Introductions
- The discussion features John, co-founder of DBA, described as a crypto-native venture fund with a focus on infrastructure, though John himself has a background in traditional finance ("reformed tradfi").
- Matthew Siegel from VanEck represents a more traditional finance perspective, running crypto research and token strategies within a firm known for ETFs and broader asset management, now expanding across venture, liquid tokens, and active equity in crypto.
- The host highlights these contrasting backgrounds, setting the stage for diverse viewpoints on valuation.
Applying Traditional Valuation Frameworks to Crypto
- John (DBA) acknowledges that while traditional, precise cash flow modeling (like a Discounted Cash Flow or DCF analysis) is impractical for most volatile, early-stage crypto projects due to unpredictable revenues and high discount rates, fundamental analysis remains crucial. Investors still need to assess if a project has the potential for massive returns (e.g., 100x), which ultimately hinges on its capacity to generate significant future cash flows or capture substantial network value (fees, MEV). He cites evaluating Solana (SOL) in mid-2023 based on its potential to capture billions in revenue as an example.
- John emphasizes, "you do have to still have a strong understanding of like okay does this have the market outcome possible of you know can I get those 100x returns... fundamentally is can this thing generate a lot of cash flows."
- Strategic Insight: Even for crypto-native VCs, assessing the long-term potential for fundamental value capture (like revenue generation) is key, even if precise short-term forecasting is impossible. This underpins the venture-style bets common in the space.
Fundamentals vs. Market Flows: A Shifting Perspective
- Matthew (VanEck) presents a revised view, stating he previously saw crypto prices as 50% fundamentals and 50% flows, but now believes it's closer to "90% flows and 10% fundamentals." He points to the market cap parity between XRP and Ethereum (ETH), despite vastly different economic activity levels, as evidence that market dynamics often override fundamentals.
- This perspective has led VanEck to become more selective, focusing active strategies on projects with strong teams, superior products compared to TradFi equivalents, and clear value capture mechanisms for the token. They've also increased focus on crypto-related equities where traditional valuation is more applicable.
- Strategic Insight: The dominance of market flows and sentiment over current fundamentals is a critical reality. Investors must acknowledge this, potentially adjusting strategies towards more selective investments or incorporating flow analysis, while researchers might study the drivers of these flows.
Comparative Valuation and Market Sentiment
- Matthew highlights the use of comparative valuation, citing an example where Phantom wallet's $3 billion private valuation made its publicly traded competitor, Exodus (EXOD), look significantly undervalued, leading to a subsequent price increase in EXOD stock. This cross-referencing between private and public markets, along with insights from their venture team, informs their liquid token strategies.
- He also notes the empirical challenge in a new asset class, leading to reliance on comparative valuation and sentiment analysis. VanEck often waits for new tokens to experience the "trough of disillusionment" (typically a significant price drop post-launch) before re-evaluating based on potential cash flow upside.
- Strategic Insight: Monitoring private market valuations and sentiment cycles can provide actionable signals for public market opportunities in crypto and crypto-related equities. Patience for market corrections ("trough of disillusionment") can offer better entry points.
The Concept of 'Moneyness' in L1 Tokens
- Matthew argues forcefully that Layer 1 (L1) tokens – the native cryptocurrencies of foundational blockchains like Ethereum or Solana – must function as 'money' for their ecosystems to work effectively. He equates the premium derived from this 'moneyness' to the Price-to-Earnings (P/E) ratio for stocks, suggesting it represents payment for future income streams. He believes this is necessary for tokens to be used as collateral, increasing velocity and ultimately driving fee accrual.
- John agrees moneyness is important but cautions that the term is often loosely applied in crypto. He draws a distinction: Bitcoin (BTC) acts primarily as a store of value driven by flows (more buyers than sellers), fitting a 'money' narrative without direct cash flows to holders (it has a "negative PE multiple" due to inflation). In contrast, he believes most other L1s, like Ethereum or Solana, will need to demonstrate tangible value capture through fees and MEV, rather than relying solely on a store-of-value narrative.
- Definition: 'Moneyness' refers to the extent an asset fulfills the traditional functions of money: a medium of exchange, a unit of account, and a store of value. L1s are foundational blockchains (e.g., Bitcoin, Ethereum).
- Strategic Insight: The debate highlights a crucial divergence in valuing different crypto assets. Investors must consider whether an L1's value proposition rests more on its potential as digital money/collateral (like Bitcoin) or as a productive asset generating yield/fees (like potentially Ethereum or Solana).
Tokenomics Deep Dive: Inflation's Role and Impact
- John criticizes a common but flawed calculation: subtracting token inflation from network fees to determine 'profitability'. He argues this ignores that stakers can capture inflation as real yield, especially if the staking participation rate is low (implying high utility demand for the token elsewhere). The dynamics of who captures inflation and under what conditions are critical.
- Definition: "Tokenomics" refers to the economic design and principles governing a cryptocurrency, including its supply, distribution, and utility. "Staking" involves locking up tokens to help secure a network, typically earning rewards (including inflation).
- Matthew draws an analogy between token inflation and stock issuance by growth companies: acceptable if the network is growing rapidly and demand is high (like early Solana), but detrimental if growth stalls while issuance continues (potentially applicable to some L2s launched in 2023-24). He also emphasizes that predictable inflation schedules (like Solana's previously) are preferred by markets over uncertain, variable rates, which might command a lower valuation.
- Definition: L2s (Layer 2s) are scaling solutions built atop L1 blockchains to improve transaction speed and reduce costs.
- Strategic Insight: Inflation is not inherently negative; its impact depends heavily on network growth, predictability, and distribution mechanisms (e.g., staking rewards vs. ecosystem incentives). Investors and researchers must analyze inflation within the specific context of each project's tokenomics and growth trajectory, avoiding simplistic calculations.
Addressing High Valuation Premiums in Crypto
- John believes most current high valuation premiums are not justified by fundamentals. He attributes them partly to the venture-like nature of even public crypto projects (where extreme outcomes are expected) and partly to low circulating supplies (small float) making prices sensitive to buying pressure. He stresses the need to see a plausible path to future cash flows, regardless of the current P/E multiple.
- Matthew acknowledges the lack of fundamental support for many valuations but manages this through disciplined position sizing. VanEck uses a tiered approach: core positions (10%+, e.g., Coinbase, ETH, SOL), fringe positions (3-5%), and "moonshots" (1%). Moonshots require less stringent criteria, perhaps only showing potential in one area (e.g., team) with a path to others, allowing participation in potentially high-return but fundamentally weaker assets, like Cardano (ADA) or XRP during sentiment shifts.
- Strategic Insight: High crypto valuations often reflect speculation, low float dynamics, or venture-style return expectations rather than current earnings. Managing risk through careful position sizing is essential when investing in assets lacking strong fundamental support.
The Role of Technical Analysis (TA)
- John takes a firm stance against TA: "I have never drawn a line on a chart in my life and I do not know what any of the lines on the charts mean and I do not plan to change that."
- Matthew uses TA selectively, finding it potentially useful only for Bitcoin due to its low inflation (making price charts more reflective of market cap) and the ability to observe on-chain profit/loss levels suggesting support/resistance. He strongly cautions against using TA price charts for high-inflation altcoins, suggesting market cap charts are more appropriate if TA is applied at all.
- Definition: Technical Analysis (TA) involves analyzing statistical trends gathered from trading activity, such as price movement and volume, to forecast future price movements.
- Strategic Insight: The utility of TA in crypto is highly contested. While some find limited application for Bitcoin, its value for altcoins, especially those with high inflation, is questionable due to distorted price signals. Fundamental analysis and understanding tokenomics remain paramount for most crypto assets.
Strategic Conclusion for Crypto AI Investors
Crypto valuation remains a complex interplay of nascent fundamentals, dominant market flows, and unique tokenomic factors like inflation. Investors and researchers must employ flexible frameworks, critically assessing potential future value capture alongside current market sentiment and the specific mechanics of each token to navigate this volatile landscape effectively.
