This episode reveals a critical disconnect between crypto's mainstream adoption narrative and its precarious market valuations, forcing a fundamental re-evaluation of where long-term value will truly accrue.
The State of Stablecoins and Market Sentiment
- Rob kicks off the discussion from a fintech conference in Miami, highlighting a significant trend: stablecoins are now a central part of strategic conversations across banking, fintech, and technology sectors. Despite this growing institutional interest and positive sentiment, the crypto market is experiencing a significant downturn, creating a confusing paradox for investors.
- Rob notes that while companies are seriously considering stablecoin integration, market prices are not reflecting this long-term potential.
- This sets the stage for a deeper analysis of market valuations versus underlying fundamentals.
Deconstructing Crypto Valuations: Are We Priced to Perfection?
- Santiago unpacks the core thesis from his recent blog post, arguing that the crypto market, excluding Bitcoin, was priced for perfection and has not earned its ~$1.5 trillion valuation. He challenges the common methodologies used by fund managers, particularly the inclusion of staking rewards in revenue calculations.
- Value Capture vs. Staking Rewards: Santiago asserts that staking rewards are not revenue but are equivalent to stock-based compensation—an expense that dilutes value. He argues that treating them as revenue is very misleading.
- Price-to-Sales Analysis: He compares the price-to-sales multiples of top networks to high-growth tech companies.
- Ethereum (~$400B valuation) and Solana (~$75B valuation) generate roughly $1-2 billion in annual revenue (fees and MEV), trading at extreme multiples (e.g., 200x for Ethereum).
- In contrast, top-tier public SaaS companies with contracted, multi-year recurring revenue trade at 20-30x sales.
- Network Effects and Monetization: While acknowledging crypto's network effects, Santiago questions their strength compared to platforms like Facebook. He argues that after over a decade, Ethereum's value capture mechanism remains fundamentally broken, especially with the L2 scaling model where value does not effectively trickle down to the L1.
- L1/L2 (Layer 1/Layer 2): L1s are the base blockchain (e.g., Ethereum), while L2s are scaling solutions built on top to process transactions faster and cheaper. The issue raised is that L2s capture user activity and fees without proportionally increasing the L1's revenue.
- Santiago states, "I just haven't seen and heard... a very compelling argument as to why these things should be valued at that like on a price to sales price to revenue basis."
Analyzing the Market Sell-Off: Macro Headwinds and Forced Selling
- The conversation shifts to the reasons behind the market's sharp decline, where Bitcoin has fallen significantly and altcoins are down as much as 70%. The speakers explore whether this is a reaction to overvaluation or driven by broader market forces.
- Macroeconomic Pressure: Rob points to a risk-off sentiment across all markets. With sticky inflation, a decreasing probability of a Fed rate cut, and investors looking to lock in profits before year-end, liquidity is drying up.
- DAT Selling Pressure: The speakers discuss the impact of DATs (Digital Asset Trusts), which are investment vehicles that hold crypto assets. Following a period of poor performance and waning investor interest, these trusts are now selling their crypto holdings to buy back their own shares and defend their price, creating sustained sell pressure.
- AI as the New Narrative: Santiago suggests that retail momentum, which historically fueled crypto rallies, may be shifting its focus to AI as the "hotter theme," diverting speculative capital away from crypto.
Where Are We in the Market Cycle? Complacency vs. Capitulation
- Using the "Wall Street Cheat Sheet" psychology of a market cycle as a framework, the hosts debate the current market phase.
- Santiago's View (Complacency): He argues we are in the "complacency" phase. Many investors who entered the market in the last two years are still profitable, and the prevailing narrative still points to positive news like institutional adoption (JPMorgan, Larry Fink) as justification for current prices.
- Rob's View (VC Capitulation): Rob offers a nuanced perspective from the venture capital world, suggesting that VCs are much further along the curve, possibly in "capitulation" or "disbelief."
- He observes a quiet pivot among crypto VCs, who are now rebranding as AI, fintech, or SaaS investors due to a loss of conviction in crypto-native opportunities.
- This creates a divergence: public token markets may be complacent, but the private venture market is already showing signs of deep skepticism.
The Shifting Landscape of Crypto Venture Capital
- The discussion delves into the changing dynamics between crypto-native VCs and traditional VCs entering the space.
- Traditional VCs' Targeted Entry: Unlike the 2021 cycle, traditional VCs like Benchmark are now making smarter, more targeted investments in crypto companies with clear parallels to traditional tech, such as stablecoin infrastructure or social trading apps (e.g., Polymarket, Fomo).
- Crypto VCs' Existential Crisis: Many crypto-native funds are struggling. They are benchmarked against Bitcoin, which most have failed to outperform. This has led to an identity crisis, questioning their "right to exist" if the only viable crypto investments are those that resemble traditional fintech.
- Overinvestment in Infrastructure: Santiago points out that nearly $100 billion has been invested in crypto infrastructure. He argues that future returns will likely come from the application layer, not from new L1s, as the infrastructure thesis is largely played out.
Aave's Strategic Pivot: From DeFi Protocol to Consumer Neo-Bank
- The announcement of Aave's new consumer-facing savings application is analyzed as a major strategic shift and a case study for the industry.
- The Product: Aave is launching a neo-bank—a digital-only bank—offering high yields (up to 9%) on deposits with up to $1 million in insurance.
- Strategic Implications: This move represents a pivot from being on-chain infrastructure to a direct-to-consumer fintech product. The key challenge will be customer acquisition cost. While the high yield is compelling, the long-term stickiness of these customers is uncertain once the subsidized rewards diminish.
- The Broader Trend: This highlights the convergence of crypto and fintech, where even DeFi blue-chips like Aave recognize that mass-market adoption requires building user-friendly, regulated, and insured products that compete directly with traditional finance.
The Monad Community Sale: A Barometer for Retail Demand
- The Monad community sale on Coinbase, which aimed to raise $187 million, is examined as a real-time indicator of retail investor appetite in the US.
- Underwhelming Demand: The sale did not fill instantly, unlike similar raises in past bull markets. At the time of recording, it was 82% filled, raising questions about the depth of US retail demand for new, high-valuation projects.
- Key Takeaways for Investors:
- US Retail is Different: The US retail market may be less speculative and "degen" than its Asian counterparts. The user base on a platform like Coinbase is likely not composed of crypto-natives familiar with a pre-launch L1 like Monad.
- Distribution is Broken: The sale highlights a mismatch between the product (a complex infrastructure project) and the distribution channel (a mass-market exchange). This suggests that launchpad models may not work for broad audiences without significant marketing and education.
- Implications for Base: The lukewarm reception raises questions for Coinbase's L2, Base, whose success relies on converting millions of mainstream users into on-chain participants. The Monad sale suggests this conversion is far from guaranteed.
Conclusion
This episode argues that crypto is at an inflection point where narratives of institutional adoption are no longer enough to sustain inflated valuations. Investors and researchers must shift their focus from speculative infrastructure plays to applications with demonstrable product-market fit and defensible value capture, as the market begins to demand fundamental justification for its existence.
