Don't treat crypto like a stock.

One of the more common ways to value a stock is with the price to earnings ratio.

It depends on the industry, but generally P/E ratios will be something like 15x or 25x.

Crypto protocols don’t have “earnings” per se, but they often do generate fees. In Ethereum’s case, some of those fees are passed back to token holders through staking. So you could take a look at ETH’s price to fees ratio as a stand-in for P/E.

Ethereum’s P/F today is over 350x fully diluted. 350x!! Solana isn’t much better at over 160x! Imagine paying that for a stock!?

The trick here is that the P/E ratio is a terrible way to analyze Ethereum or Solana. Ethereum, Solana, and other crypto are simply not stocks. They don’t trade like stocks. They don’t function like stocks.

They’re not bonds or commodities either. And you shouldn’t try to fit them into those mental models.

What crypto tokens are not

Before we talk about what crypto tokens are, let’s take a moment to define what they are not. While there are similarities in parts, crypto tokens do not fit the mold for stocks, bonds, nor commodities.

Stocks

Stocks represent ownership in a company. A share of stock is valuable because that company has an enterprise value that is justified by some expectation of future cash flow.

A company can pay dividends to shareholders. They can buy back their own stock, increasing earnings per share and reducing float. Companies can reinvest their profits into the business, driving more growth.

Bonds

Bonds are debt. They represent an obligation of a company, government or anyone really.

You own bonds because they pay interest. The rate is known and predictable, which is nice. The risk is that the obligor (the entity that owes the money) won’t repay the debt in full and with interest.

Bonds can be traded too. If you owe me $100 and I don’t think you’ll pay me back, I could sell your debt to someone else for say, $75. I accept a loss and move on. You still owe $100, but this new investor only had to pay $75 to buy this I.O.U.

The new holder of your debt now has more to gain — when you repay it, they’ll collect the interest plus the extra $25 in principal. This is why when a bond’s price increases, it’s rate decreases, and vice versa. 

There’s a crucial nuance here that differentiates bonds from stocks, commodities, and other asset classes. When you invest in bonds, you are accepting a predefined return. The upside is the interest rate plus any discount you paid up front (ie. paying $75 instead of $100 in the example above). That’s it. Your upside is capped. Negative skew.

Commodities

Commodities are just things that can be interchanged (ie. no individual unit of the thing is special, they’re all the same). Any ounce of gold is the basically the same as every other ounce of gold. It doesn’t matter which ounce you own. They’re all the same. The technical term for this is fungibility.

Commodities are valued based on supply and demand. Some random rock is worthless because there are a bazillion random rocks and not that much you can do with them. High supply, low demand. Copper is valuable because it’s in demand for use in wiring and pipes and other use cases, plus there’s only so much copper being mined every year. Supply is constrained, demand is high, therefore copper is more valuable than random rocks.

The same is true for oil, gold, silver, uranium, you name it. How much exists in total? How much of that is available for use? And how much does the market demand it? Supply and demand. 

What does all this have to do with crypto?

Crypto is all of the above and none of the above.

It’s software, and software can be or do most anything you want it to be or do.

It can be equity like – tokens can receive a cut of the profits of a protocol.  But it does not give you ownership. These are open source, decentralized software protocols — there is no company. You may have some governance rights, but that’s very different than company ownership.

You can stake tokens and earn yield, not all that different from earning a yield on a dividend. And tokens can be burned, analogous to a share buyback of a stock.

Tokens can also earn interest – they can be debt instruments like bonds or even derivatives of debt instruments too. They can be financial hybrids like a warrant or other mezzanine structure. It just depends on what’s in the smart contract code.

Crypto tokens can also be pure ponzis. They do nothing other than function as an intersection between supply and demand – WIF is only valuable because we all agreed to buy it (and also because that dog is so goddamn cute).

Crypto layers 1’s create blockspace. Blockspace is how an on-chain transaction is captured, validated, and recorded to the chain. Each block is interchangeable, and the fee you pay for your transaction, called “gas”, depends on the demand for that blockspace at that given time. Not all that different from our copper example above — Layer 1 blockchains are very commodity-like in this way.

Crypto is all the things. Sometimes simultaneously. And the uniqueness doesn’t stop there.

Crypto has its own unique attributes too

Crypto can be money. You can use it as a medium of exchange. That’s as true for bitcoin as it is for stablecoins like USDC.

It holds value too, similar to other stores like gold or real estate. 

Crypto is also a network. There are nodes operated by teams and individuals across the world that work together to execute and validate transactions.

There are developers and entrepreneurs and users that join the network for myriad applications — from banking to derivatives trading to social networks and beyond.

The blockchain has interesting network effects too – the higher the price of a token, the activity, money and users on that chain tends to increase too.

It also has anti-network characteristics too. The more usage that hits the network at one time, the more expensive it becomes to use. Higher gas prices disincentives adoption as users will go to other chains with lower fees to do the thing they want to do. Ethereum’s success drove it’s high gas prices, which drove users away to lower cost chains like Solana.

So WTF is crypto?!

Crypto is a brand new thing.

It’s the infrastructure, and it’s the applications. It’s a petri dish for innovation.

Its money. Sometimes it’s a security and other times not. There is no ownership, but it can offer governance. It can provide a yield, but it's neither debt nor a dividend. It’s a network, and an anti-network. It’s a commodity, and its software. 

One of the top angel investors in crypto, Santiago Roel Santos, put it this way recently:

 When you invest in crypto, you have to push aside your notions of the Intelligent Investor and Black-Scholes and PE ratios and discounted cash flows.

These models and all the others can be helpful to understand some specific situation in a token. But the truth is that there is no single best metric to understand crypto. It just depends.

You shouldn’t expect it to function, trade, or value like other asset classes, because it is fundamentally not the same thing.

People and investors and institutions are lazy and just want to map what they already know onto this new thing. And that doesn’t work. That creates an inefficient market.

And that’s our edge.

We use momentum and volatility targeting, in combination with network measures like TVL, transaction volume, user growth, and we layer on yields and cash flow analysis and token burn mechanics. We use combinations of tools — new and old — that are the right fit for the job.

That’s why we don’t treat crypto like a stock.

We must treat it like the mutant freak that it actually is.  

Portfolio Update

No trades or updates this week. We are max long and will remain so.

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