The Unique Nature of Crypto Speculation
This heightened storytelling in crypto can be attributed to two primary factors. First and foremost is the sector’s permissionless environment, allowing anyone to purchase or create tokens without extensive verification processes. This openness has led to phenomena such as the remarkable success of pump.fun. The second, more nuanced factor is the lack of robust legal protections for token holders. This uncertainty raises critical questions for professional investors: Will a decentralized autonomous organization (DAO) issue a new token? Are the revenues generated by protocols allocated to private equity instead of token holders? What do the market-making arrangements entail? Furthermore, will founders discreetly liquidate their token allocations in private over-the-counter markets? The absence of clear answers to these inquiries creates an atmosphere of uncertainty, limiting participation to the most speculative investors. This scenario incentivizes companies to prioritize narrative-building over traditional profit-and-loss metrics, a phenomenon recently described by Felipe Montealegre of Theia Research as “narrative Stalinism.” He posits that the entity controlling the narrative has the power to influence token performance and capital distribution, irrespective of actual market needs or customer demand, resulting in a distorted market equilibrium.
Investing as a Social Science
It is important to recognize that storytelling has always been a crucial element of investing. The field of investment is inherently social rather than purely scientific, incorporating subjective elements that contrast with mainstream economic theories, which often rely on straightforward supply and demand models. A historical example comes from F. Ross Johnson, the former CEO of RJR Nabisco, who vocally criticized the market’s undervaluation of his company’s shares despite strong cash flow. In the well-known book “Barbarians at the Gate,” Johnson lamented that despite the company’s food and tobacco assets being worth significantly more than its market valuation, the negative stigma associated with tobacco remained a significant hurdle. In the crypto arena, the challenges are even more pronounced due to fundamental issues regarding property rights.
Challenges in Crypto Capital Markets
Montealegre has emphasized that the prevalence of “narrative Stalinism” stems from inadequate protections for token holders, which elevate capital costs and deter risk-averse institutional investors. For those who focus on fundamental analysis, hoping for a market rally simply based on price increases is unrealistic—investors should seek tokens that demonstrate genuine revenue generation. However, addressing the property rights issue is crucial before meaningful progress can be made.
Emerging Opportunities Amidst Challenges
Despite the challenges faced by crypto capital markets, a select few companies are managing to thrive. While revenue-generating ventures remain rare, some have emerged successfully. Companies like Jupiter, Raydium, and Ethena have each demonstrated their ability to generate significant revenue. Hyperliquid, for example, leads the decentralized exchange (DEX) sector with daily revenues between $1 million and $2 million. For those interested in ventures outside the decentralized finance (DeFi) ecosystem, Maple Finance is a notable platform in the on-chain private credit space, achieving a revenue peak of $1 million in a month as of May. Additionally, Shuffle, a gambling application, boasts annualized net gaming revenues exceeding $100 million. The developing decentralized physical infrastructure network (DePIN) sector also showcases promising projects, with Grass reportedly generating annual revenues in the eight figures and Geodnet achieving annual recurring revenues of approximately $2-3 million.
Shifting Perspectives on Token Valuation
Discussions surrounding appropriate token valuation methods are becoming increasingly prominent, underscored by recent conversations about real economic value (REV). This trend suggests that a growing demographic of investors is shifting their focus from speculative trading to more thorough and disciplined approaches to asset valuation.
