How to value Cryptoassets? - With Su Zhu and Hasu

Transcript

Hey, welcome back to Uncommon Core, where we explore the big ideas in crypto from first principles. This show is hosted by the CEO and Chief Investment Officer of Three Arrows Capital, and me, Hasu, crypto researcher and writer. Enjoy. Hey Su, it's so good to see you again. I just checked and the last time we did an episode together just the two of us, it was in June, man. Yeah, that's crazy. Not almost half a year.

Yeah, man, it's so good to talk to you again one-on-one. You just you sent me a couple of days ago a a thread from from someone on Twitter that had went extremely viral about valuation models for cryptocurrencies, especially talking about layer one layer one tokens, right? And in the days after that two people I know from traditional finance who have not like none or very little crypto exposure also shared this thread with me and asked for my opinion on it.

So, I thought, man, this is something that we may have to talk about, right? Yeah, that sounds good. So, to me it seems that there's clear demand to hear a little bit more about sort of how we think about valuation models in crypto and now that we are making, you know, all-time highs again and so on. So, yeah, I just I want to go through some, you know, the arguments and the approaches that we've seen in the past. And to me it seems I just sat down before this call and wrote down, you know, what I remember as like the the valuation models that people have used in the past to to look at cryptocurrencies.

To me it seems they can be like high-level categorized in two brackets. And the absolute and relative valuation approaches. And I'm just going to like give this super high-level overview because don't want this to be some kind of lecture. Um so, in the relative approaches, we have the ones where it's, you know, relative People look at at something relative to itself, right? So, they look in Bitcoin, they look at sort of, okay, what is the ratio of, you know, the stock the stock to the flow in relation to the price, right? Um and then they sort of map this out, right?

And get some kind of, you know, future price development. The rainbow model is in the same category. HODL waves in the same category, where you look at something internal um to Bitcoin, right? HODL waves is sort of, what's the HODLing behavior, right? What's sort of the velocity of of coins in in sort of the Bitcoin economy. Um and map that to price, right? And um many trading indicators sort of fall into this category. And the second big one is sort of approaches that model um the price of of a cryptocurrency relative to other asset classes or other like external use cases. I think one of the first that we've seen that's sort of Chris Burniske

pioneered way back in the day, but that may also have been already like in some emails by Satoshi and whatnot is sort of looking at the the remittances market. Back then, when many people thought cryptocurrencies mainly useful, you know, to send money abroad, right? Um so, they look at like, okay, what is We have this thing in the real world, what is sort of the TAM of it? Um and how much of that can, you know, cryptocurrencies realistically capture? Uh and then arrive at some relative there. And I think even more popular is to look at like an asset class like gold, right?

So we People obviously value gold. Something like Bitcoin or Ethereum, it does feel like gold in many ways. So, um how much of the gold market can we capture? And I think those are pretty, you know, sound approaches. Um And then instead of the absolute absolute approach bracket, you know, we have seen you know, people value these tokens as a company. And recently, that's the third way that we're going to talk about, as a nation state or a nation state economy, um we have seen, you know, pioneered by John Pfeffer, like valuing these tokens as a commodity such as oil that you consume for fees.

Um yeah, and of course, um you know, as money basically. Um So, first of all, like what do you think about this high-level approach, um and does anything stand out to you? Yeah, I think I would first preface by saying I think that the I think the desire to have valuation models has never been higher because of the entry of institutional investors who are used to these kind of models in equities and fixed-income markets. So, they want to have some kind of solidity, you know, some some kind of kind of solid ground to be able to say, "Okay, the market is undervalued because of this, overvalued because of this versus the model." So, um I think that's primarily where the drive

to find these valuation models comes from. Um on the institutional side, on the on the retail side, um for traders, yeah, they they often want to be able to say, um you know, "How does this compare to previous cycles? How does this compare to to um you know, can we map on-chain dynamics to the prices?" That's why, you know, on-chain metrics research type people uh are very popular on Twitter as well. So, I think um it's all people trying to make sense of things in the world, right? So, they want to be able to tie uh facts in the world with prices in the world. Um And so, I think with that said, um

I think that uh I think the relative versus absolute is a good kind of way to split it out, right? Because um absolute-wise uh stock-to-flow is really the prime example of this, right? Where um it's lit- literally saying that um uh we can make certain predictions about the price of Bitcoin from the way that um its supply um its supply changes over time through halvings. And so I think with all these models, there's like strong elements of truth and then strong elements of um things that don't quite make sense, but um a lot of times it doesn't matter quite as well because it's all about

coordination points, also. So, I think um stock-to-flow being example where, you know, um the question would be then why why do you have uh you know, why why does stock-to-flow um just apply to Bitcoin? Why doesn't it apply to other things? And and then clearly there's quite a few times where they have to redraw or refit it. Um and and so there's a lot of kind of I wouldn't call it pseudoscience, but I would say it's it's not necessarily something that can be traded off of. Um but but at the same time it's a very powerful uh coordination point for people um in the Bitcoin market. So, because people know that other people look at this model, it becomes something that uh is reflexive as well. Um

You know, just a couple examples of this kind of reflexivity is that most Bitcoin OGs know that uh on the previous soft fork uh SegWit, Bitcoin went up 50% in about a couple months right after. So, this time with Taproot if they if they remember that, then they and they believe that other people would know this, then they also want to hold for that, right? So, and then similar for halvings as well, where people know that post halving the price goes up a lot, then there's coordination points, right? Uh so, I kind of see a lot of uh models as being actually like it's almost like constitutions or or or like like playbooks that people can follow together.

And you're seeing that in Ethereum now with the fee burning, right? Where people are trying to say, well, we burned this much in fees today, hence we must hold our ETH harder, right? Because it's even sounder to today. So, there's kind of an element of narrative building whenever you have a model. So, um while it seems kind of um crazy to traditional finance people who really believe in the solidness of models, uh the the sort of co-evolution of models and narrative is is something that's always happening, right?

So, so are you saying uh all evaluation models ultimately just memes? Yes absolutely. Uh even if you take in traditional finance, right? You take evaluation model with like when people look at foreign currencies, they talk about things like purchasing power parity, they talk about real interest rate differentials. They look at these things and they try to, you know, ascertain some relationships, right? So, part of that is doing some some kind of like backward-looking science. Uh sort of econometrics where they're saying, here is what happened before and so we can extrapolate this.

Um but at the end of the day, yeah, it's it's it's still something where you have to believe certain things about the world, right? And a great example of where the models of the past were shown to be again, you know, intersubjective is the idea of value investing, right? Which I tweeted about a while ago. And, you know, it's now been over 20 years that value investing has been sort sort of a disaster for those people. And I think that, um you know, they have this idea that, well, there are no new paradigms or no new paradigms. Well, if you look at 2005, the top stocks, you know, we're talking about oil companies.

And now 19 of in top 20 stocks are tech companies. Yeah. So, there there is you know, it it it's quite and even if you think about oil itself, I mean, petroleum was found like, you know, in the 1880s, right? Or 1870s, I can't remember exactly, but there there's kind of this desire for humans to say, "Okay, here's what has happened in the last 20, 30, 40, 50 years, and then now I've created a model and we're on solid ground now, and this is like immutable, and this is like truth that I found this truth." But really, it's like uh you know, we're we're just a species living on this planet and making up rules and just seeing if we can coordinate behavior from rules.

Yeah. Make sense of things. So, with that said, I think it's clear that uh in in crypto um the graphs for evaluation model um comes from that perspective. So, it is very important to be aware of what other people think is the valuation model for things, and then also to see sort of when that can be true and when that can be very false, right? Right, that's two things I want to unpack here. And the first is sort of the maybe the most central element to all of economics, this sort of the concept of opportunity cost, right?

Um when we look and I'm curious, so when we look at these, you know, sort of quote-unquote absolute approaches whether there's really such such a thing as an absolute approach. Um because you have a great example, like people had this meme, you know, that uh basically stocks are cheap if they are sort of below a certain PE ratio, right? For example. Um but nowadays sort of the the the the the sort of acceptable or standard PE ratio is like twice or sometimes like three times as high, right? And for for the the most valuable companies, even higher.

And and sort of I think the reason is that you can only value stocks for example against its alternatives, right? So in the past people had the alternative or like they would, you know, put their money in bonds. And now bonds are paying negative interest rates, right? So you how can you possibly value stocks without looking at bonds and all other assets, right? So is there really such a thing as an absolute model? People try to create models and call them absolute, but there isn't really no such thing as an absolute model. Another great example is, you know, Western investors have been burning money in emerging markets for many years now because they buy a stock that looks incredibly cheap on a P, but then, you know, each year when they have earnings,

they pay them out all to to employees or they pay them out through other ways, right? I mean, especially Chinese equities, you know, these companies are generally not run to create a profit for shareholders. Mhm. Uh so the company can make billions of dollars, but that doesn't mean shareholders are going to get any of it, right? Uh through dividends or through buybacks, you know, there's no So so there's kind of a always implicit assumptions in absolute model in models that purport to be absolute. There's always implicit assumptions in what people are trying to uh say. They're they're trying to sort of uh say this is uh the way that we under that we can understand this versus other things and uh by doing so uh we will make some kind

of um some kind of progress. Uh so I think that uh it's for that reason too that you'll see different coin communities have different models as well for what gives it value. So, you know, Bitcoin the the fees are not quite high these days, so there's not much talk about fees or transactions, right? because if you do that, then Ethereum or other chains look much stronger. Uh but instead, they'll talk about, you know, versus gold or they'll talk about huddle waves or they'll talk about um stock to flow. And so that, you know, is is also a reaction to the realities of the world, right? And similar for Ether, uh, you know, there's a lot of uh, high fee volume on Ether. So, they want to talk about fees a lot. And, you know,

and then there's, you know, Solana and Avalanche and, you know, high TPS chains where, you know, user accounts are growing very fast. And so, there there's kind of there's always an implicit assumption behind every model. Um, and that I I think that's quite key to understand uh, crypto actually as well. Um, because there's anytime someone tries to sell you a model and say, "This is the model you use to value all coins." And then you find like, well, let's say crazy outliers where you then you ask them, "Well, why is the market pricing this coin that way?" And then you say, "Well, market's wrong." Or, you know, things like that. Um, that you probably get a sense that you're missing something as well.

And you touched on one of my own like favorite pet peeves, which is I'm constantly talking about like with people who tell me that you cannot look at DeFi tokens, for example, as equity-like because equity gets all of its value from from the law, right? Basically, you're guaranteed, you know, that value as a shareholder of the of the uh, of the stock. But, I'm telling them, "No, it's because of the social contract that a company is sort of maximizes shareholder value, right? They could do whatever they want with their money." And there's you know, nothing really that you know, within even within like the the the the realm of what's legal, there's still like so much they can do. And so, um, I really like that you said that. And

the other point is that you made is also very good. Um, where each coin and each sort of project wants to be valued on, you know, in a in a framework or metric that makes them look really good, right? So, that's why all of the the high TPS chains, they want to only compare themselves with like low transaction costs and high TPS, right? And then you have, you know, something like Bitcoin that wants to, like, wants to com- wants to sort of value itself in in uh you know, something that makes Bitcoin look good, right? So, each community is sort of its own sell-side research, basically.

Yeah exactly. So, when we look at um when we look at these valuation models, I think what something you said is that um there's basically a a beauty contest, right, going on in in crypto at all times or like a coordination game where where you want to you want to predict what valuation models other people are going to use, um you know, and understand what according to those models, what coins um will do the best, right? Um so, there's there's basically like a meta like how how how much focus do you spend on like a meta game like that?

I think it's pretty important to understand, especially when people kind of overestimate uh certain narratives or underestimate others. So, I think a good example of this was uh EIP-1559, which uh was a very bullish catalyst going into it um and extended through a bit after as people started to see the burn, but then as people started to, you know, uh think about it a little more logically, they would they they started to say, "Okay, well, even if I'm burning a lot of fees now, uh but it hasn't, you know, the chain's not scaling on layer one, um but meanwhile all these new users are coming in and these are not, you know, necessarily wealthy people. These are people that want to be able to use DeFi

on $1,000. These are people that want to be able to use applications, um then maybe, you know, having a culture where you're you're celebrating high fees uh can be a turn-off, right? And and and can be quite quite dangerous also. So, you know, then we kind of saw a big surge in in layer one activity where, you know, they they kind of, you know, were able to capitalize on a lot of the news that's coming in, right? With, you know, BNB and and and BSC, but then also with Solana and FTX and you know, with Avalanche and their bridge and Phantom and you know, there's a number of these uh layer ones that have performed incredibly well sort of after Yuga Labs 559. So, there's kind of an example where, you

know, uh if you're purely from a fee perspective, you may say, "Well, you know, ETH uh is burning the most fees, has the most revenue, has the most on-chain revenue, hence it has the best PE ratio." Uh then you kind of miss the whole point, right? Of of what what the market will do next because um the the the kind of reality is that uh there's also a philosophical debate there that that can happen where people might think, "Okay, well, um you have the highest fees now, but if the next 1 billion users go to other chains, uh will not some of the users on your chain now go to those chains as well? They're just sort of jo- to sort of join where the new party is."

Uh so, this is kind of what's happening in the NFT space as well, unfortunately, or as well, right? Where, you know, ETH NFTs have really fallen quite a bit in large part because of Solana NFTs, right? Because people can actually collect these uh whereas no one's going to buy a one ETH NFT and pay 0.1 ETH in gas, right? So, they're having to compete with these kind of these kind of bots to do that. So, there is a there is kind of a double-sidedness to to sort of each narrative, really, right? And and so, the it is important to see sort of where that narrative can be come a little bit dangerous uh and where it's sort of um and sort of less so, right? So, I I I think that you know Bitcoin

you know for some time it had a kind of a dangerous narrative where it was you know much too tied to um to you know Elon pumping it basically and and things like that and and so when he you know started to talk about the mining you know cleaner dirty mining and then we had the China flood as well you know that became very dangerous but then you know as the market kind of stabilized and you know increasing amounts of mining moved out of China and you know into sort of very renewable and very sustainable sources I think there's something where you know I've seen a lot of people talk about how you know because

you know Ethereum is migrating to POS or POS is a strictly better consensus mechanism than POW then therefore you know once you know everyone realizes this then Bitcoin will go to zero and POS coins will go to the moon right and and and sort of that that's kind of becoming understood I mean and it's to the point that I've seen a lot of banks write research like this and and so that that's been something where um I think that if they if they zoom out they they'll probably see kind of the problem with that with that logic right namely namely that we can create umteen POS coins we can create umteen forks of POS coins as well and and

there's um kind of a reason why proof of work for for moneyness has has different properties than POS so I think that you know I've I've talked to some guys that are like some of the biggest farmers on Ethereum and and they said they actually would prefer if it stayed POW because it's Lindy like they know how it Yeah. Whereas if it goes to POS, then the Lindy clock is reset to zero and they wonder where, you know, they they want to wait at least 6 6 months before farming big, you know.

Um and these are huge farmers on huge DeFi users on Ethereum so I think that um the POW versus POS narrative is another example where, you know, if you if you take a model where, you know, any use of energy is waste, then you kind of well, then say, "Well, then why is Bitcoin number one? The market is wrong." Right? And you kind of ignore the fact that, you know, now in the US stock market, there's a ton of Bitcoin miners being listed. There's huge investment appetite. There's huge courting of Bitcoin miners by states, by Texas, Virginia, West Virginia, you know, all across the emerging market as well.

So So I just think that that there's another example where, you know, for a while the sort of dangers of POW or sort of the ways that it could get attacked were underestimated and then now it's sort of very overestimated and sort of the advantages of POW are not understood. I mean, what what people who say Bitcoin is dying or like the proof-of-stake coin can replace Bitcoin, what they also typically miss, I think they tend to be newer people in crypto. And what they tend to miss is that ultimately what matters is the strength of the community. And we touched on this with the side side, you know, the community being sort of the coin side side research. And we've seen how well they can, you know,

if one narrative falters, then they can, you know, invent the next one. And Bitcoin has transitioned narratives so many times now. I tried to show this with, you know, my article uh Visions of Bitcoin in 2018 with Nic Carter. Um this, you know, looking at this really helped me understand um that just how good of a bet Bitcoin is because there's really no one thing that can kill it, right? It's just going to transition to you know, the next narrative or the next use case.

And Ethereum at this point has also like um proven a similar sort of chameleon-like um quality. Definitely. So, one of the things and that that's an interesting thing you said that I want to unpack. So, um one of the statements from the thread and that we talked about is uh so, the value of a chain comes from how much economic utility it supports, not from how much it captures. Um and then you told me um that this statement scared you.

Um you said it's one of the seven unholy top signs. Like the signs of the market topping out. Um so, first of all, why do you think that? And what are the other signs? Well, first of all, the other signs are I haven't seen them yet and there's some chance that I won't see them this cycle. So, then there will be a super cycle as promised. But um with that said, this is one of them where um it's a similar concept to what I brought up during like the top of DeFi summer uh in 2020 where there's there's sort of a this idea of the fork, right? And and forking of things and you've kind of

seen this with Olympus now as well where there's now 15 Olympus forks at least uh on every chain, right? And it's it is kind of scaring some Olympus holders cuz now Olympus is launching to Avalanche as well cuz they're like, okay, well, there's now like two different like Avalanche Olympus forks that are all doing really well. Like I I can't ignore this anymore, right? And and and so there's the I mean, forks have just a great ability to show people that, you know, what has been built, what actually is novel, and what can be copied, but also sort of where things might fail, right? Where, you know, if you see some of these forks fail, that then you're like, "Okay, well, this may also happen to mine in

the same way." And or also, you know, maybe long-term the value capture isn't quite as strong as they thought. Uh because a a lot of stuff in crypto, it does follow a kind of thing where you need to be early in that thing, right? So, if you're not early in it, then it defeats a lot of the purpose of it to begin with, right? Um so, once things get to a certain point, there's you know, there there there is this fear of not being early anymore, and this fear drives people into things where they think there's a higher chance of being early. And so, when that happens, uh then the question is, what kinds of what kinds of investments make sense

uh given that, and what kind of investments are more exposed, right? And so, the idea that um that, you know, the way to value blockchains is by the economic utility of them, uh and not the value they capture. Um you know, the this is and then and then more so to value them as like nations, right? Um I think this is very tricky. Um I recently talked to Maddy, who we had on our podcast as well, and he was talking about the idea of tribes and and and sort of what he he he was positing a similar concept, where he's saying what crypto does is it enables tribes to come together, and there are many different

tribes, and then these tribes just are creating a lot of this value because of their ability to coordinate, and their ability to make do economically useful activities for each other, right? And I think creating like FOMO in other people who want to join the tribe, but they sort of need to buy the token to become part of the tribe. Yeah, and I you know, we we discussed privately and then he later on said, "Yeah, like the he actually thinks most of the tribes that are formed now will fail." Right? Uh like 95% plus he he said. And and so there you kind of see the point where yes, it is very easy to create tribes uh in a bull market Mhm.

where the coins are going up. The question is what tribes are sustainable when coins are going down a lot, right? So as we saw in 2018, 2019, you know, Ethereum had reasons for people to stay involved even though the number went from 1450 to $80 in a year. Uh less than a year actually. So whereas other coins that happened and then everyone left, right? And it didn't really bounce back. So um economic activity on the chain uh capturing value, these kinds of things, there there definitely needs to be some value capture mechanisms long-term. So um in the case of Ethereum, it's now

through this fee burn process, but also through this uh the the use of Ether as pristine collateral in DeFi, which is great, right? And then also in other chains, you know, that are similar to Ethereum like Avalanche, they have a similar concept, right? Where yeah, P1559 and they have, you know, deflationary coin and similar with Tron, similar with other coins. And and proof of stake, right? And proof of stake as well, right? Where you you you have some kind of like MEV uh capture potentially and you also have some kind of um ability to earn a yield uh using the native asset, right?

All right, yeah. So so I think that um while these are while these are very kind of important concepts, um there's the it can be dangerous to tie uh prices to economic activity uh or to or to raw utility uh from any specific model because again you must have a market where the people believe this is true, right? So some

some some strong counter examples, some counterfactuals to this might be something like a Cardano, right? Which has almost no utility yet. Uh but it's still doing extremely well, right? Uh it's one of the best performers since the bear market and uh it has a great community. Um and you know, the first thing that any normie ever asks you about, you know, he'll ask you about your view on Cardano probably. Um and and so the the question is like, well, what have they really achieved through this? Well, they've created a great meme, right? They created something that's really speaks to people.

Um you know, so so I think that that's something that, you know, always kind of throw throw throws a wrinkle into everything, right? And you know, so someone with stuff like Doge, stuff like Shib, uh where there's none like memetic value as well. And then the question becomes well is there actually a lot of difference between chains with utility than having value uh or memes having value or are they both memes and they are memes that appeal to different people in a different way.

You see what I'm saying? Because then if you go to Bitcoin itself, Bitcoin itself has one of the lowest utilities on chain, but has the biggest market cap by far. And so there again, it's like, you know, Bitcoin in a way has more similar things to some of the chains like Cardano or like Doge or like Sheep than it does to a chain which tries to say, "I'm I'm tied to the utility on myself." Yeah, I mean, we see this in not just in crypto, right? We see this now everywhere at in in stocks and so on, right? Because I mean, if you look at why is Tesla like worth you know, as much as like the next what is it? Like three or four next biggest car companies combined?

It's not because they, you know, sell more cars um or have higher margins. No, it's because they are selling a story, right? They They let you be part of the tribe, you know, of those visionary people who are saving the planet and what not, right? Um so in that sense, what do this like maybe a spicy question. What do you think is the biggest tribe in crypto that can still fail? I think from a purely just, you know, philosophical perspective, anything can fail, right?

Mhm. So I think there's always failure points in all these things just just like there are failure points in all nations, in all companies, in all in all things, right? Like I strongly believe in the impermanence of all things. So I think that with that being understood, I I think that then the question is what which ones are, you know, you know, they'll be uniquely susceptible if the market were were to turn and what things are less susceptible, right? And you know, I would argue like for Bitcoin and Ethereum because they spoke to some concepts of decentralization and they spoke to some philosophical concepts for people that people were willing to hold

it and build on it during the bear market even though uh they were maybe losing money, Right? Whereas something like EOS, uh once the money was gone, you know, and kind of the coins all into a treasury and the ecosystem fund wasn't doing anything, then people stopped building on it or people stopped caring as much. Whereas ironically something like uh Cardano or Tron, they actually went and you know, built communities and they they tried to build utility and and and so there's kind of this there's kind of this thing where um you know, what what kinds of projects really need the number to be high for anyone to care? And what projects does the number

not need to be high for people to care? Right? Uh so that that kind of tells you a lot about the strength of different tribes. Um and so I think generally in crypto there's uh strong members in every community. There's sort of a uh weaker large majority um that uh will likely leave and in the case of price going down. And then uh the question is how many of those people will get converted to uh the the strong, right? And does this strong number grow over time? Uh because a lot of people who came in during the previous cycle, they came in for ICOs,

they came in to flip stuff uh during during the late stage. Uh maybe they bought the top of Bitcoin and you know, then they were like, "What am I you know, just as a punt?" And then later they have to figure out what did I buy? So I think um there's a lot of evidence that the current top coins are relatively rationalist, I think. They have, you know, all uh quite strong believers. They have quite fast-growing communities and I think that um I think that I can't name like any specific tribe that I think is uniquely about to fail or anything.

Um but those are the kind of metrics that I would look at. Yeah. Okay, so to summarize, maybe you're looking at which coins, which tribes did not yet have to do a have had to endure a bear market where they converted a lot of weak members into strong members. And those are the most likely to fail. I wouldn't say they're most likely to fail, but I would say that um it is something to just keep in mind where um the there can be quite a lot of the market that thinks numbers can only go up. Um so Right.

As long as that's true, maybe people will will like it. But, if the coin is uniquely designed in a way that as the as the number goes lower, then people have no point staying, then it gets quite dangerous. And you see this with some of the DeFi Ponzi games, right? Where if the coin goes low enough, then no one will farm it. Suddenly, the TVL will all leave. And then if you if you're looking at TVL that as sort of your valuation model, then you get scared and you leave also, right? And you you also sell. So, um that's kind of sort of a canonical example of why uh you know, first of all, that metrics can be gamed by farming and and by uh these kind of Ponzi games, but also that uh it's sort of by construction going to fail if the price

goes low. Right? I mean, it's basically a question of how much leverage and reflexivity is built into the token. Um yes. And DeFi Ponzi games are good example. I would say Ethereum in 2017-18 was maybe even the first big example of such a Ponzi game. Not deliberately or anything but there you had this ICO game that was happening on top of of ether. And I don't know, like 20% or whatever of all ETH was locked ended up being locked up in in ICO treasuries.

Um with you know, removed supply from the market and and and and pushed up the price. But, then once the market turns, those issues started selling off endlessly all of those so supply back onto the market, right? So, you had it on the way up and the way down, and that's why it crashed like 95%. Um much more than, you know, Bitcoin, for example. Yeah. I will say that the coins of this cycle, they are stronger in the sense that I do think there's something unique about uh high percentage being staked. Um if people don't care because they feel like they're still earning a yield, and they feel like they're being productive. I do think there's something to that uh meme where they're less likely to

sell it um because they think they can wait it out. And then because they also know that everyone else thinks that way, they're kind of you know, there there's kind of collective shelling points, right? Um but with that said, you know, we really haven't seen yet anything where there's forced selling, right? Where, you know, either through redemptions from funds Right. Uh or or or through crystallizations or through things like that, right? Where Um where there can be just, you know, or or just profit taking or these kinds of things. So, um I think that uh it's very much true that that that staking has created a very interesting

flywheel because the more people stake, the more people see that staking, and then they think supply circulating supply is lower, and then they also buy. And because they buy it, then they want to get the highest yield on this, and then they also stake. So, then, you know, staking yields or staking rates have become sort of a uh broad uh benchmark for how um for how healthy a network is, right? Where the staking rates are higher and going higher, that means people have more conviction. And if people are unstaking and then selling, then it's like less conviction. So, I do think that that that's something that generally has seemed to work very well this cycle, and that was one of our earlier so sort of broader bets. Um but but again, it's something where, you know, the

downsides of proof of stake or sort of not the downsides, but sort of the cyclicality of proof of stake um is very is not understood at all uh by the market because it's never had to deal with it yet. I think I think it's probably uh not really comparable to the ICO boom. I don't I don't think proof of stake is going to introduce a lot of cyclicality, a lot of further cyclicality because of liquid staking. I think liquid staking will just completely replace any form of locked staking. And then all of this like when you stake an ether, you have it immediately have it back and can use it in DeFi, can sell it at any time. So, I think this sort of uh removing supply from the market effect

um no longer exists in that case. Yeah, I mean, it just it just comes down to the idea of um locking up So, in proof of stake and sort of the value accrual of these models, there's an there's an assumption there, which is that uh by locking up supply, the number will keep going up, right? Um and people will buy it because they see it locked, right? But um but again, you know, we're we're at this point where we're at, you know, 500, 1,000 X's in in quite a lot of coins.

And um also we're at uh you know, quite quite broad understanding of these facts, right? Whereas, you know, during the bear market um there was a very poor understanding of how uh proof of stake could create these kind of things. You know, we kind of saw the first taste of it with Tezos, right? And and and baking, right? Where where Coinbase uh had to buy more Tezos to support the baking of their clients. And so, that created a quick move from $1 to $4, and that got people really excited about proof of stake um as a mechanism and also with some of the governance that that was happening and and so we kind of had a taste then but then it was like generally not understood that proof of stake had this kind of uh had this kind of a flywheel effect,

right? Whereas now I think we we are very much in a point where everyone believes this flywheel effect. So I guess all I'm saying is yes, it has a flywheel effect, but everyone also knows it has a flywheel effect. I agree, yeah. It's It's no longer really relevant because or everyone already believes it. It's still true. Well, it's still true and it's still relevant. It's just that it's it's it's understood better. So that changes something, right? Yeah. versus when it's not well understood at all. Something that sort of both the relative approaches and the absolute approaches completely ignore um is sort of the cyclicality of markets, right? Um we have to talk about this. Um we talked about all of the like the downsides of the existing

approaches, why we think they're flawed, but also what elements uh might have some some sense to them. Um So how do how do you think about, you know, reflexivity and and cyclicality in the crypto markets? It seems It seems like you can almost not not value anything without putting this in the number one spot. Yeah, so I think on viewed on very long-term lenses, I think the cyclicality doesn't matter as much. Uh you can kind of just buy projects you like and then stake them and put go go into a coma and you know, or buy them, put them in cold storage for the most part. Um and that will generally work. I think that approach um that has worked and will continue to work. I think that in terms of um you know, weathering

drawdowns or or trading around the market in between kind of different coins, um I do think that um that approach requires um you know, a a certain amount of understanding that uh um that uh uh crypto does have elements of boom and bust in it by its nature of sort of being hyper capitalism, right? So, we know that all markets have boom and bust cycles uh viewed on long enough time scales.

Just a matter of asking, you know, what what does that boom and bust look like, right? For instance, it can be a far higher number than you think, right? Like um doesn't mean that, you know, Bitcoin stops at 68K or 100K. It could mean that it goes to 500K and then goes down to 250K, for instance, right? Or it could mean that, you know, like Solana did, it went from 20 cents to to uh you know, 200 and then back to one uh 115 or so and then before it doubling again and and so, I think that um the the cyclicality the cyclicality has a lot to do with um when when kind of, you know, all the upsides have been

priced in and when uh none of the upsides have been priced in or when some of the downsides that, you know, haven't been priced in or sort of the risk of uh the risk of replication hasn't been priced in, right? So, I think an example of this too was sort of with Sushi, right? Where Sushi forked Uni and then there was a lot of excitement about it. Uh at first it went down and then there was a lot of buildings and projects and then it came up, right? And then at that time, you know, some people in the market, including ourselves, we had this idea that, you know, Sushi could do really well because it would go to all the other chains and it would do this and that. But then, you know, what we kind of started to see happening with BSC, it was that, well,

actually Cake they made their own, right? And their own happened to, you know, have the support of the BNB OGs and it, you know, it happened to have the support of the ecosystem. So, that was just the Sushi of the chain. And so, and so, we started to see this thing where it's like, actually, uh you will just have that app but on different chains. And then now with Avalanche as well, right? Like, you know, the the Sushi of Avalanche is is Trader Joe. And Trader Joe incidentally also has borrow-on lending on it. And it also has, you know, a bunch of other features on it. So, there's kind of this idea that, um, you know, what what are the things on the chain that actually make it, uh, properly unique? Where will the new users go? These kinds of things. And And so, I think you like viewed in that

lens, um, I think that, um, you know, it's kind of easier for people to understand like the L1 moves of the past few months, right? Where, yeah, um, you know, like ETH people they they wanted to be able to say that everyone must value this decentralization of ETH versus other coins or other layer ones. Hence, they'll be happily willing to pay $400 fees. Or if they're not, then then they're just too poor, right? Well, actually what happens is people just have different priorities, right? Or they have different concepts of what they want to do.

And you can fork all the applications and then go over there. And I think there's also that idea then of like, well, all the innovation is on Ethereum. But that's not true, right? Like, we're already seeing incredible amounts of innovation, you know, through, uh, Phantom, through Avalanche, uh, in just in the EVM space alone, right? Um, I I think Spell is a really interesting example of that. Um, but there's a number of other ones that are coming up as well. And And so, I think there's kind of this idea in crypto very often where it's like okay the These are the coins that have made sort of the the the the OGs rich or like the previous generation rich. And now the new people have to all buy my coin. And that's how this works. But then the new people when they come in, they buy other

coins or they buy new things or or they buy, you know, so that's kind of like there's these two, um, there's these two there's these two strains of crypto I would call it. Like, one would be like the very institutional like USBC side. And then there's the sort of like very grassroots or like very user-driven side, right? Another good example of this is like Ku- Kusama versus Polkadot, right? Where Kusama has done really well and has a a ton of this organic active uh from the community, and that kind of also has an interplay with uh Polkadot in the way it's valued. So, I think the cyclicality of markets, the the the most critical thing to understand is when

there's uh replicability of the underlying thing that's supposed to give the the thing you own value, right? Uh once you become aware of this, you should you start to see that a lot of things are on less solid ground than they look at first. Right? Uh or a lot of narratives are less solid than they look at first. Basically, you you have to understand how much reflexivity and leverage is a part of your existing narrative, right? How much of that is due to being in a bull market?

Yes precisely. My last question for you, what valuation framework will help you the most in the next 6 months, and which one will work best over the next 6 years? I think 6 years is a very difficult question to answer. Uh I probably would skip that. I think in the next 6 months, um I think it's our general view that Bitcoin is very under-owned uh because there's uh entirely different type of valuation model uh that I think you could use on Bitcoin that you don't

use on the other ones, which is sort of political. And I sort of alluded to this during my podcast with Jordi, where we talked about Bitcoin uh and sort of soft Bitcoin strength. Uh sort of the quiet strength. And, you know, it's it's something where you know, gold's been flat now for 10 years and Bitcoin's gone up a million percent, right? And on top of that, Bitcoin having the providence that it does as the first chain and having the fair launch that it does. I mean, we can debate whether other chains have a better launch for promoting utility or not, but Bitcoin being the first, having the providence of the first, um, that creates a very compelling coordination point

for people to store value in because they understand that everyone else agrees with this, right? And more so, I think that you know, during the Bitcoin scaling war debates, like should Bitcoin become high utility or not, it's becoming increasingly clear even among the BCH people that I know that the way that Bitcoin has done it is the right approach. And now we've gone toward a sort of war of utility on every other chain, but Bitcoin is sort of able to sit where it is, uh, and try to be the most decentralized right?

Right. So, I think that this value proposition, uh, over the next 6 months to 1 year, I think, uh, is going to really come to the forefront because we are very much living in inflationary scenarios in a lot of countries. Uh, we have food prices going through the absolute roof. We have Russia, um, you know, basically holding Europe hostage over natural gas. It's also holding uh, a lot of markets hostage over the price of fertilizer. China's holding the a lot of the world hostage over rare earths and a lot of these other kind of uh, phosphorus and these kind of things that go into a lot of supply chain. So, there's basically an incredible inflationary push that's coming.

Um, and and I think that, uh, this kind of stuff is very bullish for Bitcoin because previously people would have wanted to buy gold, but they can't buy it now because it's not going up and they're just, you know, as it's not going up and as they see young people buying Bitcoin and especially wealthy young people buy Bitcoin they it's becoming a very Pascal's wager at this point. And I think that the that this is also where the element of proof of work mining really comes into play. And then this is a flywheel that people don't really understand in crypto, but I think it's very understood in infrastructure where if you have miners that are mining Bitcoin and they are very close with uh local governments, you know, with the grid, with uh helping uh stabilize the grid as well and also

just, you know, creating infrastructure jobs as well. Um and now that the whole world knows that Bitcoin is not going to die, uh that that it has the support of the main nations, it's going to be incredible amounts of mining projects being announced in every country, right? We're seeing huge projects in Southeast Asia, Laos, Thailand. We're seeing huge projects in Latin America, uh and this will only continue because now people will view this as a digital commodity and they'll say, "Okay, I can I can use the existing resources of my own country to mine Bitcoin and then sell it on the open market or or even just to hold it in treasury, right? Because I know that the rest of the world also created their Bitcoin this way and this is how they value it. So, this is kind of the incipient use case of crypto, the sort

of the the sort of the sound money use case. And I think that this is something that um you actually uh it's difficult to to place Bitcoin against other coins on this metric. Um there's a lot of tech these people that want to be able to do this and and so they'll talk about utility and they'll talk about um uh you know, TPS, they'll talk about, you know, scaling, but this is not really something that you can do, right? Like you can't tell them to you can't tell them to buy another coin.

You can't tell them to mine another coin. So, um I think that this kind of is the most still the most underrated uh narrative in the market and the the most underrated, uh, sort of, um, um, valuation model, you could call it. I mean, we could be in a world where, let's say, Elon comes up with great, um, you know, solar mining, clean energy mining, and he starts a plant in Texas, right? Where we're already seeing a huge amount of plants being put up. Um, and then this kind of model inspires a lot of other countries to go in.

This is the formation of the new world order very quickly, right? Um, and, you know, I was speaking with the guy who, um, did the MicroStrategy placement at Capital. Capital being like a trillion-dollar allocator of capital, uh, in the US, right? And he said, he thinks that in the long run that bonds, people will sell bonds and buy Bitcoin. People will not own government bonds as a store of value anymore. They'll own just Bitcoin. So, his target for Bitcoin just is like even higher than mine. And this is a guy who's just, you know, traditional finance, uh, sees the potential of Bitcoin to be a store of value.

And so, it's kind of a different it's a different ballgame, right? And I think that this ballgame, actually, if you zoom out, this ballgame was like completely derided during the bear market. Like, no one thought that this was possible. You know, this is all just some digital money, digital beans that we were all trading, and this is one thing versus another. But now you're seeing very serious people talk about this stuff as the formation of a new world order, right? You're seeing politicians in the US, uh, especially in the GOP, but also in the Senate or say that this is actually a political philosophy behind this well, right? There's an element of energy neutrality where people have the right to buy the things they want to buy, uh, without having woke capitalists cancel them, for instance, or having people tell them that this is not

something they can buy. Uh, and so, there's like that confluence of sovereignty and confluence of, uh, of, um, coordination that that is extremely powerful, actually. That's why we're seeing all the uh, senior politicians in the US really embrace Bitcoin because they see it as a very powerful wealth base. Uh a very powerful voting electorate. And they also see a strong path to localism, right? They see a strong path to local governments having more power, right? If they collect tax revenues and they convert it to Bitcoin, uh that's extreme power that they have over central governments.

Um that's extreme power they have over um you know, more centralized forces. Um so, I think that these kinds of things will make it very likely that Bitcoin will succeed at its sort of current uh most important meme, which is to be valued against gold, to be valued against bonds, to be valued against all sorts of other kinds of stores of value that exist. Because once it's able to to really be seen as a treasury asset uh for the largest saving institutions in the world and the and the largest pools of capital in the world, as well as for every individual that wants to save money in sort of a simple way, then this um the the this kind of flywheel effect,

this kind of coordination point um is the most underrated among crypto natives, right? Because there is a lot of very interesting tech happening as well in crypto. And I think that that the interestingness of the tech doesn't take away from the potency of the Bitcoin monetary uh strength that it's entering now. Yeah, I mean, I'm surprised I agree with everything. I'm surprised that you say on a 6-year time horizon, it's harder to predict. I personally think on a 6-year time horizon, it's much easier to predict.

And sort of what the right valuation models are is much more obvious. I mean, personally, I think it's just in the in the long term, like we this is like the next stage of the internet, right? Almost. It's like where we where we bring for the first time we have value in the digital realm that and stuff that you can own, like property. We we are actually entering like the property phase of the internet. And and you can to me it seems that we can, you know, value Bitcoin and Ether and maybe a few other coins as you know, a form of monetary commodity.

Um but also as a form of new almost like super corporation in the case of like something like ETH when when you do have sort of the the the the burn from uh EIP-1559, you have sort of the money that that gets transferred from transactors to stakers in proof of stake. Um I mean, it's you can't put a number on it. It is but but I think you can really tell like, okay, what are sort of the how is the space going to develop over like the next 5 years and what which projects are or which categories are going to be the big winners. Maybe that's not the same as as like a evaluation model, but um for me it's sort of the the view of the next 6 years is

it feels much more clear and easier to predict than, you know, what's going to happen in the short term. Yeah, I think you're right in in a way as well. I think that um the the sort of larger questions that loom over 6 years, I would guess, you know, stuff like zero knowledge proofs, stuff like you know, what what kinds of things will get captured by by by application layer, what kind of things will get captured by layer one. Um you know, right now we have incredibly vibrant layer one communities. Um and we also have the price going up 100x, 1000x as well. So, when it stops going up 1000x, I mean, we have to assume it stops going up 1000x,

right? So, once that happens, uh what are the substitution effects, right? Uh what things will substitute, what things won't. Uh this for me is harder to reason about actually because like from my point of view there's a world where you can do everything you want to do on Ethereum on Avalanche or on another chain. So we can debate that like centralization decentralization, but for a lot of users that's what they believe and so like GameFi, you know, like I I actually am more bullish on BNB for GameFi than any other chain because, you know, being you know, Binance has the clearest path to 1 billion users that that I see.

Um you know, they have these incredible partnerships. They have these incredible like fan token fan, you know, things that are happening and and and so you know, there there's also the question of like what level of decentralization will the market value, right? Like will it value very high, very low, medium, like everywhere? Mhm. It's these are quite tricky questions actually. Uh especially if not all numbers are going up. Um and I we are getting to a point where I I mean, I think uh I still think we're in a super cycle.

I I think that like drawdowns won't be too extreme, but I think that relative valuations of things versus versus other things this is actually quite this is quite in flux, right? I mean, if you think about uh just versus June, right? Like SOL $30, AVAX like $10. Now AVAX $100, you know, SOL 250, you know, and and and so there's some very real moves happening. I mean, BNB 40 to 650. I mean, there's real stuff moving around and happening and there's you know, I'm like even you look at like, you know, best movers on Venus since the beginning of the year like stuff like Phantom is up like, you know, more than even Solana and stuff that's uh

These are kind of all questions that I do have on the 6-year horizon, which is um how does this look in 6 years? Cuz we want I think I've noticed a trend from OGs or from people from the previous cycle, they want to prescribe more more providence to smart contract protocols than actually exists. They want to say things like all the innovation is on Ethereum. Or they want to say things like all the activity is that will people are willing to pay for is on Ethereum. They They want to be able to say these things in part because I think it also makes investing easier because it's just a simple decision, right? You just buy and you hold the the the biggest smart contract chain. And then we are seeing some of that mentality with institutional investors where they're like, all these other chains it's so complicated and you know,

why don't I just buy Ether? And that's like the biggest the best one it'll win. And you know, now we're kind of the last few weeks we're seeing some of these guys saying, oh like I actually missed the I missed like a 50X here. I missed a 100X here. I missed a 30X. You know what I mean, right? So now we're seeing this kind of interest come. And um I I just think that the smart contract space is incredibly fast moving and the things that we think are going to be the next new thing are very rarely the next new thing and the things that we don't think are often become, right? I saw this really good tweet from Degen Tech Luis of Fingerprints DAO did the other day where he said, like everyone's talking about GameFi now and like the chances that GameFi is the big thing

over the next year, he thinks is like not very high because everyone is talking about it now. Whereas, you know, no one is talking about DeFi when it came out of nowhere and then no one was talking about NFTs when it came out of nowhere. And and so um you know, he does bring up an interesting point there, which is what actually is mass adoption? What does it look like? What are people doing? Are we all playing giant Ponzis? Are we all playing, you know, like what what exactly is it? And and so I am excited by the idea of rapidly scalable chains now because you can do things where you can send people 1 cent, 2 cents, 5 cents. And this is something that um you know, again, purists can debate how decentralized it is, but it does enable

novel use cases. And And And so, I have a very open mind when it comes to smart contract space. I try not to assume anything uh like about how it looks in 5 10 years because I think it's it it's truly in flux. If people had told you a a year ago that Phantom is up 1,000 X, you would have said they're insane. But you would have been wrong. So, you know what I mean, right? Like it's something that uh uh it it's it's it's very We like to We We like to ascribe a certainty to what has just happened and then predict it and then project it. Or we like to do these kind of things, but really crypto, because of the permissionless nature of it and because of the also the boom-bust nature of it, like I remember when we did our top 20 coins thing, we said,

"Eventually the top 20 will be filled with DeFi coins." You remember this, right? Yes, I do. And we were We were both completely wrong, right? And, you know, so instead they're filled with dog coins and they're filled with uh and they're filled with alternate layer one, right? Yeah. Yeah. Yeah. And And And And so, I I'm not arrogant enough to say that like in 5 years I I know what smart contract protocols will look like. I I think flux is is really the nature of this this part of the market. I agree. It's always good to go back to these earlier episodes and almost look at them look at them as, you know, these time pieces where you can Yeah exactly.

and see how wrong you were and, you know, get humbled by the market. And I think not enough people do this, right? I think um like there's something we can debate about um like valuation models uh all day. I think the biggest takeaway is that, you know, what is the dominant valuation model changes all the time. It's just basically a game of narratives. Um but there are some things that don't change, right? I mean, some of the the very long-term trends that, you know, make crypto go up, I think they are very safe to bet on.

Yes. And you can opt out of a lot of this game if you just say I'm holding for 3 to like 3 4 5 years. And also, you know, stay humble about the market, right? This This is This sort of going back to like writing actually writing down a thesis and coming back to it 6 months later and look and seeing how wrong you were. I think this is something that probably a lot more people would benefit from that than thinking about what is the next valuation model. Yeah.

Definitely. Okay, Sue. Thanks for the discussion and speak around. All righty.