Payback Era: Capital Discipline Meets Demand Inflection

Transcript

token 249. Everyone's pretty bullish. Let's face it. Everyone's talking about the big demand drivers for block space. And these demand drivers are absolutely real. We have AI agents and tokenization. Now, you're going to hear a lot about that over the next couple of days. This presentation is not necessarily about that. This presentation is about the other side of the equation, the supply side. Now, we've had well, let's let's go back to last year, token 2049. Everyone was pretty bullish. All the presentations

were up only. And of course, what happened? The market fell 50 60%. Most tokens outside of Bitcoin fell a lot more than that. And so there were very good reasons why we had that correction or bare market. You could look at global liquidity that was tightening in Q4 of last year. The Fed was still tightening its balance sheet. You can look at the Binance liquidation fiasco which totally nuked the market. There was also liquidity that was being pulled out of crypto at that time that was chasing returns in the AI trade for very good reason. AI is the most transformative technology we have ever seen. But the

thing about crypto is that we tend to look outwards and rarely do we look inwards as what are the drivers that have caused quite frankly several years of disappointing returns for assets in the crypto space. Now for me, I came into the space in 2022 and I've always held a very Bitcoin dominant portfolio. And the reason why I've struggled with altcoins is that the supply schedule, the tokconomics never made any sense to me at all.

We've had no to we've had very little token or value acrruel to the underlying token throughout those years. We've had massive overupp, you know, we've been printing tokens. There was misalignment between the token and the team or the company behind the token. And of course, we had the disillusionment disillusionment of the investor base because of that. So the reason why I personally am as bullish as I have ever been since I came into this space is not necessarily because I see demand inflecting higher from here which it is in my view absolutely going to do

and it's already started. It's because for the first time in crypto's history, we are seeing something which I call capital discipline. That is supply side constraint and better tokconomics. And that, ladies and gentlemen, is what I call crypto's payback error. Now, maybe like some of you here, uh I suspect if you're in finance, you wasted a couple of years at university studying economics. I certainly did and it's taken me an entire lifetime to try and unlearn pretty much everything that I was taught. But the one thing about economics and some of the evergreen uh

notions or theories have stayed with me and that is demand and supply. So what happens when demand for a good or service increases and the supply stays fixed? The price increases. Now in crypto we know that supply has not stayed fixed. Supply has been constantly expanding. This chart here is the top 200 index. It's an index I created with a team called Bit Performance. Shout out to Matt at Bit Performance. We've created a whole raft of crypto indices for retail investors through API. This is the equal weighted top 200. The equal weighted top 200 is

up 56% since January 2021. In that time, the circulating supply of tokens is up 78%. Now, if you remove the 2021 excess liquidity environment when our central planners in all their wisdom pump the market with excess liquidity because of the co insanity and response. That was a distortion of crypto markets from intrinsic value. But nevertheless, the 2022 to 2025 bull markets disappointed. The market cap index went higher, market cap went higher, but only a handful of assets out of the top 200 actually outperformed Bitcoin. Why is

that? One of the reasons is that supply was constantly increasing. So, we have to ask ourselves, what's the full picture? Why has crypto underperformed versus expectations and importantly versus increasing demand? And so the way I've thought about this because it's been troubling me for quite some time is we've thought about the crypto cap well the entire crypto market as being a a a stage or a process which really started with Ethereum. Now I'll offend everyone who loves Bitcoin. I

love Bitcoin. Bitcoin is my largest position. But really the start of the era of crypto started with Ethereum. That was the genesis. Smart contracts and the first smart contract platform. Years later, DeFi applications. That's when we started to understand that actually we could build a global financial system on blockchain rails. But by 2021, it became very apparent that this technology would not sc at that point could not scale to meet the demands of global finance. So the whole industry rallied behind the problem. How do we scale blockchains? How do we improve

interoperability? How do we decrease the friction? And in an almost, you know, in this hyperfocused way, they basically solve the problem. $36 billion was invested on venture capital in 2021 into solving predominantly this specific problem. And guess what? Here we are. And we have solved most of those issues. Not all, but interoperability, friction. Ethereum cost $10 a transaction in 2021. It's now down to 4 cents. Salana, Sui, they're all under 1 cent.

Now we're starting to see global finance move on chain. But the problem here was that the industry was so focused on solving the technology issue that the actual token itself was an afterthought. And look, it wasn't just greedy VCs and greedy founders, although there was certainly a lot of that. It was the conditions that allowed that to happen which was the absence of regulatory oversight and actually a hostile US administration and regulatory authorities to the industry to the technology.

So when you have that situation, we still have a free and open market and c and market forces started to look at the problem and have started to solve the problem of the token itself and the underperformance. Moving on to the next stage. By 2025, because we had a new administration, because we had a new SEC and a new CFTC, we started to see the emergence of capital discipline within crypto. Some of it passive, some of it proactive. And what do I mean by that? You started to see pro protocols starting to align

between the equity and the token. You started to see initiatives to start buying back tokens, value acrruel mechanisms and you also started to see supply Now that is the first in that's the first part of the bullish formula which I'm proposing here today. The second is the demand inflection. Because we built the system, because we scaled the system, now we can have the fruits of that labor, which is demand inflection.

Everyone here is talking about tokenization. We're going to see trillions move on chain and we're going to see a whole new economic actor emerge from the overbuild of compute, which is AI agents that are just starting to appear. This combined gives us a new error in crypto which I call the payback error. So let's have a look at the charts. This is when we talk about capital discipline, I'm talking about two things. We'll start with the first thing which is supply discipline. The yellow line here is the annualized inflation rate of circulating supply of the top 200. In 2021, it peaked at 21 26%. That

was peak inflation in crypto. When you were buying in that market, 26% inflation, new tokens coming on board. Since then, inflation has dropped to 3.3%. Look at the white line. This is the top 200 market cap index. It has gone nowhere for 5 years. Yes, Bitcoin made new highs, but very few assets did over the last 5 years. Inflation is coming down. Now, what can we draw from this as insights? Look, this isn't a perfect analogy, but I think there's there's signal here. The last time we saw a disinflationary regime, it was the most bullish backdrop for

equities. In 1980, inflation peaked at around 16%. Vulkar came in with the Fed jacked up rates. The market went into a bare market. The economy went into recession for two years. It went nowhere. And for the next 18 years, we had the greatest bull market we had ever seen. The S&P rallied 13 times. Now, of course, it wasn't just because inflation dropped, although it was a large part of this. We had productivity improvements. We had technology. We had deregulation. We had demographics. The point being is a disinflationary background is good for asset prices. If you think about crypto and you think about inflation running at

26% now down to 3%. I forgot to mention unlocks. Part of that inflation uh is the circulating supply through inflation rewards but also unlocks. Unlocks used to account for 14 to 15% of the annual new supply coming on. It's now down to about 4%. And that's because a lot of the protocols have finished their vesting. So when you put that together, you can see the case for crypto is starting to improve. Now supply only explains the leakage of value. It doesn't mean token has to go up. What you need as well, you need to have mechanisms that acrue value

back to the token. The token needs to take on the properties of an equity. What makes us invest in equities? We get a return. We get an income stream. We get scarcity because they do buybacks. So I started tracking the data and in the last couple of years, we have seen a huge improvement in the number of protocols that are initiating value acrruel mechanisms. In fact, in 2021, only one in 15 would do this. Now it's up to 1 in5. Now this has been this has been a result of market forces retail getting completely pissed off with this asset

class not performing even though demand was increasing because there was lack of value acrruel because there was shenanigans. There was misalignment between the protocols and the teams behind the protocols and that is starting to change. If we look at how much cash is being returned to token holders, it's about $2 billion in the last 12 months, that's buybacks, that's burns, that's staking rewards. Now, some of that is more permanent than others. A burn is not the same as a buyback, but it all is positive in terms of acrewing value back to the underlying token.

The line here on the chart, the yellow line, is the real return. This line is calculating what is what holders are paid in those value acrruel mechanisms minus the new supply that's coming on. It used to be negative 1720%. It's now underg -3%. Capital discipline plus new demand or increasing demand is closing that gap. When you look at the number of tokens in the top 200 17% now are deflationary.

That's never happened before. And of course, once you have capital discipline, it doesn't matter unless people actually want or are using the services or are consuming the block space. Every single metric that matters is up and to the right and some more than others. The ones that really matter are are the ones that have to do with tokenization. tokenized real world assets, stable coins, equities, they are exploding and it's only just started.

And of course, we have the new economic actor. We have AI agents. We know that AI agents are consuming between five to seven more tokens than humans. We also know that in terms of agentic payments, it is very very early. X42, the agentto Asian payment uh protocol has been very quiet all year. Let's face it, it's doing about a million dollars in transaction value as of August. But when you consider the changes, the announcements that have been made, Cloudflare, which represents about 20% of web traffic enabling X42, so websites can get paid for API calls. The number that we see on the right hand here on

the right side is as low as it ever will be. We've talked about monetary velocity, how fast money moves through the economy. As long as we're not seeing hyperinflation, monetary velocity going up is extremely bullish for an economy. We are going to see something called machine velocity, which is monetary velocity squared. once these economic actors are funded and start moving through protocols like X42. So there ladies and gentlemen is the formula for why I am bullish on crypto.

It's not just about the fact that we're building this global financial system. If you don't have the discipline from the protocols inside the ecosystem, if you don't have the alignment to the making the token the center of value, the center of gravity for all value acrruel, then what you'll end up is another situation where this where this asset class really underdelivers over the next couple of years. But that's not what we're seeing. We are seeing real fundamental change.

Let's take a look at the data. I'm an analyst. I build quantitative models. And the reality is from 2022 to 2025, the most frustrating thing was that you did not get paid in crypto to be a fundamental investor. I built lots of ways to try and build or or pick uh assets in the space based on fundamentals. And it is the reason why I stayed very very heavy on Bitcoin until recently.

And this is an example of what I'm talking about. The white line is the market cap index which is basically a proxy for Bitcoin and Ethereum Salana and the large caps. Now over the last well since 2022 that index is up 10%. Not a great return but it's up. If you had invested in a simple system which said I'll only invest in tokens that actually generate fees, you know, actually have some sort of business. It made no difference to investing in in the tokens in the top 200 that did that had no fees. So, go figure. If you invested in the assets in the top 200 that had low inflation, low dilution,

you wouldn't have been better off. It made no difference. But something changed last year when you started screening for assets with growing fees, better token acrruel, low supply, they started to outperform. Now this year they have exploded higher. this year if you invested in a simple fundamental a basket of uh tokens with a simple fundamental criteria like hey does this act token actually make any money then it would have outperformed bitcoin or outperformed the large large cap uh index by 11%.

So at Real Vision, we're building a quality filter. Now, if you're an equity investor, you're familiar with factors. Factors are a way of defining stocks based on their characteristics. People are value investors. They look for low valuations. People are growth investors. They look at companies that are growing their top line. There are momentum investors, which are using purely price. And there are investors that look at things like return on investment capital, return on equity. They would define themselves as a quality investor. That factor translates to crypto and it starts to show up in the data that actually you want to own the assets that have a high

quality characteristic. What does that actually mean in crypto? You've got to look for the assets that are actually generating fees but actually generating fees on a sustainable basis. You want to look for the assets that have strong value acrruel. Okay, the tokconomic policies are positive. And you want to look for the assets that have relatively low supply. If you take a basket of those assets and go long the top ones and short the bottom ones, that is what the result is. The yellow line here is the quality long short basket. It has outperformed everything. It has outperformed Bitcoin. Now, I wouldn't want to get carried away with this. This is a purely academic exercise. In crypto, you can't short the market

because of the market structure. You could short, but you can't really replicate this strategy. But if you had just invested in the top third of the assets that are ranked on these positive attributes, you would be up 17% this year, and Bitcoin is still down 10%. Sorry. This is the market telling us that finally fundamentals matter. So let's zoom out. This is the market cap weighted index. You can see the log trend over the last 9 years.

But you can also see that we're trading below trend at the moment by about 35%. You can see that the market has gone nowhere. Meanwhile, everything has exploded in terms of adoption, and I would still argue it's early. So, when you think about where we're headed, you can think about the fact that suddenly we're starting to see a rerating of this asset class. Crypto should not be up right now. We have a macro overlay or macro situation.

We have a tightening global liquidity. The dollar is up, bond volatility, all the markers that have guided the liquidity cycle for crypto are telling us that crypto should not be up. But there is something structural happening here which is changing. And so this is the thesis. When capital discipline meets demand inflection, this asset class is going to be rerated a lot higher. Thank you ladies and gentlemen.