Why The Next Bull Market Will Be The Biggest Yet (Fundamentals Improving & Price Lagging)

Transcript

Do buybacks actually work? And should buybacks work? So, this started because a clip came out of Paul, the CEO of Morpho, and he says token projects should not be doing buybacks because they're not they're not ambitious enough. If they are, if you're doing buybacks, if you care about buybacks, then you are basically shooting yourself in the foot for five, five for 10% extra growth on top of your asset versus the 10 to 100 to,000x that we're really shooting for in this market. And so on one side, you have people saying that the revenue distribution to holders doesn't make sense. It should be reinvested into

growth. The other side is the market saying, "Look, we only want to support companies that do buybacks. We only want to support companies that invest in themselves, that have actual growth, and that want to have people treated like first- class citizens who hold their token. And why would I own your coin if you don't do buybacks? And so, I'm going to I'm going to ask my lovely co-host, the man with the mic over six inches from his mouth, ask him what he thinks about buybacks and their relevance in today's crypto economy.

Um, yeah, great question. >> I mean, right, like it's it's just bare market things, you know? >> No. Well, here's here's the thing. Uh, you're right on some of the things that you mentioned, but I think there's a nuance here, and that's, you know, yes, uh, token holders want to be treated like first class citizens. Yes, why would I own anything else that is not acrewing value to my token? Uh, yes, there are a class of assets out there that do generate revenue and do pass that back to the token. Why would I own anything else other than those assets? It my position on this debate is that value acrruel is imperative.

Buybacks are not the only mechanism to fund value acrruel. Right? So I think we agree right value acrruel is imperative. There is a class of companies out there that are making money. there's a class of of companies out there that are passing that money right back to equity and labs corporations uh and and they do have a token live and it's not getting a portion of that revenue and so you don't want to invest into that asset class or that class of tokens but of those companies that do generate revenue which I I would like to see some data behind this I would say of you know companies that are still alive they raised some money they didn't stop building they're

still practicing and trying to put together you know a good token or a good business I would say maybe 10% of them have made a dollar right tokens that have you know raised money are in this generation of companies maybe 10% of them have found some semblance of product market fit and have generated some money from some customer out there somewhere 10% of the companies that exist today of the 10% how many of those dollar of those companies are passing e all of that revenue back to an equity or a labs company. Uh maybe 50% of them, right?

50% of the companies out there are passing it back to equities and labs corporations. And there isn't a single dollar or single cent that is going back in terms of value acrruel to the token, right? But that leaves 5% of the companies out there that meet the criteria that say they have made some money, they have generated revenue, and they are passing some money. maybe not all the money but some money back to the token. Um then it becomes how are they passing it back to the token and by and large the mechanism through which they've been passing value back to the token the small set of uh tok of companies and tokens that meet this criteria they've been passing it back in terms of buybacks. That's not the only mechanism to pass value back to token

holders. So obviously you know multiple things are true here. Yes, more companies here need revenue. Yes, more companies here need to acrue that revenue directly to the token. You know, the ones who are doing buybacks are certainly doing something right, but is buybacks the correct mech mechanism? And I would implore these founders to sort of do research into some of the other mechanisms that are out there. We haven't really seen like direct dividends passed back to companies in the form of cash or in the form of, you know, if it was in the form of their emissions or excuse me, in the form of their own token, that would be an emissions. we're not really looking for that. Um, buybacks is one of the ways where you can decrease supply.

A dividend would be incredible, right? If you have a protocol uh that's generating cash, they have a token, why not just pay uh the token holders, maybe they have to stake it, put it in a smart contract so it's programmable, just pay them in stable coins, just pay them in pure dollars, right? Because that's the way the equities markets do this thing. Well, that's exactly it. That's how equities markets do it. it implies that they're securities and that's why we haven't quite seen that mechanism. But by and large, you know, we agree on on a lot of this. The part where I would push back is that buybacks are not the only mechanism. Dividends are another mechanism. Maybe it's inhibited by regulation, but I'd imagine that there's more mechanisms out there in addition to

buybacks and dividends where companies could pass value back to token holders. >> All right, Mr. Clay, I really appreciate the thought. I just have to question whether like we're we're we're solving the problem, right? It's like, okay, maybe we don't do buybacks. Okay, but isn't just taking the money that you earn and distributing as a stable coin to a token holder? Is that not the same what the argument would be is the waste of capital and not investing that into growth that that like right that capital's whether it's being bought back and burned or distributed via stable coins different strokes for different

folks but what about the you're not investing into growth because that is the that is the crux of this is like >> I'll answer that directly >> yeah yeah but Andy let me jump in here because I want to answer this point directly >> if that's what your argument is then you shouldn't have a token. You launched your token prematurely. >> And so if you're suggesting that your dollars are better spent into growth rather than acrewing value to your token, don't have a token. There's no need. There's no rush. Why? You know, the argument for passing value back into growth is a good one. And it's that the the industry in the company is so early in its history that it's dollars better spent on growth. And that applies to so many of these companies because I think

you and I you know are one of the longer term thinkers uh you know in in this industry. We believe in the long-term growth thesis of this industry and I think dollars should be spent in growth gain market share and then monetized later down the road but don't have a token to tokens. We've basically proven that in 99% of the the digital asset digital finance use cases tokens are unnecessary to the ultimate user experience. you know, in the L1 trade, did you need a token to, you know, pay validators to, you know, bootstrap the economic security of the network? Sure.

Sure. But in hindsight, it was premature to launch those tokens. And if you want to fuel dollars into growth, you probably should be doing that, but you should also take your token off the market. And that's not something that we've really seen. But I mean, could you imagine if if a company said, "Hey, we we're so early. We want to be passing their our our revenue back into growth. We're going to take our we're going to buy back our token 100% of the token supply. We're going to take it private at 420 or whatever. Well, you you know what I actually predict may happen is that some of these tokens out there may be clawed back and there may be like a swap for like tokenized equities. like the equity of the company may be the new token >> or teams might just come out and be like

>> um >> you know we screwed up on our token design. We cannot take the current token and allocate the equity structure that exists offchain into the current equity structure that exists you know in the token landscape because well the labs owns X and the investors owns Y and my great grandmother owns Z and you know and so they might have to do the full rescending of the token and then reissue a token that is the equity tokenized of that company. Now when you look at the performance of tokens that have buybacks on the last I think it's like six to 12 months 12 months I mean it's been a reckoning and of course this is

obviously heavily carried by like lighter and hyperlquid and a couple of these but the tokens that have performed the best have revenue and they have buybacks pump hype lighter obviously those are the three leaders. So how do you reconcile with that? Is that a bare market phenomenon? Like is it fair to say that within the bare market perhaps there is a strategy that doing some sort of fundamental buyback floor protection, you know, like the old memes of like the bids in the books, you know, like like what do they call it like the janitors are here to sweep the floors and NFT landscape or something like that? Like is that a fair strategy?

Maybe the answer is what Luca Pres had commented on our post today, which is that you you you think about it in this in this way and you start to turn yourself more into like a hedge fund rather than a uh uh rather than a oh we just going to do a programmable daily buyback. But then the push back would be well the market has been rewarding companies that do daily buybacks in a programmable fashion. Look at Pump Fund. they started the pro uh programmable daily buybacks at a certain point and you looked at the that the market changed the market structure changed after that hyperl obviously set the standard lighter following Lucas says the buyback matter is quite simple from a corporate f corporate finance

standpoint and I'll pull this up on the screen he says assuming market rationality you should buy back your shares and slashtokens if the return of reinvesting that capital internally is lower than the hurdle rate investors require from the share/token. And so in rational markets plus a high return on equity, you invest in exuberant markets plus a mid return on equity, you invest. In bearish markets plus a mid return on equity, you buy back in rational markets plus a a low return on equity. You buy back in manipulated markets.

>> And so maybe this is the right way to do it. I like I mean Luke is one of the smartest guys in the space. >> Um >> so basically what he's saying is rational markets like let's call it a sideways or decent market going up with a high return on equity which means that your return on labor if you will is higher than your return on capital. Maybe you're nearing a local top. Maybe you think it's ex in exuberant markets and a mid-tier return on equity which is like a return on labor. you invest. But in bearish markets, plus a mid-tier return on labor equity, meaning like I couldn't, you know, you could hire anyone right now, Rob, and your token's not going to pump,

>> right? No, that's absolutely true. >> Or rational market with you could hire anyone or you could deploy any AI workflow. >> Yeah. >> And and your mark and your token's not going to pump. My bad. >> Right. And this is what we I mean to put it in simple terms in bull markets the return on capital is greater than the return on labor right so >> right that is true however it is not true in exuberant markets >> um >> what's not true in exuberant in exuberant markets you would be going from a bull to a bear >> and so yeah you don't want to be exactly you don't want to be dropping the top of your ass >> right um there is a point in which the opposite what you

that the return on capital is greater. I mean in bull markets, you know, you have beginning of bull markets and you have end of bare market of bull markets and >> and you have the end of the bare market. >> Yes. Exactly. And so timing plays a big part in that. And what Luca is saying is that the return on capital is the greatest at the beginning of the bull market. That's when you want to be buying your tokens, especially because as we know when bare markets transition to bull markets, they do so via apathetic market conditions when return on equity is very low. And so that is the best time to be buying back your token, right? Point of maximum upside, right? Point of minimum return on labor, return on announcement, return on

equity. Um, as that goes, right, it diminishes their upside, right? because you're realizing the upside as the market goes and the bull market continues, right? And it slowly transforms as the bull market comes to a close, right? The return on equity gets higher because there are things that you can ultimately do to pump via narrative, via announcement, via product launch, via hire, right? and you're also reaching the top of the capital market, in which case the potential upside is smaller because you've already realized a large portion of the bull market. So, no, I think I think Luca is super dialed. This guy has it. I mean, he's super smart and I I mean, I can't say

enough good things about Luca. >> So, then it looks like uh the rollup intern commented this. We think this is the correct way to think about it, but how do you balance this versus turning yourself into a directional hedge fund? i.e. for your native token. Also, the market seems to be appreciating programmable flows versus arbitrary flows when it comes to buybacks due to a foundational trust issue in the industry. >> Which uh which rollup intern tweeted this? This is a fantastic question by the rollup intern. >> Yeah, I think it might have been uh my agent. I think his name is uh Atan Soho. >> Yeah, >> Mr. Mr. Duka top blaster.

>> And so Luca says programmable flows are not it's not like deciding dividend policy for traditional for traditional company. It's the other side of a buyback. Large caps have always been actively looking at their price. Google used to issue shares when they had negative leverage because they knew the price of stock was very good. It's always about the RO, the return on equity versus earnings yield in the open market. Earnings yield is the opposite of price to earnings. Higher return on equity, you should invest. Lower return on equity, you should give money back. point that Paul is making is that it's pretty concerning if small and high growth startups cannot deploy money internally at high return rates, especially when those companies are still zero to negligible revenues. The

counterpoint, however, is that these token prices are littered with insider activity, have low float, can be easily manipulated, and doing finance calculations on fair prices is irrelevant. You know, I I want to take somewhat of a left field, off-the-wall approach and perspective to this, which is that in some way, shape, or form, every company is a DAT. Every in more more specifically, every company kind of has an MNAV. >> Every company kind of has an MNAV. If you follow me here on this, this is stretchy pulley logic here, but you know, the MNAV is tied to your return on equity, right? And so if uh a tre treasury company's mnav is under uh one they would buy back their shares. If

it's over one you would hit the ATM you would buy back you know the the token. Similarly, you know, your shares are effectively your equity here, right? But it is invested into via, you know, labor capital um uh announcements partnerships, product launches, these sorts of things, >> right? And so in the market conditions that he's describing, it would be when your MNAV is under one, that's when you would hammer your equity and you would invest in growth. Flip side is, you know, when it's exuberant market conditions and these things, right? um then your return on equity is low. That is when uh it doesn't make sense to buy back your own shares. It makes more sense to go back

and buy your own token. So in a very similar way, you can kind of look at these treasury companies and how they react to their MNAV as a in a in a similar way that you can react to your return on equity. Well, Luca's got me thinking like, I've just been trying to buy as much Zcash, Bitcoin, hype, and other distressed crypto assets for the next bull cycle. But he's got me thinking like, are we shooting ourselves in the foot, thinking too small, doing distributions out to buy more crypto assets versus just buying and buying and buying more into the business? And I think of it as like risk, right? I think of it as like there's a certain risk to investing into the business. There's a certain risk to uh this is our own capital, right? this is our own business. There's a certain risk to

like, oh, you hire a new person, you spend 80k a year on them, 120k a year on them, you know, whatever it is, and it fails. What is 120k a year or doesn't go as well as you thought? What is 120k in Zcash at 400 before the intergalactic run to 10k mean? You know, what does that get you? Well, it gets you like three million. And so like you know I guess the question is always for these VC backed companies is you have a token you're you're morpho your token trading at two bill right um how do you allocate capital to help you scale like I don't know it's just different for different companies but it just got me thinking like it it it is a risk question and like a operator it's a skill issue I

mean everything in life is a skill issue >> we're or an issue of time horizons but I think your I think your answer is actually in the flowchart If you scroll back up uh to the original Luca tweet, um you'll see his flowchart here, right? And if you're applying, right, because the roll-up doesn't have a token yet or ever, but anyway, um you know, the roll-up doesn't have a token, right? And so in this flowchart, if you're looking, you can kind of treat the rollup as a aggregation or a commulative of all the tokens that are out there in some ways.

And you can say that Zcash kind of falls into that bucket. And so yes, Zcash is not the rollup token, right? Neither is Bitcoin or ETH, but these might be the tokens that if we're in the market conditions and our equity is in the conditions that fall into, you know, one of the four uh quadrants of this flowchart, we would buy things, not the roll-up token because it doesn't exist, but we would buy the Zcash, those who are, you know, the tokens that make up the tokens that we would buy if it's the case where we fall into these market conditions.

>> It's a little bit little bit of Or you would or you would not buy the uh crypto asset or stock or house. You would buy more of AI workflow support team. Exactly. >> Uh office space, podcast gear, etc., etc. And so this out here I think this is like the this is like the Eli like I'm five. >> Uh >> uh I'm just curious if we have anything that that we should ask before we should kind of close this out. >> I mean I was just going to say our business at the rollup is a media company. it is somewhat decorrelated or or uncorrelated from some of the other you know digital asset digital finance companies that are out there. Um, and so our return on equity might be different, whereas the general market conditions

for return on equity are right now very low return on equity, right? We're in apathetic market conditions, low return on equity. And so it calls for buying back tokens. You know, you would basically look at this flowchart and you would say, where does my company fit in? generally were in very low ROE conditions broadly for you know digital asset companies. Um I think our company also fits into that although you could make an argument against that in which case it wouldn't make sense to go buy tokens. It would make more sense to go invest into the business but at this point right because market prices are depressed right and it's very apathetic out there. return on equity is low broadly it would make sense to just

buy tokens whether that's your own token or other tokens that you believe fall into the category >> just buy tokens just invest in >> I think that's what I think that's a >> little gambler in you as well you know what I mean of this of this debate what do you think is what do you think can outperform do you think your business can outperform um or do you think your personal allocations can and and that's going to be the question so >> if you um the one thing that I would I mean if you want to plug something into Grock here. It would be, you know, take Luca's tweet, put it into Grock, and say, "Which of the four quadrants are we in right now?" And I think we know the answer, but let's just make sure Grock is on the same page.

I would say that uh I would say that uh we are in low ROE bearish market conditions and therefore the conclusion is buyback according to Luca's logic which I think is sound logic. We're certainly not in exuberant market conditions. That's for sure. No, I mean I think we both know it's it's highly likely to be Wait, which you said the it's it's >> it's highly likely to be in the bearish market, low to mid ROE, which either way puts you into the buyback category.

>> Yeah. Yeah. Bearish markets plus mid ROE. >> Yep. Exactly. Which puts you in the buyback category. And Andy, to answer your question, it means don't go invest into the business. At least according to Luca's logic, >> it means to buy back the token. >> It means buy back the token. And what do you do if your token doesn't exist? Well, you buy back the tokens that you think are going to do >> are going to do well. >> Yeah. >> In in in this setting, returning capital via buybacks can be more value accreative than forcing internal reinvestment when the market is pricing to pricing tokens poorly and incremental returns on new capital only middling. He also flags bearish mid RE. This is a broad characterizations. Yeah. But I don't

know. It's interesting. There's many ways to skin this cat, I think, no matter what. Um, and people are not going to agree with this necessarily, but that what is what makes a debate. That's what makes markets. That what's makes life. Ladies and gentlemen, that has been the rollup today. It's time to close it out. >> I mean, the other the other conclusion to draw here is uh too many companies and projects have tokens when they shouldn't. >> Yeah. >> They launched them too early. And uh you know >> and there's a weird certain advantage to not having lots of tokens, still having some capital left and waiting and having waited out this bare market.

>> You're not forced to play this game unin. >> Yeah. And you got the hindsight of like seeing all this token equity shenanigans and you're not going to launch a token next bull cycle that doesn't have claim of the equity of the company. You're just going to launch your tokenized equity. Maybe that's not the best outcome as the previous cycles, but that's what happens to you guys. The industry is on undergoing a structural change. uh industry is maturing, infrastructure is maturing, global adoption is rapidly increasing and um this continues to