As crypto networks and protocols mature, reliable, real-time on-chain data now gives market participants an overview of cash flows, active users, user retention, value locked, transaction volumes, and developer activity across a growing range of crypto protocols and applications.
With this comes a new way of researching and investing in crypto assets – by making use of fundamental analysis (i.e. measuring the value of a stock by investigating relevant economic and financial factors). If the past is any indication of the future, we should expect cryptocurrency markets to mature in the coming years.
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Value investing and fundamental analysis: a brief history
“In the short run, the market is a voting machine. But in the long run, the market is a weighing machine.
So said Benjamin Graham, value investing pioneer. Graham's first book, Security Analysis, was published in 1934—shortly after the creation of the Securities Act of 1933 and the Securities Exchange Act of 1934 in the wake of the stock market crash and Great Depression.
Graham's work helped lay the foundation for fundamental analysis and emerging concepts such as intrinsic value. This work planted the seeds for the market to reach consensus on the best way to evaluate stocks and conduct comparative analysis.
These ideas were later popularized by Warren Buffett in the 1950s and 1960s after Graham published his second book, The Intelligent Investor. Academic and corporate acceptance pushed these concepts into mainstream consciousness in the 1970s, 1980s, and 1990s, as the market achieved consensus around financial statements and basic metrics such as the price-to-earnings ratio.
“Price is for reservation.” “Profit return.” “Debt to Equity.” “Free cash flow.” “Return on equity.” “Net margins.” All these concepts came in this era. Alongside this came investment concepts such as “economic moats” and “durable competitive advantages.”
Of course, none of this would have been possible without Quality data. Without data, stocks will trade based on speculation, narrative and branding.
Hmm. This kind of sounds similar to today's cryptocurrencies.
Crypto: from speculation → utility → basics
Just as traditional markets have reached a consensus on the best ways to value stocks using data, we expect the same to happen with cryptocurrency networks and protocols.
Of course, it is important to realize that speculation is at the core of every innovation throughout history. It takes speculative capital to create new industries. We saw this with the age of steel and electricity. Oil era. Automotive and mass production. We've seen that with railways. More recently, we have seen this with the introduction of the information and communications age.
With history as our guide, speculation eventually leads to productive capital finding its way to its highest and best use. Eventually, the market achieves consensus on the best methods to use, And the value New technology (and the companies that use it).
We see this happening today with the era of Blockchain or Web3 technology – which installs a new data layer in the Internet, one that introduces the concept of shared global accounting ledgers and digital property rights.
For example, below we can see active users on Ethereum L1 versus top L2 networks:
This data can inform expected value accretion at the L2 versus L1 level within the Ethereum ecosystem.
And here we have Ethereum's “GDP” – the sum of fees generated by the most prominent protocols and applications built “atop” the L1 infrastructure.
These data can inform comparative analysis of alternative layer 1 networks.
Ultimately, we expect that consensus will be reached around the KPIs and metrics that determine the evaluation of different sectors within Web3 – just as we have seen in traditional finance.
As providers of high-quality data set the table for fundamental analysis, we should expect to see new products hitting the market that leverage this data – such as fundamentals-based products. Indicators And the new Investment frameworks.
As understanding of fundamental analysis of crypto networks increases with new and improved data, we should expect the next wave of “smart money” to find higher quality projects.
Gaining an investment advantage will require access to high-quality data before the rest of the market gets it. This also gives regulators the tools to monitor markets and set sensible new rules to protect investors. After all, the accuracy and near-real-time delivery of data within cryptocurrency networks is unprecedented in finance.
The future of investing in cryptocurrencies will be based on fundamentals.
It all starts with high-quality on-chain data.
