Crypto Relative Value: Adding Growth to the Picture

Last week, we compared top-line fees (transaction costs, fees, interest paid, etc.) to fully diluted market cap and noted the wide range of fee generation across digital assets, the Layer 1 premium, and Bitcoin’s unique position.

This week, we add growth. Most digital assets are, after all, early-stage tech startups, where growth often outweighs everything. We use year/year change in fees to approximate a deconstructed PEG ratio (if <2yrs of data, we annualize prior-year daily fees). The percentile of each project’s growth rate and valuation is shown. Key takeaways:

🏦 DeFi again stands out, with strong relative growth and lower valuations. We noted last week that DeFi’s cheapness may reflect shallow moats or an “app” discount vs. L1 platforms. That discount looks even more pronounced once growth is considered. While models carry risk, the mix of strong growth and low valuations makes DeFi an attractive arena for selection.

💸 About 40% of Layer 1s show negative growth yet above-median valuations. Investors are still pricing high growth expectations. It’s too early to call winners, but worth questioning valuations of projects with little fee growth or adoption. While addressable markets are large, the market may not be effectively discerning among projects.

📉 Surprisingly, there’s a modest negative correlation between fee growth and valuations, even after controlling for sector. Fee generation is not the only driver, and historical growth is an imperfect proxy for future growth in such a dynamic space. Still, the disconnect underscores that digital asset valuation remains complex and often inefficient.

Ultimately, digital asset valuations are intricately tied to network effects, which are difficult to value. We believe there is still much growth ahead in crypto, and investors have reason to be optimistic about the general direction of the space. It is too early to call winners, and even lower-growth projects could still pull into the lead, which is why we believe it is imperative to stay nimble, unbiased, and not a “maxi” on anything. But, as markets rally indiscriminately, it’s important to step back and question “what’s in the price?”.

The information herein is for general information purposes only, is not investment advice, and should not be used in the evaluation of any investment decision. An investment in digital assets involves a high degree of risk. Past performance is no guarantee of future results.