May 2022, best of all coins, is the middle of a bear market and what I want to invest in now are coins that actually have fundamental value and businesses that are earning revenues that can grow over time and will come out the other side of this bear market. They are not just coins that are floating around in narratives and are short-term trades. I don’t do that anyway, so we’re going to look at those coins and I want to start off with this, which is a chart showing us that Bitcoin itself has outperformed this year’s Nasdaq index.
The coins are obviously much more like the Nasdaq. What I mean by that is that they are what’s called long-duration, meaning their revenues are far out into the future in comparison to their multiples, their valuations, so they’re valued highly in comparison to their current earnings.
What is more long-term cooperation, that’s Jet-Bot. It is one of these fantastic initiatives, which allows you to follow the best traders and track all of their trades via Binance trading bots. The platform has been available since 2019 and offers new customers a 3-day trial period.
Bitcoin is a little bit different, it’s not a tech stock in my opinion in any way shape or form, although it does have a high correlation short term to the NASDAQ because of the type of institutions that are trading it. Bitcoin is outperforming the NASDAQ this year. All coins, of course, are more like the NASDAQ. Like I said, what I want to do though is come to something like token terminal and actually see what cryptocurrencies have good solid businesses with no narratives if this is going to pop off.
What’s actually making money? Because if a project is making money, it can actually last through a bear market. If a project is running on a narrative and the money’s running out, they will be doomed over time. They will not succeed if a crypto is not making money. It’s not financially supporting itself, and that goes for L1s as well. It will eventually fail. You need a successful business model.
The token terminal, by the way, is an amazing site. You can use it free for the most part. The first crypto thing that we come to is just this behemoth up here that is nowhere near mature yet, but look at the amount of revenue this thing makes. Ethereum over the last week has made 300 million dollars in revenues. This is an outstanding week for Ethereum because what we’ve had right here is essentially the other side launch, right the other side meta. This thing has just gone absolutely crazy and when you have a big NFT launch on Ethereum, you make 230 million dollars in a day. This is a fantastic business that Ethereum has now.
It is an L1 and so it can’t be valued just like a tech stock on its revenues because there is a portion of the value, quite a large portion of value, that is essentially a monetary premium. Ethereum is used to collateralize other assets. For example, diastable currents, stablecoin, and you know many other assets throughout the system use ethereum as a base asset. There is value to Ethereum not just for its revenues but for its value as something that can be collateralized and is hard money.
What we can see here is the price to sales ratio and the price to earnings ratio. What is so outstanding about ethereum is that this huge asset, a massive growth asset, is only trading at around 50 times earnings, which is quite typical of a lot of tech stocks. They’ve all been bashed and Ethereum was trading at I think around 100 times earnings, now 50 times earnings just as a tech stock. If you were to look at it like this, I would not say with the growth that we’re seeing with Ethereum usage users even in a bear market when things are coming down. When we come out of this, we’re going to see a huge amount of usage with Ethereum and also with all the L2 networks that are on top of Ethereum, you can have way more transactions flowing through to that base layer as well.
Ethereum is a productive asset. It produces more revenue than pretty much any other cryptocurrency, and so being in that with so much revenue kind of going to the base layer, it’s basically protection, at least to say that I own something that actually has value accruing to it and that can be used in many different ways by Ethereum itself. The Ethereum ecosystem as well. This is what I look at with an L1 is the L1 financially sustainable. What I mean by that is Ethereum’s expensive. But with L2, it becomes cheap, but with Ethereum L1, it has enough revenue to sustain its ecosystem to sustain proof-of-stake. It’s moving to incentivize people to run nodes because they will make money doing.
If you go down the list, and I’m just going to pick out Solana. There is no shade at Solana. Solana has extremely cheap transactions. What that means is that maybe if someone were to run a node, they would actually go and run a node on Ethereum and not Solana. That means Ethereum has more potential for decentralization. It becomes a stronger and more robust network over time. And with Air2 scanning solutions, you can also reduce costs. This is the type of thing that you may want to look at when looking at an L1. So is it financially sustainable because over the long term through bulls and bears, it needs to be?
And also, is the currency hard without a hard currency without a cap on supply without knowing that the currency at some point is going to have zero inflation, it can’t really be used as an asset that’s collateralizable, so a lot of apps will not be collateralizable assets because they’re applications, they’re not hard currency, like something like Bitcoin, the hardest currency. And then, how relevant is the currency, as in, can it be used as a collateral to fund other projects and to, you know, fund stable coins and everything like that, and Ethereum does that, obviously, Bitcoin does that as well, now for Terra USD, and then you can obviously make your decisions on those L1s. But Ethereum makes so much revenue, and you can see that by the token metrics. When you’re looking at an investment, you know, you really don’t look further than that has a great price to sales ratio plus all of the hard money aspects.
How to value Dapps
Let’s look at applications. What apps are actually making the most amount of money now in a bear market that could potentially grow their businesses during a bull market as well? The problem with apps is the non-hard money aspect of it. You really have to value these like businesses because that’s what they are and so they don’t have as much premium. You have to just value them on their revenues and luckily we can do that.
But what you want to do now is move on to applications. This is how I value them. First of all, you know how much they actually make. Not running on narratives here, but how much money do they actually make at this point in time? That is obviously important and is it growing as well or is the business kind of fading off? You know, is it going through a peak or is it actually sustainably growing its income over time? You know what’s the total addressable market of the application or the business model that it’s in and are there a lot of competitors or is it kind of the A1. I think with most things, there’s an A1. There’s a brand that stands out, and that brand is really important. It will count for something over time, and then really important is the tokenomics of applications, because if we look at these applications and how much they’re earning, tokenomics really do make or break a project. Bad economics and kind of a bad plan of trying to get those revenues back to token holders is going to really damage the investment prospects.
Is there a down structure? Most applications now seem to be moving towards DAO structures where essentially the revenue, the protocol revenue or percentage of it. Let’s say 10 of the protocol revenue, comes back to the DAO. Then, obviously, if you’re a token holder, you can vote on, you know, the money, the revenue that comes into the DAO, what to do with it. Do you want to put some towards growing the ecosystem and spending it? You know, do you want to vote to just return all of that money to token holders, so it’s just like owning essentially a share in a company, but obviously this is a new way of doing things with a dodgy structure, you know, with those protocols.
So let’s have a look at the first one I want to go through, which is the pancake swap. The market cap is $2 billion right now but the total revenue in the last week was about 6 million dollars. That’s a price to sales ratio of around 4.3 times. That’s obviously a tiny multiple of its current earnings now.
PancakeSwap is a DeX, which means during a bear market it’s going to look like a bad business. Trading volumes are going to come down, its revenue is going to come down, but is it a popular DeX that people use and during a bull market it’s obviously going to grow and make way more money again, so that’s something that we have to look at.
However, if you only look at the annualized protocol revenue, which is 165 million dollars, and the annualized total revenue is 500 million dollars, a lot of liquidity providers actually get a lot of the revenue as well. What we’re looking at really is the annualized protocol revenue of 165 million and the price to sales or price to earnings ratio of 13.5. 13.5 is something like an S&P 500 stock trader trades, not a high growth area. It was kind of a low multiple.
The problem with PancakeSwap is really the tokenomics, which I think is why you get this kind of low multiple here. They have very high inflation of tokens, which means all of that money that’s being earned is being diluted over and over again by more tokens.
This is just something that happens with applications. Unfortunately, you’re not going to get that kind of really hard money style asset like Bitcoin. You know, Bitcoin does that. So if you want something different than obviously an app, you’re just going to The PancakeSwap, as you can see here, remains the most used app in the world.
But do you want to own the most used application in the world, possibly right now and it’s an exchange? Is this going to grow over time, potentially because what Binance China is doing right now is something called the BCS, or Binance application side chains. This is a way for them to scale their blockchain. It’s not really scaling, we won’t get into that, but essentially they’re allowing applications to launch their own separate chains that connect to the Binance. This may happen in the future when a lot of the new applications, side chains, gaming chains, app specific chains actually have tokens that they may want to go on to pancakes or up to trade because it is the most liquid venue to trade. Liquidity is really the key here for exchanges, so that’s why I think the Binance ecosystem may grow and PancakeSwap may grow with it. What you can see here is essentially that PancakeSwap is number two only to Ethereum when it comes to exchange volume over the last seven days. You can see billions of dollars worth of traded.
The tokenomics are bad but there are ways around it by staking Cake. It’s a business that can grow over time. It looks pretty bad now because we’re in a bear market but you can see they are one of the most profitable protocols in the whole crypto ecosystem.
The next coin is DYDX, which has absolutely awful tokenomics, but they’re actually changing this towards the end of this year, so this is why research pays off. And DYDX is really important as it’s a futures and derivatives exchange on the blockchain. It’s actually on Ethereum L2 and uses Starkware, which is a scaling solution. DYDX is essentially like an app specific L2 scaling solution on Ethereum. And I think as L2 grows, DYDX is going to be there on that L2. You can securely bridge your assets over to their exchange and trade them. They’re going to be there on that L2. They’re going to be setting up a spot market as well. They’re going to be setting up a spot market as well. It’s just that their tokenomics are really poor right now for an investment, but obviously, if you look forward to the future, then you can make your own decisions.
They make around 500 million dollars annualized and they trade on a price to earnings ratio of seven as an application. The issue here is that they have so much issuance of their coin and so that’s why you get this very low price. It’s because the coins are just flooding the market all the time as incentives. The difference here though, is that towards the end of this year, DYDX is moving to a complete DAO structure. Like I said, a DAO structure means that no one will have control over what happens to those tokens except for the DAO.
So obviously, DYDX probably still owns a lot of these tokens, but there’s 500 million dollars in annualized revenue. When the DAO can vote on these things, they can potentially vote to pass some of those profits back to token holders or potentially reduce the amount of incentive tokens that are being led out, which will obviously stop some of the pressure on the price. So there are ways that you can add value here.
But what’s really important to know about the DYDX though is the crazy volume that they do, so if you look at DeX volumes, you can see here that UniSwap is by far and away, you know, the largest player here with almost two billion dollars in 24 hour volume, which is a lot. The next competitor is miles away at 200 million.
If you go over to DYDX, they actually show you their daily volume. You can follow their Twitter. If we go down, you can see that they trade around a billion dollars’ worth daily, so this is 780 million in the last 24 hours. You’ve got a billion dollars’ worth of trading volume. For now, derivatives have a lower trading fee than spot, so they’re not going to be making as much money, but DYDX now has insane volume on its decks. If they can just work out the tokenomics and stop pummeling the market with all these incentive tokens, this is an incredibly profitable protocol.
Another token that I’ve personally been watching for a while is Lido Finance. I think this is a great business, but sometimes it pumps a lot and I don’t really want to pay up at those prices. Just wait for a bit of a dump. I was actually looking at this in the last bear or the last sell-off down way cheaper. Now it really pumped in my face like 120. I just couldn’t buy it here but look at the revenue that they make.
Lido is essentially a cross-chain liquid staking derivative provider. What that means is that essentially when you stake your assets on the blockchain, you have to lock them up: Etherium – 21 days; Terra – 21 days; Solana – 20 days or something like that.
When you stake your cryptocurrencies on the blockchain, specifically like this, you basically give up your crypto and you can’t use it. There’s a lockup period, which is not good for investors. So what this service does is you give them the coins and they’ll give you back a secondary coin known as a liquid staking derivative that you can use. It accrues the interest and the staking rules that you get. You can also use the value of that coin, which is one for one with what you staked across, meaning you can increase your yield or you can sell it straight away if you want. You can do everything else with it. So this is a really important business that’s going to be around for a very long time.
Lido is without a doubt the number one player in this sector, and it’s not even close. You can see how much of the market that they have. It’s basically the whole thing that no one else is even possible to see. There are some questions about whether you know that Lido is centralizing Ethereum because they own so much of Ethereum staked in ETH 2.0.
Essentially, Lido is the absolute king of Lido ETH, or liquid staking derivatives, and they just take a 10% fee of everything staked. If they add more chains, you know, they will just be making a 10 fee and the lido is a dow structure, so those profits go back to the DAO and, you know, eventually they may just return those profits to kind of token holders. That is part of the reason why you may not want to go into, it’s kind of eth-related anyway. If you have Ethereum, you know, why buy such a correlated asset? But they are filling out the other chains as well, and so this will be basically 10 of all the staking rewards across chains over time, and so they have a potentially long-term business where they’re just taking money for old rope.
Then we have something like ENS, or Ethereum Name Service. Again, if you own Ethereum, it’s kind of difficult to buy something like this because you’re not really diversifying at all. The Ethereum Name Service is obviously tied into the success of Ethereum itself anyway. You can see the crazy growth of ethereum names. If you think of .com or .whatever, this would be .eth. If you’ve ever been on Twitter and you see people with the dot eth domain, this is where they register that domain with the decentralized domain name service. You can see that they obviously make very solid revenues because if you’re on web three, you’re going to need a dot eth domain or one of the others. You can do it on other chains as well, but obviously eth is kind of the A1 situation.Protocol revenue over 30 days is 10 million. This is huge right. So there’s been essentially like an NFT frenzy of registering digit five-digit domains. So I think this isn’t really sustainable what we can see right here, but down here you can see solid revenues over time and obviously with domains you do have to renew them. You can obviously register them for a very long time, but at some point you have to renew them.
So I think this is essentially going to become a kind of very boring investment where you know the revenues. It’s going to be slow growth over time, but obviously if you think Web 3 is going to grow and you want to kind of be part of all of those domains, and they just charge a fee for registering a domain, then obviously this protocol is going to just continue to earn revenue and it’s going to be very predictable.
I mean, you know the analytics here and how early all of this stuff. is there’s what been a million names created. You can see the monthly registrations in dot eth are definitely growing right here. Same with Ethereum in the early days. You know, very small, but if this grows and continues to grow, you’ve just got a protocol here that just charges people a set fee over time as long as Ethereum stays relevant. But obviously, the downside is that if you’re in Ethereum anyway, does this really diversify you or give you kind of extra income.
Well, you’d have to look at the actual price of an Ethereum Name Service in relation to its revenues and work out whether it’s kind of under or overvalued at this current time. You may have to be more tactical looking at prices for these types of tokens versus the ethereum, which is more of a kind of DCA type of investment.
Dapps are risky!
So that’s my thought on those coins. They don’t have the best tokenomics but they’re early-stage businesses and not decentralized money, so you have to treat them like that. They do dilute their shareholders quite a lot, so this is very normal. If you’ve ever kind of traded shares or early stage shares, you know that happens when they raise money, but what you want to do really is get in when the valuations are low, when they’re still kind of diluting, and then ride it through. That’s kind of the play that I would make on these, but you bet you do have to be more tactical with the valuations here as well.
[This article is a transcription of a video made by MoneyZG]
Original video: https://youtu.be/fh2YZFGpX_0 ]