By: Byron Gilliam
Compiled by: TechFlow
“The social goal of skillful investing should be to defeat the dark forces of time and ignorance that loom over our future.”
—John Maynard Keynes, famous economist
Story time for crypto investors
Despite the large numbers involved, investing is generally considered to be more of an art than a science.
The selection of common stocks is a difficult art, Benjamin Graham once warned.
Grahams lifelong student Warren Buffett further clarified that Investing is an art...putting cash now in the hope of getting more cash in the future.
Almost all investing comes down to forecasting future cash flows.
But Peter Lynch warns that investors who are “trained to rigidly quantify everything are at a great disadvantage.”
However, this does not mean that “valuations are just a meme,” as some financial nihilists claim.
Rather, it means that applying and interpreting quantifiable valuation metrics is a creative activity in itself.
Choosing which valuation metric to apply to which investment is a subjective decision—and knowing how to interpret the results is even more so.
For example, a low valuation does not necessarily mean that the stock is cheap, and a high valuation does not necessarily mean that the stock is expensive (often the opposite is true).
A stock may look very cheap on some metrics and extremely expensive on others.
There is no obvious correlation between these valuations and actual returns.
This can often be frustrating -- if cheap stocks arent going to go up and expensive stocks arent going to go down, why bother trying to figure it all out?
I think it’s all worth looking into because that’s what makes investing interesting and appealing — and if that’s the case, the fun of crypto investing has only just begun.
Until recently, crypto investors had very limited options when it came to data, with little available beyond token prices and market capitalization.
This makes everything in crypto a “story” — and that’s okay!
Investing is essentially the art of storytelling.
However, the best investment stories are often told in numbers, and the crypto space is gradually having such conditions as more protocols begin to generate revenue and a larger portion of these revenues are distributed to token holders.
Furthermore, these numbers have become more accessible thanks to the work of organizations like Blockworks Research , whose analysts package this data into easy-to-understand charts and reports for us to reference.
This helps the crypto space move to a higher level of narrative: telling stories with numbers.
Lets look at some current numbers.
Ethereum vs. Solana
Judging from crypto Twitter and podcasts, it seems that market sentiment for Ethereum has hit new lows, especially compared to Solana.
But if a newcomer with a traditional finance (TradFi) background looks at the data directly, he or she may come to a completely different conclusion.
According to Blockworks Research, Solana recorded $36 million in “net token holder income” in April, which gives the SOL token an annualized earnings multiple of 178x — a multiple that, while high, may be justified given current low activity levels.
In comparison, Ethereum netted $21 million to token holders in April, giving ETH tokens a whopping 841x earnings multiple.
An investor from traditional finance (TradFi) wouldn’t immediately think, “Wow, why is everyone so pessimistic about Ethereum?” when they see ETH’s valuation multiple is 5x that of SOL.
But they also won’t immediately assume that the market is 5x more positive about Solana than Ethereum.
Instead, they might conclude that Solana’s revenue estimate is low, perhaps because it derives primarily from “low-quality” memecoin trading activity, while Ethereum’s revenue estimate is high, at least in part, because it includes higher-quality activity, such as revenue associated with real-world assets (RWAs).
Now we have some perspectives to work with: if you believe that memecoin trading activity is not that low quality, then SOL may be undervalued; and if you believe that real-world assets are the future, then ETH may not be overvalued.
Of course, you can dig deeper to get more information.
According to Blockworks Research, the combined revenue of all Solana applications is only about 1.8 times the revenue of Solana itself.
For a platform-based business, this is a very high take rate - far higher than Apples 30% cap, and the US government even believes that Apples take rate is already monopolistic.
This could mean that Solana’s revenue is too high, so its token valuation multiple should be low; or, it could mean that Solana has a business moat, so its token valuation multiple should be high.
In either case, this is a story worth watching.
Hyperliquid
Hyperliquid is a semi-decentralized crypto exchange with a somewhat peculiar story: the protocol generated a whopping $43 million in revenue in April and distributed nearly all of it to token holders.
Not surprisingly, this pattern has helped its token outperform recently. As Blockworks Research’s Boccaccio noted in a recent report: “The bailout fund uses transaction fees to buy back tokens every 10 minutes, creating constant buying pressure.”
Every 10 minutes!
It’s hard to make a definitive judgment on this because in traditional finance, no company returns 100% of its revenue to shareholders—let alone every 10 minutes.
Judging from its valuation, the crypto market seems to be somewhat hesitant about this.
HYPE tokens are trading at a valuation of approximately 17x annualized revenue (based on market cap), which would normally be considered expensive.
But in this case, revenue and profitability appear to be the same thing, so if you believe HYPE can continue to win business from centralized exchanges, the valuation still looks quite reasonable.
Boccaccio cautioned that HYPE is trading at significantly higher valuation multiples than its decentralized peers, but these peers may not be the right comparison.
“Hyperliquid’s L1 would only need to capture a small portion of Binance’s daily trading volume to significantly increase its trading volume… Capturing 10-15% of Binance’s BTC/USDT trading volume alone could increase HyperCore’s trading volume by 50%.”
“So the growth multiples are justified,” Boccaccio concluded.
Of course, the size of this multiple depends on how much you believe the story.
Jupiter
Jupiter, a decentralized exchange (DEX) aggregator on Solana, returns a relatively modest 50% of revenue to token holders (also via buybacks) — but it’s still pretty impressive.
Marc Arjoon estimates that Jupiter could generate $280 million in revenue over the next 12 months, which would imply a yield of around 11.5% on JUP tokens based on market cap.
In the stock market, an 11.5% yield usually means the underlying business is in trouble, but that doesnt seem to be the case here.
Jupiter is “the default router on Solana,” Arjoon wrote, “currently unrivaled in the aggregation space,” and “is the fourth-highest-grossing application among all crypto dapps.”
More importantly, it’s being run like a real business: “Jupiter’s strategic actions for 2024-2025 show that this is an organization that is actively entering a hyper-growth phase, ambitiously positioning itself as Solana’s top crypto super-app.”
That doesnt sound at all like a company that should have an 11.5% yield.
Of course, there are still a lot of risks, which Arjoon outlines in detail in his recent report.
But he concluded that Jupiter currently trades at attractive multiples relative to its peers, suggesting that it still has considerable upside potential even without taking multiple expansion into account.
He even quantifies this with a segment valuation analysis, which is comforting to my traditional finance background:
This looks like a good story.
Helium
Helium, a decentralized telecommunications services provider, has long been a hot topic in the crypto space — it was founded way back in 2013.
But now, it’s more than just a story, it’s a story with data: “Revenue growth, as measured by Data Credit Burn, is accelerating, up 43% month-over-month,” Blockworks Research’s Nick Carpinito wrote in a recent report.
“More importantly, Helium’s revenue stream is gradually shifting from Helium Mobile to Mobile Offload, which now accounts for about three times the data credit burn and is growing nearly 180% month-over-month, an incredible growth rate for a DePIN (decentralized Internet of Things) protocol sold into the enterprise budget space.”
“Mobile Offload” is the blue line in the chart above, and its quarterly growth rate is a staggering 180%, which is a shocking number for anyone.
Helium’s HNT token appears to already reflect this in its valuation, currently trading at around 120 times annualized sales.
But Carpinito mentioned on the 0x Research podcast that he expects revenue to accelerate further due to a surge in data credit usage as ATT allows its US customers to connect to the Helium network.
As a result, “we are likely to see unprecedented increases in HNT prices over the next 12 months, and this increase will be more stable than the previous speculation-based Helium price fluctuations.”
In the crypto space, it’s extremely rare to hear someone make this kind of price prediction based on non-speculative factors.
And its refreshing.
Pendle
Finally, Pendle is a “yield trading” protocol whose new product “Boros” will allow users to speculate on any on-chain or off-chain yield, starting at the funding rate.
“This implementation is similar to the classic interest rate swap market, where traders can pay a floating rate to receive a fixed rate, or pay a fixed rate to receive a floating rate, and supports leveraged trading,” explained Luke Leasure of Blockworks Research.
It sounds a bit complicated to a traditional finance guy like me, but apparently it’s a huge market: “The perpetual futures market settles close to $60 trillion per year, with hundreds of billions of dollars in open interest. Boros will enter a completely new, huge, and untapped market.” Leasure said he expects Boros could potentially double Pendle’s revenue.
This is rarely heard in traditional finance.
In an optimistic scenario, Leasure estimates that a “vote-escrowed” version of the Pendle token could trade at just 1.6x:
1.6 times!
In the stock market, valuations as low as 1.6x earnings are only seen when a business is about to collapse, but that is clearly not the case with Pendle.
That said, this isn’t investment advice (at least not from me), as Pendle’s story is pretty complicated — as are most projects in the crypto space.
But at least now these stories can be told digitally.
——Byron Gilliam
