Cryptocurrencies Without Compound Interest Can't Outperform Stocks?

Original Author: Santiago Roel Santos

Original Compilation: Luffy, Foresight News

As I write this, the crypto market is experiencing a sharp decline. Bitcoin has touched the $60,000 mark, SOL has fallen back to levels seen during the FTX bankruptcy asset liquidation, and Ethereum has dropped to $1,800. I won't dwell on the long-term bearish narratives.

This article aims to explore a more fundamental question: why tokens cannot achieve compound growth.

For the past few months, I've held a consistent view: from a fundamental perspective, crypto assets are severely overvalued. Metcalfe's Law cannot support current valuations, and the divergence between industry adoption and asset prices may persist for years.

Imagine this scenario: "Dear liquidity providers, stablecoin trading volume has grown 100-fold, but the returns we've brought you are only 1.3x. Thank you for your trust and patience."

What's the strongest counter-argument to all this? "You're too pessimistic and don't understand the intrinsic value of tokens; this is a new paradigm."

I understand the intrinsic value of tokens all too well, and that's precisely the crux of the problem.

The Compound Engine

Berkshire Hathaway's market cap is now around $1.1 trillion. This isn't due to Buffett's market timing prowess, but because the company possesses the ability for compound growth.

Every year, Berkshire reinvests its profits into new businesses, expands profit margins, acquires competitors, thereby increasing the intrinsic value per share, and the stock price follows. This is an inevitable result because the underlying economic engine is constantly growing.

This is the core value of a stock. It represents ownership of a profit-reinvestment engine. Management earns profits, then allocates capital, pursues growth, cuts costs, buys back stock. Every correct decision becomes the foundation for the next round of growth, creating a compounding effect.

$1 growing at a 15% compound rate for 20 years becomes $16.37. $1 sitting at 0% interest for 20 years remains $1.

A stock can transform $1 of profit into $16 of value. A token can only turn $1 of fees into $1 of fees, with no appreciation.

Show Me Your Growth Engine

Let's see what happens when a private equity fund acquires a business with $5 million in annual free cash flow:

Year 1: Achieves $5 million FCF. Management reinvests it into R&D, building stablecoin custody channels, paying down debt. These are three key capital allocation decisions.

Year 2: Each decision yields returns. FCF grows to $5.75 million.

Year 3: Prior gains continue compounding, funding a new round of decisions. FCF reaches $6.6 million.

This is a business compounding at 15%. $5 million grows to $6.6 million not due to market euphoria, but because each capital allocation decision made by people empowers the next, creating a virtuous cycle. Persist for 20 years, and $5 million becomes $82 million.

Now, consider a crypto protocol with $5 million in annual fee revenue:

Year 1: Earns $5 million in fees. Distributes it all to token stakers. Capital completely exits the system.

Year 2: Might earn another $5 million in fees, provided users return. Then distributes it all again. Capital exits again.

Year 3: Revenue depends entirely on how many users are still playing at this "casino."

No compounding exists because there was no reinvestment in Year 1, hence no growth flywheel by Year 3. Subsidy programs alone are far from sufficient.

Token Design Was Always This Way

This isn't accidental; it's a legal strategy.

Looking back to 2017-2019, the SEC cracked down on anything resembling a security. Lawyers advising crypto protocol teams all gave the same advice: never make a token look like a stock. Don't give token holders a claim on cash flows. Don't give tokens governance over the core development entity. Don't retain earnings. Define it as a utility asset, not an investment.

Thus, the entire crypto industry designed tokens to deliberately distance them from stocks. No cash flow rights to avoid looking like dividends. No governance over the core dev entity to avoid looking like shareholder rights. No retained earnings to avoid looking like a corporate treasury. Staking rewards were defined as network participation rewards, not investment returns.

The strategy worked. Most tokens successfully avoided being classified as securities. But in doing so, they lost all possibility of achieving compound growth.

This asset class was deliberately designed from its inception to be incapable of performing the core action for creating long-term wealth: compounding.

Developers Hold Equity; You Hold the "Coupon"

Every major crypto protocol has a for-profit core development entity behind it. These entities develop software, control the front-end, own the brand, and manage enterprise partnerships. And token holders? They only get governance voting rights and a variable claim on fee revenue.

This model is ubiquitous. The core dev entity holds the talent, IP, brand, enterprise contracts, and strategic optionality. Token holders get a variable "coupon" tied to network usage and the "privilege" to vote on proposals increasingly ignored by the dev entity.

It's no wonder that when a company like Circle acquires a protocol like Axelar, they buy the equity of the core dev entity, not the tokens. Because equity compounds; tokens don't.

Ambiguous regulation has spawned this distorted industry outcome.

What Are You Actually Holding?

Strip away all market narratives. Ignore price volatility. Look at what token holders actually receive.

Stake Ethereum, you get ~3-4% yield. This yield is determined by network issuance and dynamically adjusted based on staking participation: more stakers, lower yield; fewer stakers, higher yield.

This is essentially a variable-rate coupon tied to a protocol's predetermined mechanism. It's not a stock; it's a bond.

Sure, Ethereum's price might go from $3,000 to $10,000. But a junk bond's price can also double if spreads tighten. That doesn't make it a stock.

The key question is: what mechanism drives the growth of your cash flow?

Stock cash flow growth: Management reinvests profits, achieving compound growth. Growth rate = Return on Capital × Reinvestment Rate. You, as a holder, participate in an expanding economic engine.

Token cash flow: Entirely depends on Network Usage × Fee Rate × Staking Participation. You receive a coupon fluctuating with block space demand. The entire system lacks any reinvestment mechanism or compound growth engine.

Wild price swings make people think they hold stocks. But economically, they hold fixed-income products with 60-80% annualized volatility. This is the worst of both worlds.

Most tokens, after accounting for inflationary dilution, offer real yields of just 1-3%. No fixed-income investor would accept that risk/reward profile. Yet the asset's high volatility attracts wave after wave of buyers. This is the Greater Fool Theory in action.

The Power Law of Timing, Not Compounding

This is why tokens cannot accumulate value and compound. The market is realizing this. It's not stupid. It's pivoting to crypto-related equities. First, digital asset treasuries. Now, more capital is flowing into companies using crypto tech to lower costs, increase revenue, and compound.

Wealth creation in crypto follows the power law of timing: those who made fortunes bought early and sold at the right time. My own portfolio follows this. Crypto assets are called "liquid venture capital" for a reason.

Wealth creation in stocks follows the power law of compounding: Buffett didn't time his purchase of Coca-Cola; he bought it and held for 35 years, letting compounding work.

In crypto, time is your enemy: hold too long, and gains evaporate. High issuance, low float, high FDV designs, coupled with insufficient demand and excess block space, are key reasons. Hyper-liquid assets are rare exceptions.

In stocks, time is your ally: the longer you hold a compounding asset, the more powerful the math becomes.

Crypto rewards traders. Stocks reward holders. And in reality, far more people have gotten rich holding stocks than trading them.

I have to run these numbers repeatedly because every liquidity provider asks: "Why not just buy Ethereum?"

Pull up the chart of a compounding stock—Danaher, Constellation Software, Berkshire—and compare it to Ethereum's chart. The compounding stock's line slopes steadily up and to the right because its economic engine grows every year. Ethereum's price surges and crashes in cycles. The ultimate cumulative return depends entirely on your entry and exit timing.

Maybe the final returns are similar. But holding the stock lets you sleep at night. Holding the token requires you to be a market prophet. "Time in the market beats timing the market" is common wisdom. The hard part is actually staying invested. Stocks make long-term holding easier: cash flow provides a price floor, dividends give you patience, buybacks compound on your behalf while you hold. Crypto makes long-term holding incredibly hard: fee revenue dries up, narratives shift, you have nothing to lean on—no price floor, no stable coupon, just belief.

I'd rather be a holder than a prophet.

Investment Strategy

If tokens can't compound, and compounding is the core method of wealth creation, the conclusion is clear.

The internet created trillions in value. Where did that value ultimately flow? Not to protocols like TCP/IP, HTTP, SMTP. They are public goods, immensely valuable, but capture zero value at the protocol level for investors.

Value flowed to companies like Amazon, Google, Meta, Apple. They built businesses on top of the protocols and compounded.

Crypto is repeating this pattern.

Stablecoins are becoming the TCP/IP of money—highly useful, high adoption—but whether the protocols themselves capture proportional value is unclear. USDT is backed by a company with equity, not just a protocol. This is telling.

The real compounding entities are companies integrating stablecoin infrastructure into their operations, reducing payment friction, optimizing working capital, cutting FX costs. A CFO who saves $3 million annually by switching cross-border payments to stablecoins can reinvest that $3 million into sales, product, or debt paydown. That $3 million compounds. The protocol facilitating the transaction earns a fee. It doesn't compound.

The "Fat Protocol" thesis argued crypto protocols would capture more value than the application layer. Seven years later, public chains hold ~90% of total crypto market cap, but their share of fees has plummeted from ~60% to ~12%. The application layer generates ~73% of fees but holds less than 10% of the valuation. Markets are efficient. The data speaks for itself.

The market still clings to the "Fat Protocol" narrative. But the next chapter of crypto will be written by crypto-enabled equities: companies with users, generating cash flow, whose management can use crypto tech to optimize their business and achieve higher compound growth rates. They will outperform tokens.

A portfolio of Robinhood, Klarna, NuBank, Stripe, Revolut, Western Union, Visa, BlackRock will outperform a basket of tokens.

These companies have a real price floor: cash flow, assets, customers. Tokens do not. When tokens are valued at insane multiples of future revenue, their downside is brutal.

Long-term bullish on crypto technology. Selective on tokens. Overweight equities of companies that can leverage crypto infrastructure to amplify their advantages and compound.

The Frustrating Reality

Every attempt to solve the token compounding problem inadvertently proves my point.

DAOs trying to perform real capital allocation—like MakerDAO buying treasuries, creating subDAOs, appointing domain teams—are slowly recreating corporate governance. The more a protocol tries to compound, the more it must resemble a company.

Digital asset treasuries and tokenized equity wrapper tools don't solve this. They just create a second claim on the same cash flow, competing with the underlying token. These tools don't make the protocol better at compounding; they redistribute yield from token holders who don't hold the tool to those who do.

Token burns are not stock buybacks. Ethereum's burn is a thermostat set to a fixed temperature. Apple's buybacks are flexible decisions by management based on market conditions. Intelligent capital allocation—the ability to adjust strategy based on circumstances—is the essence of compounding. Rigid rules don't compound; flexible decisions do.

And regulation? This is the most interesting part. The root cause of tokens' inability to compound is that protocols cannot operate as companies: they can't incorporate, retain earnings, or make legally binding promises to token holders. The GENIUS Act proves Congress can bring tokens into the financial system without killing them. When we have a framework allowing protocols to operate using corporate capital allocation tools, it will be the biggest catalyst in crypto history, bigger than the Bitcoin spot ETF.

Until then, smart capital will keep flowing to equities. And the compounding gap between tokens and stocks will widen every year.

This Is Not Bearish on Blockchain

Let me be clear: Blockchain is an economic system with immense potential. It will be the foundational infrastructure for digital payments and agentic commerce. My company, Inversion, is building a blockchain because we believe this deeply.

The problem isn't the technology; it's the token economic model. Today's blockchain networks transfer value; they don't accumulate and reinvest it to compound. But this will change: regulation will evolve, governance will mature, and some protocol will figure out how to retain and reinvest value like a good company. When that day comes, tokens will be stocks in everything but name, and the compounding engine will start.

I'm not bearish on that future. I just have a view on its timing.

Someday, blockchain networks will compound value. Until then, I'll buy companies using crypto to compound faster.

I might be wrong on timing. Crypto is an adaptive system, and that's one of its greatest features. I don't need to be precisely right; I just need to be directionally correct: compounding assets will outperform over the long run.

And that's the beauty of compounding. As Charlie Munger said: "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

Crypto technology dramatically lowers the cost of infrastructure. Wealth will flow to those who use that low-cost infrastructure to compound.