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Since its genesis, crypto has been a wildly speculative market where excellence in storytelling commands a price premium.
Crypto’s average daily volatility is several times higher than that of traditional assets like gold or equities.
Storytelling pervades all capital markets, but why is it especially pervasive and magnified in crypto?
I can think of two reasons.
The most obvious: its permissionless nature. Anyone can buy a token (no KYC), and anyone can launch a token (see pump.fun’s success).
A second and more subtle reason: weak legal protections for token holders.
As a professional investor, these are all questions you have to reckon with:
- Will your DAO launch a second token?
- Do protocol revenues accrete to private equity, rather than the token?
- What do your token’s market-making agreements look like?
- Will founders sell their allocations on the private OTC market quietly?
All of these questions (with no answers) create uncertainty for investors, which shrinks the available market pie to the most degenerate gamblers.
That, in turn, produces incentives for companies to ignore the laws of profit and loss and rather play the narrative game, or what Theia Research’s Felipe Montealegre termed “narrative Stalinism” in a recent talk.
“Whoever decides what the narrative is decides what tokens do well regardless of product-market fit and customers, and decides who gets more capital or less capital to invest. It’s a perverse equilibrium.”
To be sure, storytelling is and has always been part of investing.
Investing is fundamentally a social, not natural, science.
And the social sciences will always contain elements of subjectivity — contrary to mainstream economics, where the economy can be neatly modulated on a supply and demand graph with perfect causal explanations.
F. Ross Johnson, the CEO of the great American food and tobacco conglomerate RJR Nabisco in the 1980s, often lamented the poor market valuation of his shares despite its great cash flows.
In the revered business book Barbarians at the Gate, Johnson famously complained:
“It’s plain as the nose on your face that this company is wildly undervalued…we tried to put food and tobacco businesses together, and it hasn’t worked. Diversification is not working. We are sitting on food assets that are worth 25x earnings and we trade at 9x earnings, because we’re still seen as a tobacco company.”
Negative cultural perceptions of tobacco soiled RJR Nabisco’s prospects.
But in the case of crypto, the problem is even more fundamental.
Fundamental property rights suck.
As Montealegre argued, most companies play the game of “narrative Stalinism” because weak token holder protections raise the cost of capital and entry barriers for more risk-averse institutional investors.
From the viewpoint of a fundamentals investor, wishing for an alt season so “number goes up” is pure hopium. You’re better off betting on a token with real revenue flows, but first: Fix the property rights problem.
Fundamental companies
Despite the prevailing problems in crypto capital markets, however, a handful of companies have punched up against their weight. Revenue-generating companies are scarce, but they exist.
Within finance, Jupiter, Raydium and Ethena are all million-dollar-generating businesses. The Hyperliquid perps DEX stands out at the top, with $1-2 million in daily revenues.
If you prefer businesses not tethered to the “circular” economy of DeFi, there is the onchain private credit Maple Finance, which hit a monthly high in $1 million revenue in May. Or Shuffle, a gambling app generating an annualized $100 million + in “net gaming revenue.”
Even the nascent DePIN sector has a few breakouts of its own, namely the data-scraping Grass (allegedly generating eight figure annualized revenues) and the real-time kinematic network Geodnet, making sub $2-3 million in annual recurring revenues (ARR).
Debate around the right ways to value tokens is also notably louder, as seen in recent talk around real economic value (REV). This suggests a growing class of investors moving away from speculation, and toward more rigorous approaches to valuations.
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