From Speculation to Fundamentals: A New Paradigm for Cryptocurrency Markets

Author: Michael Nadeau, CoinDesk; Compiled by: Deng Tong, Golden Finance

As crypto networks and protocols mature, trusted real-time on-chain data now provides market participants with access to a range of A perspective on cash flow, active users, user retention, locked value, transaction volume and developer activity across a growing number of crypto protocols and applications.  

With it comes a new way of researching and investing in cryptoassets – through fundamental analysis (i.e. measuring the value of a stock by investigating relevant economic and financial factors). If the past is an indicator of the future, we should expect the crypto market to mature in the coming years.

"In the short term, the market is a voting machine. But in the long term, the market is a weighing machine." 

This is Said by Benjamin Graham, the pioneer of value investing. Graham's first book, "Security Analysis," was published in 1934, just as the Securities Act of 1933 and the Securities Exchange Act of 1934 were enacted in the aftermath of the stock market crash and the Great Depression.

Graham's work helped lay the foundation for new concepts such as fundamental analysis and intrinsic value. This work sowed the seeds for market consensus on how to value stocks and conduct comparative analyses.  

These ideas were later widely promoted by Warren Buffett in the 1950s and 1960s after Graham published his second book, The Intelligent Investor. Acceptance by academia and business further propelled these concepts into mainstream consciousness in the 1970s, 1980s, and 1990s, as the market reached consensus on financial data and core metrics such as price-to-earnings ratios.

"Price to Book Ratio", "Dividend Yield", "Debt to Equity Ratio", "Free Cash Flow", "Return on Equity", "Net Profit Margin", all these concepts are gradually becoming more and more popular in this era. Be mature. Along with this came investment concepts such as "economic moat" and "enduring competitive advantage."

Of course, all of this requires good data. Without data, stocks will trade on speculation, narratives and brands. Well, that sounds a bit like the crypto market today.

Just as traditional markets are reaching consensus on the best ways to value stocks using data, we expect something similar will happen with crypto networks and protocols.

Of course, it is important to realize thatspeculation is at the heart of every innovation in history. Creating new industries requires speculative capital.

With history as our guide,speculation ultimately leads productive capital to find its highest and best use. Ultimately, the market reaches consensus on how to use and evaluate new technology (and the businesses that leverage it).

We are seeing this being realized today in the era of blockchain technology, or Web3 - which is introducing a new data layer to the Internet, introducing shared global accounting distributed ledgers and digital property rights concept.

For example, below we can observe active users on Ethereum L1 and its top L2 network:

Data: Token Terminal

These data can be the L2 and L1 levels in the Ethereum ecosystem The expected value accumulation provides information.  

Here we have Ethereum’s “GDP” – the sum of fees generated by the most important protocols and applications “built on top” of L1 infrastructure.

Data: Token Terminal

These data can provide information for comparative analysis of alternative Layer 1 networks.  

Ultimately, we expect a consensus to develop around key KPIs and metrics in various areas within Web3 – just like we see in traditional finance.  

Summary

As quality data providers lay the foundation for fundamental analysis, we should expect to see new products that leverage this data come to market – e.g. based on fundamental comprehensive indices and new investment frameworks.

As fundamental analysis of crypto networks becomes more deeply understood with new and ever-improving data, we should expect the next wave of “smart money” to find the highest quality projects.

Gaining an investment advantage will require gaining access to quality data before other players in the market. It also gives regulators the tools they need to monitor markets and develop sensible new investor protection rules. After all, the level of granularity and near-real-time delivery of data in encrypted networks is unprecedented in the financial world.

Future crypto investments will be based on fundamentals.

And it all starts with high-quality on-chain data.