Summary:
The “crypto is dead” narrative is back, but beware of false claims
We see some more excess that needs to be shaken out, and differentiation is key
Being a “fundamental investor” in crypto should be more than just a buzz word
Understanding value accrual is a necessity in all markets, particularly in a bear
Example token where the fundamentals creates an attractive opportunity to accumulate
"Crypto is dead"...again
The total crypto asset market is down ~47% as measured by total market cap YTD, with most of the selloff occurring since early April. In line with prior crypto bear markets, the “crypto is dead” narratives have begun to resurface for the 449th time (Bitcoin Obituaries). Just last week, an official warned investors to avoid crypto after the market “fell to all-time-lows last month”. A comment so comically false that many took it as a buy signal.
In the below, we take the current top 10 tokens by market cap (ex-stablecoins) and show performance relative their respective all-time-lows (ATL).
While clearly dispelling the notion that we are at “all-time-lows”, the above still does not tell the full story. Missing are the individual projects that innovated particular use cases or created new ones that had far better performance, and those that at one point had large market caps based purely on hype and momentum that dramatically underperformed or no longer exist.
In our view, there could be further pain ahead, as there is still too much value assigned to particular tokens, including some of the above, that either:
a) Do not have users or fees
b) The token does not represent a claim on fees
c) Both
There has also been an excessive amount of capital raised by VCs that will struggle to find attractive investments at reasonable valuations. In the last 12 months, over $25B has been raised by VC funds targeting crypto companies. There simply are not enough deals to absorb that, which has led these firms to fill any round available at valuations that do not reflect the amount of risk these early stage deals have. Our guess is that some of this money finds its way into public markets.
An example of this is ex-WeWork CEO Adam Neumman raising $70MM from leading VCs to launch a platform to “bring carbon credits onto the blockchain”. The raise consisted of venture rounds and presale of its new “Goddess Nature Token”. No product? No users? Questionable governance history? But the token is going to pump, right?
Add in fears of what it will take to get inflation under control, and we think there is still excess to shake out. The question is when the market will differentiate between platforms with suspect fundamentals, and those where the fundamentals are already far too attractive to ignore.
So what is our current approach?
Focus on the bear necessities
In crypto, it has become popular for people to label themselves as “fundamental investors”. But a quick look into what they own proves this to be a buzz word. In the traditional world of asset management, fundamental investors break down companies by looking into their cash flows, competitive moat, leadership, total addressable market, and estimated growth rates to determine earnings potential and assign a valuation. It should be no different in crypto.
Frequently we see participants confuse a potentially successful applications or platform with a good investment. A platform could have the potential for high utility, that will attract new users, and could generate high fees, but if owning the token does not represent a claim on those fees, then the price of the token should not correlate with use of the platform. Said differently, if you as the holder do not receive a share or earnings, sales, or cash flow, then you cannot assign a P/E, P/S, or P/CF multiple.
We refer to this concept as “value accrual” – how do fees generated from a platform or application accrue to token holders, driving value. If the answer is “they don’t”, then generally speaking we do not find that token to be investable. There have been instances of where a token’s value accrual mechanics change to be more or less favorable for token holders. We monitor these changes closely with the goal of being early holders of tokens that may have a favorable change, and exiting exposure to those that a negative change. To the extent we can be active in influencing positive change, we will do so.
Our experience has been that focusing on value accrual drives outperformance in all market cycles. In a bear market, focusing on value accrual is a necessity. It is also what we are the most excited about as we watch all crypto assets sell-off in tandem.
To highlight what we mean, below is an example of a platform we are particularly excited about. It currently sits outside of the top 150 by market cap, and is quickly becoming the market leader in a massive addressable market. Token holders receive a set percentage of all fees generated, and unlike traditional assets such as equities, we can track the revenues and user activity in real time (thank you, blockchain).
source: token dashboard as of 6/5/22
This is an actual business, that for the past 5 months has been annualizing $30MM in earnings to token holders. As you can see in the above, the token price peaked in mid-January as earnings ramped, maxing out at a P/E of 18.5x. As the overall market sold off, earnings stayed consistent. This token currently trades at 4.5x annualized earnings for a platform that has grown earnings 165% and daily unique users (7 day average) 293% YTD, while consistently growing volumes when total crypto market activity is down.
We continue to find similar opportunities that we believe will outperform going forward. And while we are being patient in our deployment, we are very excited to be able to accumulate these positions at these levels.
Please don’t hesitate to reach out with questions or feedback.
Sincerely,
Motus Capital Management
Past performance is not indicative of future results. This communication does not constitute an offer to sell or solicitation of an offer to buy the Interests in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation in such jurisdiction. This communication is being provided solely as a high-level overview and is not intended to be relied on for the terms of any offering.