Motus Capital Management
Motus Missives Vol. 5 | Cash Flow is Still King
Updated: Dec 28, 2022
There is a “new” trend that has begun to permeate amongst the crypto community – “real yield”. The idea that assets that pay an organic yield to holders based on a percentage of fees (revenues) generated makes that asset more valuable relative to those that have no claim on revenues. What a novel concept! If you have read our prior posts, we refer to this as value accrual, and it underpins our investment process when navigating this market. To quote our June 7th Missives:
“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 of 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.”
In response to this revelation, crypto assets that return fees to holders have meaningfully outperformed the market in the past month. For example, in our June 7th piece we highlighted a derivatives exchange that pays 30% of all fees generated to token holders. That token has more than doubled from then till now. While that return may seem excessive, it still trades at a sub-20 P/E with triple digit revenue growth and can scale without needing to hire more employees or expand physical footprint.
The above example looked uniquely attractive at the time of writing, but we have seen similar return profiles in assets that possess similar characteristics. Perhaps by coincidence, the second largest blockchain, Ethereum, is currently undergoing a major enhancement that will bring value accrual to its ETH token holders. That this is a new “trend” within crypto shows the market’s immaturity and inefficiencies but could lead to less excess as well.
It Pays to be Nimble
Evaluating investments based on earnings should be standard practice for any investment manager in any market. However, the reality is that larger crypto funds have and will struggle to allocate to the most attractive opportunities due to liquidity. Per leading crypto research provider Messari, half of the crypto assets ranked 51 – 200 by market cap have real daily trading volume of $5MM or less. Practically speaking, a fund above $250MM cannot build a meaningful position in an asset with that level of liquidity without impacting the price. Selling out of the position also creates challenges, with significant price consequence if needing to do so quickly. The only other option is to acquire positions in the private/OTC market, with its associated premiums and/or multi-year lockups.
When looking at the assets that have outperformed due to strong value accrual, and in our opinion still look attractive, the majority reside outside of the top 150, with many outside of the top 300. Conversely, there are very few assets in the top 50 that return any value to token holders. This is likely why there is so much turnover in the top 10 crypto assets by market cap each year. In the below we compare the top 10 from 2020 to 2021 ex-Bitcoin, Ethereum, and stablecoins.
Notably, multiple top performers in 2021 did not exist in 2020, and only one of the assets shown above receives meaningful fees from activity. In a market that is innovating rapidly we would expect this turnover to continue. Only those that have the ability to stay nimble will be able to take advantage.
We have been following this market closely since 2016. Our experience tells us that whenever a new “trend” emerges, that money will flow to that trend. We expect continued inflows into assets with value accrual, and given that has always been a core part of our thesis, we welcome the tailwind. This may lead to stretched valuations in certain pockets of the market, and in others, the emergence of governance activism to change “tokenomics” for the better. We are actively monitoring these trends, and will be nimble in our execution.
Please do not hesitate to reach out with questions, comments, or feedback!
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.