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The crypto markets are maturing.
As this plays out, it's increasingly becoming a stock-pickers market.
Broad beta doesn’t work anymore. Which means it’s getting more difficult to outperform BTC without owning assets in growth sectors with real fundamentals and value-accretive token economics.
In this week’s edition of The Watch List, we cover the investable assets we’ve initiated coverage on across fundamentals, buybacks, token economics, momentum, and performance relative to BTC.
The goal is to share our framework for evaluating assets while identifying what we believe may be the most undervalued asset in crypto today.
*Please note that you can click the data citation note under each chart to access the supporting dashboard for this week’s report.
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The top projects here are Ethena and lending/yield protocols. This makes sense, as they have much lower user activity than other parts of the tech stack, such as trading and high-velocity applications.
Regarding Ethena, we think the project has collected roughly $160m in protocol revenue (total revenues less payments to sUSDe holders) over the last year. While the market is currently focused on projects conducting active buybacks, we think there are some assets (possibly ENA) that could benefit from future buybacks, given existing protocol revenues.
Derive is the leading non-lending/yield based app (albeit with a relatively small user set today). Hyperliquid is the leader amongst more established projects. This shows the stickiness of its core users at a foundational level, and the protocol’s ability to monetize them.
Notably, HyperEVM is generating more fees/active addresses than any of the top L1s — a strong sign for the nascent L1.
Price to Sales = 30-day total fees annualized/circulating market cap
On its own, a low P/S ratio does not tell us that much. For example, we also need to know: 1) Which projects generate the most revenue? 2) What % of that revenue flows to tokenholders? 3) Why might an asset have high revenues, buybacks, and still a low p/s ratio (market dislocation or structural issue)?
The answer to the first question is 1) AAVE, 2) UNI, 3) HYPE, 4) PUMP, 5) JUP, 6) ENA, 7) ETH, 8) SOL, 9) RAY, and 10) BNB.
Of those revenues, the projects that capture the most protocol revenue and share that value with tokenholders via buybacks are PUMP, LIT, HYPE, JUP, RAY, AERO, and DRV. More on buyback yield later in the report.
The asset with the highest revenue and buybacks, yet a low p/s ratio, is PUMP.
TVL can serve as an indication of product/market fit. But it does not tell us anything about the quality of the business model.
We can see this in the data. AAVE looks significantly undervalued, relative to its TVL. But only 41% of Aave’s TVL is utilized in active loans. And of that, Aave captures roughly 15% of the total loan fees as protocol revenue. Therefore, Aave, and other lending protocols (and protocols with low velocity) deserve lower valuations when compared with protocols that turn over their TVL at high velocity.
This is why we prefer “fast DeFi” over “slow DeFi” as investors. “Fast DeFi” = more fees, buybacks, reflexivity, and upside potential.
Buyback yield = 30-day annualized buybacks/circulating market cap.
PUMP currently has the highest buyback yield of any crypto asset. This is true when we look at 30-day annualized, 90-day annualized, and 365-day figures.
LIT, HYPE, JUP, RAY, AERO, DRV, and VVV account for the remaining crypto projects on The Watch List with strong product-market fit, revenue, and buybacks.
Team & Investor Unlocks = 365-day anticipated unlocks/circulating supply today.
The holy grail is to find an asset with 1) product/market fit in a growth sector, 2) strong revenue in a high-velocity product, 3) strong buybacks/value to the token, 4) low team + investor unlocks.
As we can see, that mix does not exist (due to unlocks). This presents challenges for investors, who have to make judgment calls on leadership teams with long-term conviction and aligned goals with tokenholders.
Beta calculation = weekly covariance over the last 365 days.
Given that most crypto assets are highly correlated with BTC, we allocate a portion of our portfolio to select assets with high beta relative to BTC.
These tend to be riskier assets, further out on the risk curve. That’s exactly what we see in the data, with three of our favorite meme coins displaying the highest BETA to BTC.
As an investor, having a 2.6 Beta to BTC is compelling if you can develop long-term conviction (we study holder cohorts) + get your entries right (buying extremely oversold conditions). That’s not easy to do. But it’s something that’s worked well for us in the past with a small % of the portfolio in “hot sauce” assets (BONK and SPX6900 were two of our best trades in the last cycle, albeit in relatively small size). Of course. No risk, no reward. The upside reflexivity of these assets is just as pronounced on the downside (which is why timing is so important).
The Watch List is a curated list of crypto assets that we’ve initiated coverage on.
The assets that make it into the TDR Pro portfolio are those we ultimately believe can outperform BTC over 1-3+ years. That’s a high bar to make it into the portfolio. And it should be. Most investors ultimately struggle to outperform BTC, including most crypto native hedge funds.
As shown in the chart, only 14 of 31 assets have outperformed BTC over the last year. Only 9 assets on The Watch List have outperformed BTC over the last three years.
At the end of the day, it's all about 1) asset selection, 2) getting your entries right.
We do not expect to outperform BTC with each asset in our portfolio (if we had that level of confidence, we wouldn’t hold BTC). The goal is simply to get more assets right than wrong, while significantly outperforming on the ones we get right.
It’s not enough to simply pick the right assets. Buying them at the correct time is just as important, if not more important.
In the chart above, we can see that 7 assets on The Watch List are currently trading above their 50 Week Moving Average.
We typically avoid purchasing tokens trading in this range. And as a general rule, we like to buy assets only when they are down 50% or more from their prior highs.
In terms of momentum, we like to buy when assets are trading at or near “oversold” levels on the 14-day RSI, ideally already down significantly and within our “fair value” ranges.
“If all you ever did was buy high-quality stocks on the 200-week moving average, you would beat the S&P 500 by a large margin over time. The problem is, few human beings have that kind of discipline.”
-Charlie Munger (RIP)
The same rule can be applied to crypto assets and equities.
Our dataset is small here, given the 200 WMA is a long-term, 4-year moving average (many coins have not been trading for that long).
What’s the most undervalued crypto asset on The Watch List today?
That’s a subjective question. But we continue to believe it’s PUMP. At the bottom of the ‘22 bear market, we thought it was SOL.
Of course, an asset price cannot become “dislocated” from its long-term upside without a clear reason for that dislocation.
In ‘22, Solana was perceived as the “FTX chain” due to their significant investments in the ecosystem (and SOL holdings). Of course, when FTX went down, investors fled the asset. Many developers fled the ecosystem. And the rest of the industry, including many in the Ethereum ecosystem, “punched down” on SOL at the cycle lows (down 96%).
Of course, those who could envision a “comeback” saw something different.
They saw better UX than Ethereum. A strong, mission-driven leadership team. A well-capitalized and organized foundation. And a developer ecosystem poised to double down.
At the end of the day, the best investments we’ve made are the ones that feel the scariest. Because to get it right, you have to go against the herd. Against our core instincts as humans (to remain “in” the tribe).
In case you missed it, we shared our views on why we believe PUMP is so misunderstood a few weeks back. There is no guarantee that we are correct. But if we are, we think it will be obvious in hindsight (as it was with SOL).
Generally speaking, we like high-velocity “fast DeFi” in the next cycle. Particularly for tokens with established buyback programs, given the reflexive nature of crypto cycles.
We hope this week’s report can help to serve as a framework for identifying and analyzing undervalued assets, and how to think about when to buy them.
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Disclaimer: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.