Thursday Undervalued Mailbag
Q: Is DeFi decentralized?
Depends on who you ask.
Judge Failla says it is: Her opinion in the class action suit against Uniswap's developers and backers agreed with the defendants' argument that suing Uniswap for transactions it facilitates is akin to suing Ford because a bank robber used an F-150 as a getaway car. Uniswap is decentralized code and therefore cannot be held liable for what people choose to do with it.
The IRS says it can't be: New guidance from the IRS implies that DeFi protocols need to be centralized enough to respond to a search warrant.
The DOJ says it depends: The indictment against the co-founders of Tornado Cash suggests that if you write software and someone uses it, you're OK. But if you run servers and a website to facilitate its usage, you may be "operating a scheme" (to launder $1 billion, in this case).
If it's run on StarkWare, it's probably not: A wallet provider built on StarkWare tech told users this week that "wallets that did not upgrade on time will lose their funds."
Only $550k was at risk, but that is definitely not how crypto is meant to work.
Their advice? "We suggest joining [StarkWare's] Discord for the latest updates."
Is it still self-custody if access to your funds is contingent on complying with software upgrades that get announced on Discord?
Either way, that's not going to catch on.
The devs did do something in the end — users have access to their funds again — but at the very least it's a reminder that the more complex and trustless DeFi gets, the more trusting you have to be to use it.
If we always have to trust the devs to do something, DeFi may not be as decentralized as the name would have you believe.
Q: Is crypto the boringest risk asset?
Depends on how you look at it: Bitcoin is up 63% year-to-date, which is a lot more exciting than the S&P's 19%.
But the S&P is now just 6% from its all-time highs, while Bitcoin holders remain a much-less-exciting 60% from the highs.
(Math note: It takes a 150% rally to erase a 60% decline.)
Things are feeling more optimistic this week with the probability of spot ETFs rising, but I don't think that will get us very far.
Crypto has had two "everything rallies" and it's unlikely to get another.
In 2017 and 2021 everything went up, just because it was crypto.
But crypto is no longer the new, new thing and interest rates are no longer 0%.
With risk-free rates over 5%, I suspect it will take a substantial new narrative to get people interested in risky crypto again.
The stock market is back near its highs because it's found a new narrative (AI).
To do likewise, crypto will need to find one, too.
Q: Is Bitcoin cheap then?
If your preferred valuation metric is distance-from-all-time-high, then I guess it is, yes.
But if you apply any traditional metrics, it's infinitely expensive.
Which is why Bitcoiners keep trying non-traditional metrics, like the "stock-to-flow model," or MVRV or Metcalf's law, none of which ever made any sense to me.
The latest is "cointime," a sum-total measure of how long each bitcoin has been held: "The longer a bitcoin is unmoved, the higher its cointime and implied economic significance."
That does actually register with my TradFi brain. If, for example, you burn a $100 bill, you've extinguished a liability of the government, which makes its other liabilities a little easier to meet and therefore more valuable.
Similarly, I think we can consider Satoshi's coins burnt at this point, which effectively gives all other holders a larger piece of a smaller Bitcoin pie.
That may provide a "signal for over- and under-valuation," according to the authors, which is not the same as providing a valuation.
But a signal is probably as good as you can do with bitcoin because there's not really anything to value — no fees or yield or cash flow to measure.
So we invent other things to measure, like cointime, which might be helpful to some, but risks muddying the waters, in my opinion.
I'd rather lean into the idea that Bitcoin is simply worth what people think it's worth — like gold. Or baseball cards. Or the Mona Lisa.
That won't work for everyone, but it doesn't have to because valuation, like beauty, is in the eye of the beholder.
Q: What about ETH?
Ethereum charges fees and staked ETH pays out yield, so traditional valuation metrics may apply — but it still very much depends on how you look at it.
A new Fidelity report employs a DCF model to estimate that ETH is worth as much as $3,612 (using an 8% discount rate and 5% terminal growth) or as little as $843 (15% discount rate and 2% terminal growth).
Even the high-end of that range doesn't sound like a great risk-adjusted bet. But really you can tweak the inputs to get any price target you want out of a DCF model — which is why sell-side analysts are the only people that use them.
The rest of us like to keep it as simple as possible and the simplest metric for ETH is its staking yield — currently 3.8% on Lido.
And because Ethereum effectively pays out all of its earnings, you can also take the inverse of that yield to arrive at a price-to-earnings multiple: A 3.8% yield is equivalent to a 26x P/E.
On either of those metrics, ETH seems pricey to me. But if you think ETH is a high-growth asset, it will look cheap to you.
Either way, though, a staking yield isn't exactly a dividend and network fees are not exactly revenue, so we can't take these metrics too literally, either.
Q: What's it all mean then?
Depends how you look at it!
Which is what makes crypto — however decentralized, cheap, or expensive — the most fun asset class.
(Not investment advice.)
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