Digital assets are experiencing a clear divergence between rapidly improving fundamentals and all-time low investor sentiment. This presents an attractive opportunity to begin scaling into blockchain-related investments.
For more than a year, the crypto universe has suffered a “crisis of confidence”, with precipitous declines in asset prices for anything related to Web3, digital assets, and blockchain. Although this might continue for more months and possibly quarters, something has changed.
The underlying fundamentals for blockchain and digital assets have improved and continue to do so, as many Fortune 500 companies are planning for a blockchain-enabled future. Despite the rapidly improving fundamentals, investor sentiment still remains at an all-time low. This divergence has created an attractive opportunity to begin allocating to blockchain investments.
This is not unprecedented, and we would point to early 2009 as a corollary to today's digital asset market dynamics. Early 2009 was when investor fear was at its peak, and even seasoned Wall Street veterans wondered whether the entire global financial system might collapse, and couldn’t find any reasons to be optimistic.
One of the legendary great investors, Stanley Druckenmiller, was advising his clients at that time to “invest in the world the way it’s going to be in 18-24 months not the way it is now.” The NASDAQ returned +54% in 2009, which was the 4th best annual return over the last 100 years.
Oath Digital, along with other investors and entrepreneurs are espousing Druckenmiller’s sage advice and suggesting that investors should be looking at what blockchain and the digital asset world will be in 2024 and beyond and not where it is today. Too often, investors try to find the bottom and wind up realizing too late, that the bottom is something that is viewed in a “rear view mirror,” not in front of them.
We believe that Smart Contract Platform tokens, like ETH, today represent a highly asymmetric investment opportunity, as we are just beginning to see how blockchain will transform our digital economy.
In Investing in the "Picks and Shovels", we provide an overview of the current Smart Contract Platform landscape. Smart Contract Platforms are ecosystems of decentralized applications (“dApps”) that run on public blockchains.
In addition to maintaining ~70%+ market share in the most important dApp categories (NFTs and DeFi), the ETH token is uniquely designed to increase in value as demand to transact on the network increases. This creates a system where the value created by innovative new applications built on the Ethereum network will accrue to the ETH token.
We also remain constructive on other smart contract platforms like Polygon, Solana and Cosmos that act as the foundational "picks and shovels" powering the growth of blockchain-based innovation.
Below, we outline four reasons to be optimistic about the next 18-24 months for blockchains and smart contract platform tokens:
Similar to the rapid rise in real estate prices in 2005-2008, hindsight has made it clear the 2021 digital asset market was at least partially driven by overleveraging. Also similar to the real estate market, this overleveraging occurred because of centralized capital markets built on top of the asset class, not because of inherent flaws with the underlying asset.
In 2022 we saw widespread bankruptcies of digital asset borrowers/lenders (such as Celsius, Genesis, BlockFi) and blow-ups of fraudulent under-collateralized hedge funds such as Alameda and Three Arrows Capital. These collapses have completely frozen the centralized lending/borrowing markets for digital assets.
On-chain analytics show that ETH’s holder base is now dominated by long-term holders vs. short term speculators. This will create the strong foundation to eventually create a pricing floor as we move out of crypto winter.
Throughout 2022, dozens of Fortune 500 companies and once-skeptical CEOs publicly signaled their support and plans to further adopt blockchain technology. This public support of the underlying blockchain technology spanned nearly all sectors:
Financial Institutions: Fidelity, KKR, BlackRock, Goldman Sachs
Consumer: Starbucks, Nike, Adidas, LVMH
Social Media: Reddit, Instagram, Twitter, Tiktok
Automotive: Porsche, BMW, Tesla
Gaming: Web3 gaming companies raised a combined $5bn in 2022
Smart contract token pricing is closely correlated with the activity on that blockchain. The higher the demand to use the Ethereum network, the higher the price of the ETH token. The above announcements signal an increased institutional push into blockchain-related technology, which will eventually lead to greater adoption and increased token price.
2022 was a banner year for technical development for the Ethereum network.
The Merge was an incredible technical achievement, seamlessly transitioning Ethereum from a Proof-of-Work consensus mechanism to Proof-of-Stake.
In addition to reducing Ethereum’s energy consumption by 99%, the Merge vastly improved the supply dynamics for the ETH token. The Merge reduced the ETH token issuance by 90%, with token emissions now going to long-term holders (stakers) vs. miners who needed to sell ETH to cover operating expenses. Additionally, ETH’s burn mechanism turns ETH net deflationary in periods of elevated network usage.
The most important metric we track to evaluate the health of the smart contract platform ecosystem is developer activity. The future of blockchain-enabled technology is reliant on the smartest, most talented developers continuing to build innovative and novel applications on smart contract platforms.
We’re encouraged to see that the number of developers grew by 5% YoY despite token prices falling by more than 70%. Looking at the last two cycles ,bull markets attract a great number of talented developers and entrepreneurs, most of which stick around throughout bear markets to build the next wave of innovation.
Our primary role as digital asset investment managers is to properly manage risk. Given the asymmetric potential for digital assets, protecting capital and surviving across cycles is paramount in realizing the return potential. While we acknowledge the ongoing risks to the digital asset prices such as potential regulatory scrutiny, global macroeconomic headwinds, and ongoing negative press, the upcoming positive catalysts and improvements to fundamentals should vastly outweigh these headwinds over a 3-5 year time horizon.
We therefore think now is an ideal time for investors to begin scaling into digital asset investments. We expect volatility to continue, however remain optimistic about the blockchain-enabled future.
Oath Digital, Inc. All content is original and has been researched and produced by Oath Digital, Inc (“Oath Digital”) unless otherwise stated herein. This report is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. There is not enough information contained in this report to make an investment decision and any information contained herein should not be used as a basis for this purpose. This report does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of investors. Investors are not to construe the contents of this report as legal, tax or investment advice, and should consult their own advisors concerning an investment in digital assets. The price and value of assets referred to in this research and the income from them may fluctuate. Past performance is not indicative of the future performance of any assets referred to herein. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on Oath’s views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements that are forward-looking by reason of context, the words “may, will, should, could, can, expects, plans, intends, anticipates, believes, estimates, predicts, potential, projected, or continue” and similar expressions identify forward-looking statements. Oath assumes no obligation to update any forward-looking statements contained herein and you should not place undue reliance on such statements, which speak only as of the date hereof. Although Oath has taken reasonable care to ensure that the information contained herein is accurate, no representation or warranty (including liability towards third parties), expressed or implied, is made by Oath as to its accuracy, reliability or completeness. You should not make any investment decisions based on these estimates and forward-looking statements.
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