The "good days" for crypto investing are over; embrace equity-like assets in the crypto world.

Original title: The Crypto Market was Much Healthier 5 Years Ago

Original author: Jeff Dorman (Arca CIO)

Original article translated by: Deep Tide TechFlow

Introduction:

Is the crypto market getting increasingly boring? Jeff Dorman, chief investment officer at Arca, writes that despite the infrastructure and regulatory environment never being stronger, the current investment climate is the worst in history.

He sharply criticized industry leaders' failed attempts to force cryptocurrencies into "macro trading tools," leading to extreme convergence in the correlations of various assets. Dorman called for a return to the essence of "tokens as securities packaging," urging attention to equity-like assets with cash flow generation capabilities, such as DePIN and DeFi.

With gold prices soaring while Bitcoin remains relatively weak, this in-depth reflection provides an important perspective for re-examining the investment logic of Web3.

The full text is as follows:

Bitcoin is facing an unfortunate situation.

Most investment debates exist because people operate on different time horizons, often leading to misunderstandings even when both sides are technically correct. Take the gold vs. Bitcoin debate, for example: Bitcoin enthusiasts tend to argue that Bitcoin is the best investment because it has significantly outperformed gold over the past 10 years.

Gold investors tend to believe that gold is the best investment and have recently been "mocking" Bitcoin's decline, as gold has significantly outperformed Bitcoin over the past year (the situation is similar for silver and copper).

Meanwhile, over the past five years, gold and Bitcoin have yielded almost identical returns. Gold tends to remain stagnant for extended periods before skyrocketing when central banks and trend followers buy in; while Bitcoin tends to experience sharp rises followed by significant crashes, but ultimately recovers to higher levels.

Therefore, depending on your investment horizon, you can almost win or lose any argument about Bitcoin versus gold.

Even so, it's undeniable that gold (and silver) have recently outperformed Bitcoin. In a way, this is somewhat ironic (or even pathetic). The biggest players in the crypto industry have spent the last decade catering to macro investors, not true fundamental investors, who are now saying, "Forget it, let's just buy gold, silver, and copper." We've been calling for a shift in the industry's thinking for a long time. There are currently over $600 trillion in assets under management , and the buyer base for these assets is a much more sticky group of investors. Many digital assets look more like bonds and stocks, issued by companies that generate revenue and conduct token buybacks; yet, for some reason, market leaders have decided to ignore this token sub-sector.

Perhaps Bitcoin's recent poor performance relative to precious metals is enough to make major brokers, exchanges, asset managers, and other crypto leaders realize that their attempts to transform cryptocurrency into a full-fledged macro trading tool have failed. Instead, they may turn their attention to educating the $600 trillion investor base that prefers cash flow-generating assets. It's not too late for the industry to start focusing on quasi-equity tokens backed by cash flow-generating tech businesses (such as various DePIN, CeFi, DeFi, and token issuance platform companies).

However, if you simply change the position of the "finish line," Bitcoin will still be king. Therefore, it's more likely that nothing will change.

asset differences

The "good days" of crypto investing seem to be a thing of the past. Back in 2020 and 2021, it seemed like every month brought a new narrative, track, or use case, along with new tokens, and positive returns were coming from every corner of the market. While the growth engine of blockchain has never been stronger (thanks to legislative progress in Washington, the growth of stablecoins, DeFi, and the tokenization of real-world assets like RWA), the investment environment has never been worse.

One sign of a healthy market is dispersion and low cross-market correlation. You certainly want healthcare and defense stocks to move differently from tech and AI stocks; you also want emerging market stocks to move independently of developed markets. Dispersion is generally considered a good thing.

2020 and 2021 are largely remembered as a "broad-based rally," but that wasn't entirely accurate. It was rare to see the entire market moving in unison. More often, one sector rose while another fell. Gaming might surge while DeFi fell; DeFi might surge while "dinosaur" L1 tokens fell; Layer-1 might surge while Web3 fell. A diversified crypto portfolio effectively smoothed out returns and typically lowered the overall portfolio's beta and correlation. Liquidity fluctuated with changing interests and demands, but returns were highly varied. This was very encouraging. The influx of funds into crypto hedge funds in 2020 and 2021 made sense, given the expanding investable space and the diversification of returns.

Fast forward to today, and all the "crypto-wrapped" assets look remarkably similar in terms of returns. Since the flash crash on October 10th, the declines across sectors have been virtually indistinguishable. Regardless of what you hold, how the token captures economic value, or the project's trajectory... the returns are largely the same. This is incredibly frustrating.

This table can look slightly encouraging during periods of market prosperity. "Good" tokens tend to outperform "bad" tokens. But a healthy system should actually be the opposite: you want good tokens to perform better in bad times, not just in good times. Below is the same table from the low on April 7 to the high on September 15.

Interestingly, when the crypto industry was still in its infancy, market participants went to great lengths to differentiate between different types of crypto assets. For example, I published an article in 2018 in which I categorized crypto assets into four types:

1. Cryptocurrencies/money
2. Decentralized protocols/platforms
3. Asset-backed tokens
4. Pass-through securities

At the time, this classification method was quite unique and attracted many investors. Importantly, crypto assets were evolving, from simply Bitcoin to smart contract protocols, asset-backed stablecoins, and then to equity-like transmissive securities. Studying different growth areas was once a primary source of excess returns (alpha), and investors wanted to understand the various valuation techniques needed to assess different types of assets. At the time, most crypto investors didn't even know when unemployment claims data was released or when the Federal Reserve (FOMC) meeting was held, and rarely looked for signals in macroeconomic data.

These different asset classes still exist after the 2022 crash. Their essence hasn't changed. But the way the industry markets itself has changed dramatically. The "gatekeepers" now believe Bitcoin and stablecoins are the only things that matter; the media seems to want to write nothing but about Trump tokens and other memecoins. In the past few years, not only has Bitcoin outperformed most other crypto assets, but many investors have even forgotten about these other asset classes (and sectors). The business models of the underlying companies and protocols haven't become more relevant, but the correlation of the assets themselves has indeed increased due to investor flight and market makers dominating price movements.

This is why Matt Levine's recent article on tokens was so surprising and popular. In just four paragraphs, Levine accurately described the differences and nuances between various tokens. This gives me hope that this type of analysis is still viable.

Leading cryptocurrency exchanges, asset management firms, market makers, over-the-counter (OTC) platforms, and pricing services still refer to everything other than Bitcoin as "altcoins" and seem to only write macro research reports, bundling all "cryptocurrencies" together as a single massive asset. Did you know that Coinbase, for example, seems to have only a small research team led by a lead analyst (David Duong) whose work focuses primarily on macro research? I have nothing against Mr. Duong—his analysis is excellent. But who would go to Coinbase specifically to read macro analysis?

Imagine if leading ETF providers and exchanges simply wrote general articles about ETFs, saying things like "ETFs are down today!" or "ETFs react negatively to inflation data." They'd be laughed at and go bankrupt. Not all ETFs are created equal, and those who sell and promote ETFs understand this. What matters most is what's inside the ETF, and investors seem to be able to wisely differentiate between them, largely because industry leaders have helped their clients understand this.

Similarly, a token is merely a "wrapping". As Matt Levine eloquently describes, what matters is what's inside the token. The type of token matters, the track matters, and its properties (inflation or amortization) matter.

Perhaps Levine isn't the only one who understands this. But he's done a better job of explaining the industry than those who actually profit from it.