Author: Jeff Dorman (Arca CIO)
Compiled by: Deep Tide TechFlow
Original title: The Crypto Market Five Years Ago Was Actually Healthier Than Now
Deep Tide Introduction:
Is the crypto market becoming increasingly dull? Arca Chief Investment Officer Jeff Dorman writes that although infrastructure and regulatory environments have never been stronger, the current investment environment is the "worst in history."
He sharply criticizes industry leaders' failed attempts to forcibly transform cryptocurrencies into "macro trading tools," leading to extreme convergence in correlations among various assets. Dorman calls for a return to the essence of "tokens as securities packaging," focusing on equity-like assets such as DePIN and DeFi that have cash flow generation capabilities.
At a time when gold is surging while Bitcoin is relatively weak, this in-depth reflective article provides an important perspective for re-examining Web3 investment logic.
Full text below:
Bitcoin is facing an unfortunate situation
Most investment debates exist because people are on different time horizons, so they often "talk past each other," even though technically both sides are correct. Take the debate between gold and Bitcoin as an example: Bitcoin enthusiasts tend to say that Bitcoin is the best investment because its performance over the past 10 years has far exceeded that of gold.
Caption: Source TradingView, comparison of Bitcoin (BTC) vs. gold (GLD) returns over the past 10 years
Gold investors, on the other hand, tend to believe that gold is the best investment and have recently been "mocking" Bitcoin's weakness, as gold has significantly outperformed Bitcoin over the past year (the same goes for silver and copper).
Caption: Source TradingView, comparison of Bitcoin (BTC) vs. gold (GLD) returns over the past 1 year
Meanwhile, over the past 5 years, the returns of gold and Bitcoin have been almost identical. Gold tends to do nothing for long periods, then skyrocket when central banks and trend followers buy; Bitcoin tends to have sharp rallies followed by significant crashes but ultimately moves higher.
Caption: Source TradingView, comparison of Bitcoin (BTC) vs. gold (GLD) returns over the past 5 years
Therefore, depending on your investment horizon, you can almost win or lose any argument about Bitcoin vs. gold.
Even so, it's undeniable that recently gold (and silver) have shown strength relative to Bitcoin. To some extent, this is somewhat ironic (or pathetic). The largest companies in the crypto industry have spent the past 10 years trying to cater to macro investors rather than true fundamental investors, and now these macro investors are saying, "Never mind, we'll just buy gold, silver, and copper instead." We have long called for a shift in the industry's thinking. There are over $600 trillion in entrusted assets, and the buyers of these assets are a much stickier investor base. There are many digital assets that look more like bonds and stocks, issued by companies that generate revenue and conduct token buybacks, yet market leaders have, for some reason, decided to ignore this token sub-sector.
Perhaps Bitcoin's recent poor performance relative to precious metals will be enough for large brokers, exchanges, asset managers, and other crypto leaders to realize that their attempt to turn cryptocurrencies into an all-encompassing macro trading tool has failed. Instead, they might start focusing on and educating that $600 trillion pool of investors who prefer to buy cash-flow generating assets. It's not too late for the industry to start paying attention to those quasi-equity tokens that carry cash-flow generating tech businesses (like various DePIN, CeFi, DeFi, and token issuance platform companies).
Then again, if you just keep moving the "finish line," Bitcoin is still king. So, more likely than not, nothing will change.
Asset Differentiation
The "good old days" of crypto investing seem like a thing of the past. Back in 2020 and 2021, it seemed like every month brought a new narrative, sector, use case, and new type of token, with positive returns coming from all corners of the market. Although the growth engines of blockchain have never been stronger (thanks to legislative progress in Washington, stablecoin growth, DeFi, and RWA tokenization), the investment environment has never been worse.
A sign of market health is dispersion and low cross-market correlation. You want healthcare and defense stocks to move differently from tech and AI stocks; you want emerging market stocks to move independently of developed markets. Dispersion is generally seen as a good thing.
2020 and 2021 are largely remembered as "everything goes up" markets, but that wasn't entirely true. It was rare to see the entire market move in lockstep. More commonly, one sector would rise while another fell. Gaming surged while DeFi might have been falling; DeFi surged while "Dino" L1 tokens fell; Layer-1s surged while the Web3 sector fell. A diversified crypto portfolio actually smoothed returns and often lowered the overall portfolio's beta and correlation. Liquidity came and went as interest and demand shifted, but performance was diverse. This was very exciting. The massive inflow into crypto hedge funds in 2020 and 2021 made sense because the investable universe was expanding and returns were differentiated.
Fast forward to today, and the returns of all "crypto-wrapped" assets look identical. Since the flash crash on October 10th, the declines across sectors are almost indistinguishable. No matter what you hold, or how the token captures economic value, or what the project's trajectory is... the returns are largely the same. This is very frustrating.
Caption: Arca internal calculations and CoinGecko API data for a sample of representative crypto assets
During market booms, this table looks slightly more encouraging. "Good" tokens tend to outperform "bad" tokens. But a healthy system should actually be the opposite: you want good tokens to perform better during bad times, not just during good times. Here is the same table from the low on April 7th to the high on September 15th.
Caption: Arca internal calculations and CoinGecko API data for a sample of representative crypto assets
Interestingly, when the crypto industry was in its infancy, market participants worked very hard to differentiate between different types of crypto assets. For example, I published an article in 2018 where I categorized crypto assets into 4 types:
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Cryptocurrencies/money
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Decentralized protocols/platforms
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Asset-backed tokens
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Pass-through securities
At the time, this classification method was quite unique and attracted many investors. Importantly, crypto assets were evolving, from just Bitcoin, to smart contract protocols, asset-backed stablecoins, to equity-like pass-through securities. Researching different growth areas was a major source of alpha, and investors wanted to understand the various valuation techniques required to assess different asset types. Most crypto investors back then didn't even know when unemployment data was released or when FOMC meetings were held, and rarely looked to macro data for signals.
After the 2022 crash, these different types of assets still exist. Nothing has fundamentally changed. But there has been a huge change in how the industry markets itself. The "gatekeepers" decided that Bitcoin and stablecoins were the only things that mattered; the media decided they didn't want to write about anything except TRUMP tokens and other memecoins. Over the past few years, not only has Bitcoin outperformed most other crypto assets, but many investors have even forgotten these other asset types (and sectors) exist. The business models of the underlying companies and protocols haven't become less relevant, but the assets themselves have become more correlated due to investor flight and market makers dominating price action.
This is why Matt Levine's recent article about tokens was so surprising and well-received. In just 4 short paragraphs, Levine accurately described the differences and nuances between various tokens. It gives me some hope that this kind of analysis is still possible.
The leading crypto exchanges, asset managers, market makers, OTC desks, and pricing services still call everything besides Bitcoin an "altcoin" and seem to only write macro research, bundling all "cryptocurrencies" together as one giant asset. Take Coinbase, for example – they seem to have only a very small research team led by one primary analyst (David Duong) whose focus is primarily on macro research. I have nothing against Mr. Bitcoin (Mr. Duong) – his analysis is excellent. But who goes to Coinbase specifically for macro analysis?
Imagine if leading ETF providers and exchanges only wrote generically about ETFs, saying things like "ETFs are down today!" or "ETFs react negatively to inflation data." They would be laughed out of business. Not all ETFs are the same just because they use the same "wrapper," and those selling and promoting ETFs understand this. What's inside the ETF matters most, and investors seem to be able to intelligently differentiate between ETFs, mainly because industry leaders help their clients understand this.
Similarly, a token is just a "wrapper." As Matt Levine eloquently described, what's inside the token matters. The type of token matters, the sector matters, its properties (inflationary or amortizing) matter.
Perhaps Levine isn't the only one who understands this. But he does a better job explaining the industry than those who actually profit from it.
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