“The Value Path of Blockchain Investment”
Author: Continue Capital Founder Pima
The underperformance of the altcoin market has raised concerns among many people in the industry. In a complex environment with different stages of development, it is inevitable that the difficulty of investment increases. However, the fundamental problem lies in finding a business model that ensures long-term sustainable development for a project.
After ten years, I have found that many people, even those who have been in the industry for a long time, still do not understand why public chains continue to dominate the top 100 rankings and why top public chains attract billions and even trillions of dollars in funding, while your coin struggles with just millions or tens of millions. Personally, I like to simplify complex things, so I will try to analyze it from a different perspective.
Starting from first principles, “P = E * PE,” which means “Stock Price = Profit * Valuation.” Therefore, in the long run, the factors influencing stock prices are only profit and valuation.
Firstly, valuation (PE). This is a complex factor influenced by many aspects, such as growth rate, interest rate, penetration rate, industry space, central bank liquidity, monopolies, etc. These factors determine the valuation given to different stocks at a certain period of time. Idol Warren Buffett said he doesn’t buy BTC because it doesn’t generate cash flow (you can consider cash flow as profit). From a long-term perspective, I agree with most of what he said, but the above stock price formula only considers profit (E) and not valuation (PE). Therefore, MEME/BTC can be classified under the same category in the PE factor as long as your MEME continues to attract people to buy without needing to generate its own cash flow. However, there is an important premise: within a certain market capitalization. The larger the market capitalization, the more people you need to attract, and without sustained cash flow support, it is very difficult to sustain.
Secondly, profit (E), let’s focus on this. Profit comes from revenue, so for stock prices to rise, revenue must increase. And where does revenue come from? It comes from the business model, which is defined as a business activity that earns profits by providing goods or services to others. In 2006, Duan Yongping, with $620,000, won a lunch with Warren Buffett. He asked Buffett a question that had been bothering him for a long time: What is the most important thing to consider when investing? Buffett’s answer was the business model. A company cannot sustain long-term development if it doesn’t know how to make money. The core reason for the continuous rise of the seven sisters in the US stock market is profit, not other short-term factors.
In my opinion, there are mainly: blockchain space fees, SWAP fees (exchanges, including DEX/CEX), lending interest spread, stablecoins (transaction fees), MEV (parasitic in the blockchain space). Others are easy to understand, so let’s focus on blockchain space fees.
In fact, the crypto world has created a new business model: selling blockchain space, which means public chains charge for access and storage of global computing/bandwidth resources using GAS fees. Global consumers purchase access and storage rights to global computation/bandwidth resources based on the base price of each transaction.
I used to be confused about a few words, such as “value” and the internet. We know that most of the information on the internet is free, such as images, text, videos, etc. Each piece of information can be infinitely copied. Therefore, in the early stages of internet development, people didn’t know how to monetize it. Later, they gradually discovered the business models of the internet, including earning money from SaaS subscription services, advertisements, and transactions (e-commerce), among others.
So, what is the business model of blockchain? I later understood the concept of the crypto world’s “value internet,” which is a paid internet where you have to pay GAS fees for every action. The original intention of blockchain was to solve the problem of currency attributes, which is very different from the free internet. You can’t infinitely copy and repeatedly pay the same amount of money to others. The free internet cannot solve the currency problem. Therefore, in the process of expanding from currency to public chains, the unique aspect is that it makes consumers bear the cost of accessing blockchain space. For the past few decades, enterprises in the online world have been leasing computing resources by themselves and paying AWS bills to provide products and services to customers, thus charging fees and making profits. But on blockchain applications, users pay for the project’s operating costs. Globally, consumers pay billions to tens of billions of dollars in GAS fees each year, which is the revenue of public chains. If the annual revenue is 10 billion, with a 5% government bond yield, a 20 times PE would result in a market size of 200 billion. With a 10 times PE, it would be a trillion-dollar market, and with a 50 times PE, it would be a 500 billion market. This is why the public chain market is so huge fundamentally.
For example, the current total supply of USDT on the TRON (TRX) network is 60 billion, which occupies a significant portion of the USDT market. I looked at TRX’s annual revenue for 2023, which is estimated to be around $400-500 million, with 75% of it coming from USDT transfer fees, equivalent to $400 million in profit. If we give it a 20 times PE, a valuation of 8 billion for TRX is reasonable. However, the focus is not on this, but on whether this data can increase tenfold or more in the next ten years. How much market share can SOL gain in the future with its payment and open finance capabilities? But let’s not digress further on expansion topics.
You need to understand that I am only trying to explain why the public chain market is huge, which is the existing phenomenon of people being willing to pay GAS fees. I haven’t delved deeper into why you need to pay GAS fees and why more people will pay GAS in the future. Is it due to the need for transfer payments? The desire for wealth accumulation (hoarding GAS)? The demand for entertainment (paying for a specific DAPP)? The demand for trading cryptocurrencies, commodities, stocks, SWAPs, and everything else? You need to know that if no one pays GAS fees in the future, the public chain market will cease to exist. So, when you see fancy terms that are difficult for ordinary people to understand, it’s unclear whether it’s due to the early stage of development in the crypto world or the difficulty of practical implementation. The promotion often revolves around abstract terms that are hard to comprehend, such as scalability, ZK technology, L2, UTXO, chain abstraction, modularity, homomorphic encryption, parallel EVM, etc. Personally, as I didn’t participate in the early development of the internet, I only learned later that terms like modularity and monolithic chain originated from internet technology. But in the internet field, few people mention them, while in the crypto world, they are repeatedly emphasized. I am now resistant to using these terms in narratives. After understanding the basic concepts, I directly ask: How much revenue can this technology bring? How much profit can it generate for me to repurchase? Otherwise, where is the market fit for your technology? I can support long-term deep cultivation of basic technology/disciplines, but tell me how long it will take to have a clear business model. Two years, ten years, or twenty years? The more complex questions about increasing revenue from GAS fees and who can occupy the top market share are the key considerations. Although I have already chosen SOL
Therefore, since public chains are products with revenue, cash flow, and profit, their business models are clear and have a way forward. What’s left is how you choose to expand revenue, increase market share, and reduce costs, among other actions that align with the path of business development.
Many projects in the crypto world do not have a business model; they don’t even know how to make money. Only 3% of the Fortune 500 companies have survived until now. Investing is about finding these 3% of projects and holding them for the long term. Many investment concepts are straightforward but challenging to implement. With thousands of projects in the crypto world, how can you clearly see the value for investment? Take investment seriously.
When the river is clear, longevity follows. Rather than indulging in fanciful and unrealistic ideas, it’s better to be down-to-earth. Otherwise, time will be running out for you.
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