Are all valuation models ultimately just memes? Hasu
Yes, absolutely. Su Zhu
2 main valuation approaches: absolute & relative valuation
Relative valuation
stock to flow (why does s2f model only apply to BTC and not to other tokens?)
HODL waves
Gold
Absolute valuation
Valuing the crypto asset like it is a nation state economy, company, commodity, money
High desire for some kind of valuation model for crypto assets as more institutional investors, who are used to valuation in equities and fixed income, enter the space
These models have strong elements of truth but also some part of them don’t make 100% sense.
It’s very important to be aware of what other people think is the valuation model for things, and then also to see when that can be true and when that can be very false. Su Zhu
Is there such a thing as absolute model? Hasu
People try to create models and call them absolute, but there isn’t really no such thing as an absolute model. Su Zhu
Implicit assumptions in absolute models
Different coin/token communities have different models to favourably value their own coin/token.
BTC - as fees are not quite high these days, there’s not much talk about fees or transactions, compared to Eth where there are high fees and a fee-based model would make Eth look stronger. So the BTC community references gold, HODL waves, stock to flow.
ETH - as there is high fee volume on the Eth chain, Eth community prefers to talk about fees. High fees, more onchain revenue, better P/E ratio.
Avalanche / Solana - low transaction costs, high TPS.
There’s an implicit assumption behind every model and I think that’s quite key to understand crypto as well. Su Zhu
Each community is its own sell-side research. Hasu
Market cyclicality
Both the relative and absolute approach completely ignore market cyclicality.
Cyclicality doesn’t matter on a long term timeframe.
But if you want to trade around the market, between different coins, that approach requires an understanding that crypto has its own boom and bust cycle.
Cyclicality has a lot to do with when all the up/downside has been priced in and when none of the up/downside has been priced in, or when the risk of replication hasn’t been priced in.
Example: Sushi. Thought Sushi could go to the other chains like BSC, but Cake emerged and has support of Binance/BNB OGs.
People who say BTC is dying or POS coins will replace POW coins are typically newer people in crypto. They tend to miss that, ultimately, what matters is the strength of the community.
BTC has transitioned narratives many times. Something Hasu has looked into in the article below. ETH has also demonstrated a similar charmelon-like quality.
https://uncommoncore.co/visions-of-bitcoin-how-major-bitcoin-narratives-changed-over-time/
The value of a chain comes from how much economic utility it supports, not from how much it captures.
Su Zhu said that the above statement is one of the 7 unholy market top signs.
There needs to be value capture mechanisms long term.
In the case of ETH, it’s through the fee-burn process + the use of ETH as “pristine collateral” in DeFi + POS with MEV capture + ability to earn yield using native asset. Similar concept in other L2s - Avax, Tron.
Dangerous to tie prices to economic activity or to raw utility from any specific model. Need to have people to believe that the model is true. A counter-example is Cardano, with almost no utility but has strong community, and its price kept going up.
BTC has one of the lowest utilities onchain, but has the biggest market cap. Su suggests BTC is more similar to Cardano or Doge/Shib than a chain whose value is tied to its utility.
Valuation frameworks
An entirely different type of valuation model can be used for BTC - which is political in nature. Gold flat for 10 years while BTC went up 1mil% + BTC has providence of being the first + fair launch = compelling coordination point. This point will come to the forefront given inflationary situations in many countries.
What is the dominant valuation model changes all the time. It’s just basically a game of narratives. Hasu