Cryptoasset Fundamental Analysis — The Definitive Guide — Part I
Why Cryptoassets are the ultimate value play and Warren Buffett is missing the boat.
The crypto bears are often heard proclaiming that Crypto Assets lack any fundamentals. They say things like “Cryptoassets have no intrinsic value. There is no value behind them, no assets, no earnings”. Or much worse:
“Bitcoin is rat poison squared” — Warren Buffet.
This is seriously misguided. Crypto entities build disruptive technology on next-generation fat protocols on top of TCP/IP which have economic and business models baked into them. These technological breakthroughs are beyond the grasp of traditional Fundamental Analysts.
In this series of articles I present Cryptoasset Fundamental Analysis — a general framework that I claim effective in quick valuation of crypto entities.
Fundamental Analysis and High Tech Firms
For those unfamiliar with Fundamental Analysis, it is a method of valuing a firm which takes into account the assets, liabilities, and earnings, plus other factors such as quality of management, competitive landscape, and economic factors. This is in contrast to Technical Analysis which, in simplest terms, assumes all these factors are reflected in the price, and utilizes statistics based on price, volume of transactions, volatility, momentum, etc..
It should be obvious why Technical Analysis is useful for Crypto traders — they are the most technically savvy participant in the history of financial markets, often with higher-than-average quantitative and logical capabilities.
But rapid technological disruption requires us to harness our intuition in order to make the translation from the Fundamental Analysis of our grandfathers.
Even Warren Buffet admitted he was wrong on Google & Amazon as Amazon went without profits for almost two decades. A new framework is needed.
As software technology propagates and business model innovation accelerates, the valuation models of the past become increasingly ineffective.
Models are made to be destroyed, so we can learn from them — so let’s dissect the Fundamental Analysis of Crypto Assets:
Fundamental Analysis of Tech Startups
In the early stages, tech software firms can be valued on four factors (as articulated by the world-renowned tech accelerator Y Combinator ), and these are the key dimensions of hypergrowth: Idea, Product, Team, Execution.
Let’s break this down:
Idea
This includes things like a concept and brand that provides sufficient value in a large enough market, a disruptive innovation, and even generativity.
Product
Software that does not suck and is scalable. This is a tangible asset that can be valued on dimensions of utility, efficiency, quality, scalability, performance, reuse, evolvability, etc..
Team
An experienced and energized core team with the right blend of capabilities and synergistic personalities. Also, experienced advisors who can guide the core team and connect them with resources.
Execution
In the early stages of a startup we are talking about the implementation of pioneering disruptions, speed to market, and traction. As startups grow, a solid Operating Rhythm becomes critical.
However, these aren’t the only dimensions of value for cryptoasset entities. Given the economics, game theory, and mechanism design inherent in the policies enacted, cryptoassets can be valued using, wait for it… Cryptoasset Fundamental Analysis.
Stay tuned for Cryptoasset Fundamental Analysis — The Definitive Guide — Part II, where I layout a theory of high tech crypto firm fundamental analysis.
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