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HEALTH, WEALTH, AND HAPPINESS

March 4, 2022

“If you cannot control your emotions, you cannot control your money.”

- Warren Buffett

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This Social Club Runs on Crypto Tokens and Vibes (New York Times): You know that DAOs (Decentralized Autonomous Organizations) are gaining steam when the mainstream press starts covering them.

This article covers the Friends With Benefits DAO, and how one token gets you access to exclusive events to hobnob with other creative folks.

Investor takeaway: Think of DAOs like blockchain-based collectives. While most DAOs still have limited appeal for mainstream investors, it pays to educate yourself on how they work. (Paid members can watch our Hands-on DAO Workshop.)

The Friends With Benefits token (FWB) is not just a membership token: it also functions like an investment, with the price going up or down depending on the "vibes" (to quote the article).

Watching the decline in value of the FWB token since its peak in August is a fascinating social experiment, like watching a trendy nightclub gradually fall out of favor.

Investor takeaway: Think about how DAOs will allow us to put a price on things that were formerly unmeasurable (like brand, buzz, or "vibes").

Daily Active Users: like X-ray vision for crypto investors.

More users = more value

In the world of crypto, users drive value.

This is because of network effects: the more users there are on a blockchain, the more developers it will have. The more developers it has, the more apps. The more apps, the more users. And so on, in a virtuous circle.

Along the way, you get all kinds of second-order effects: better developer tools and education, increased brand recognition, and more crypto exchanges supporting the ecosystem.

Just look at Ethereum and the recent success of the enormous ETHDenver event: once you get the snowball rolling, it starts to pick up speed. That's simply an example of network effects.

This is what network effects look like, in real life. (Courtesy Infura)

The #1 most important metric for a new blockchain investment is number of users. Not price. Not market cap. NUMBER OF USERS.

Say it with me: I will research the number of users before I make any crypto investments.

A terrific tool is Glassnode, where you can see real-time stats on the Daily Active Users for top tokens. It’s incredibly eye-opening.

You can’t fake Daily Active Users. (At least, not for long.) It's like having X-ray vision: You strip away the hype, and get to see the blockchain completely naked.

There are a few ways to look at Daily Active Users:

• comparing across tokens
• trends over time
• users vs. price

Let’s take each of these in turn.

Method 1: Comparing DAU Across Tokens

Here’s a look at Daily Active Users of bitcoin (DAU = orange line):

Now compare it with Ethereum (DAU = blue line):

The first thing I noticed was that bitcoin has 1 million Daily Active Users, where Ethereum has only 500,000. Did you know that? I didn’t. With all the DeFi activity, I thought Ethereum had more users.

Now let’s compare it with a DeFi token like Aave:

Here we have only about 500 active addresses a day. (You read that right.) Comparing Ethereum to Aave is like comparing Amazon to a local grocery store.

When I say “more users = more value,” I don’t mean that more users means higher price. You can see from these charts that price (the gray line) often moves in mysterious ways.

However, over the long-term, users drive value, so user growth will generally correlate with higher token price (just as in a traditional company, customer growth will generally correlate with higher stock price).

So in plain English: if you see Daily Active Users growing over a period of several months, that’s a potential winning investment. If it’s on the decline over the same period of time, watch out.

Method 2: DAU Trends Over Time

You can see the health of a blockchain (like the health of a business) in real-time. Consider Balancer (BAL), which was the talk of the town a few years back. Auto-rebalancing portfolios!Say goodbye to fund managers!

Today the BAL token has somewhere around 100 Daily Active Users. That's pretty bleak. Compare that with the Daily Active Users for Brave Attention Token (BAT), the token built into the Brave browser:

Here we see much healthier growth over time (though we should ask what happened in July 2021, and whether BAT will recover). Note also the regular spikes in usage, suggesting BAT is really being used to pump value at regular intervals, like a heartbeat.

If these two charts were your starting point as an investor, you could say that BAL is probably on its way out, and BAT just may be worth a deeper look. (For further research, you can use a tool like our peer-reviewed Blockchain Investor Scorecard).

Method 3: DAU vs. Price

Finally, we can look at Daily Active Users vs. price to see if they are moving in lockstep, like Polygon’s MATIC token: 

Or if it’s more out of sync, like the price for Uniswap’s UNI:

To be clear, price and users don’t need to be in perfect unison. If the price is below the number of users, it could be a great time to buy (look at November 2020 for Uniswap). But if the price remains high when the number of users is on the decline, that’s a warning flag (look at November 2021).

The Glassnode charts are helpful because they compare Daily Active Users and price by default. So if you see price below DAU, especially as DAU is growing, that’s potentially a crypto bargain.

Think of Users like Customers

It can be helpful to think about users of a blockchain like customers of a traditional company. The price of the token is like the price of the stock. The big difference is that in blockchain we have perfect, real-time information. With traditional companies, we don’t.

This “information asymmetry” is a big problem in traditional markets. If you’re an investor in Meta Platforms, Inc., formerly known as Facebook, Inc., you would like to know whether the Facebook platform is losing customers. But you won’t find out until months after the fact, when the reports come out and the stock price takes a hit.

In blockchain, we can watch our crypto investments and monitor “customers” (users) in real time. We don’t need to obsess about daily price movements, but checking in every few months is a good rule of thumb. And of course DAU is extremely helpful when researching new investments.

Daily Active Users is like X-ray vision. It's another investing superpower. Use it wisely.

Health, wealth, and happiness,

John Hargrave

Publisher

CZ, that sounds like a perfectly reasonable approach! We appreciate your efforts to get more people involved in crypto.

Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It is created by Evamarie Augustine, Charles Bovaird, Mati Greenspan, John Hargrave, and Alexandre Lores.

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