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- Instead of putting your money into all these DeFi platforms, just buy the underlying tokens instead (e.g., instead of locking up value in Compound, just buy and hold COMP)
- The tokens can be considered like “stock” in these “companies” (e.g., buying UNI is like buying "shares" of the Uniswap "company")
- To quickly validate which tokens might be a good buy, look at user growth (chart here)
- Any projects that are rapidly growing (but token price is not) are likely good buys
- As always, do additional research, and don’t invest more than you’re ready to lose
Once you've identified a good DeFi investment, here's the three-step method to invest:
I’ve tested this approach with some of the smartest investors in DeFi, inviting them to poke holes in it (I invite you to poke holes in it, too). They have agreed this is a good approach for long-term investors in this space. In my mind, it’s like buying GOOG stock in 2004.
Today I'll add a little more rigor to this approach, with some additional metrics to find good long-term DeFi buys. And it starts with something I heard from an insider at Binance.
Blockchain is Transparent
DeFi is built on public blockchains, which means you can see everything happening in real time.
This is very different from investing in public companies. Let’s say you hold FB stock: you know the number of people using Facebook is an incredibly important factor in the value of your investment. But you don’t know how many people are using Facebook until they release their quarterly reports, by which time the data is old.
In blockchain, where user growth is everything, you can see this data in real-time. (Again, here’s the chart.) Because blockchains have network effects, rapidly growing blockchains can have exponential growth curves. Check out for instance this growth in DeFi protocol Compound: |
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That’s a pretty strong signal to buy COMP. This data is the blockchain investor’s secret weapon. This data is not available to ordinary investors in ordinary markets. This data shows you how many people are actually using a blockchain, not just hyping it.
Public blockchains are transparent. This is not theory, it's a fact. And it's staring you in the face.
She talked about Binance Smart Chain, which is Binance’s new blockchain for building DeFi projects (their answer to Ethereum, where most DeFi projects are built today).
Sun pointed out that one of the key metrics they use for monitoring the success of Binance Smart Chain is how many developers are building things on it. This was a lightbulb-switch, key-click, "a-ha" moment for me.
Think about this logically: when you have more developers on a DeFi blockchain, you have more dapps being released. More dapps attract more users. More users, in turn, attract more developers. In the best case, you have a virtuous circle that is an investor's dream: |
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That’s a pretty strong signal to buy a blockchain token. This is why the easiest way to invest in DeFi is simply to buy and hold ether. ETH is the main game in town, the blockchain that all these dapps are being built upon. It’s like investing in FB stock (the platform) instead of ZNGA (an app distributed on that platform).
Thus, “number of developers” is a good metric for measuring the value of blockchain platforms, like Ethereum, Cardano, Polkadot, and Binance Smart Chain. |
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Right column is active developer accounts (courtesy Santiment) Note this doesn’t work for DeFi protocols, just DeFi platforms. But there is a similar metric for DeFi protocols: POWER USERS.
Measuring Power Users with Discord
For example, Discord is the instant messaging platform of choice for the crypto community. (I’m not a fan, but my kids love it.) Discord is geeky and difficult to use – think early Usenet newsgroups – which makes it a good “barrier to entry” to measure power users of a DeFi protocol. |
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Why Discord? Why not Telegram, Reddit, and Twitter?
First, there’s the problem of counting the same user multiple times: if you’re a “power user” on Discord, you’re probably also on Twitter, so let’s keep it simple and just use one channel.
Twitter is also a different animal: It’s easy for anyone to tweet about anything; it’s much harder to find and join a Discord server. Plus, Twitter activity pretty much just matches price movements, so it doesn’t tell you anything usefulabout where or when to invest: |
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In the chart above, the green line is bitcoin price; blue spikes are social activity around “bitcoin.” You'll be hard-pressed to see a pattern, except that social activity spikes when bitcoin price spikes. Twitter activity, in other words, is not very useful for valuing a blockchain.
Think of it this way: Twitter is low commitment. Discord is higher commitment. Using the platform is very high commitment. Buying the token is the highest commitment.
Putting it Together In summary, we can value the leading DeFi protocols by adding up their active users (most important) and power users (secondary importance), then dividing by total market cap to get a rough "value per user." |
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Looking at these numbers, we’d say that Uniswap may be somewhat undervalued, while Ren and Aave are overvalued. While no one knows what a blockchain user “should” be worth, this early data would suggest something like $2,000 per user. The chart makes it even more clear: |
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This doesn’t tell us everything, but it tells us a lot – especially when tracked over time. Because of blockchain’s network effects, when we see total users and power users skyrocketing (without a subsequent increase in price), we’ve potentially got a hit on our hands.
In summary:
- Look at total users and power users to see which DeFi projects are experiencing "rocket ship" growth.
- Look for where the token price is low, relative to the user growth.
- Do your qualitative research, in addition to this quantitative research (use our Blockchain Investor's Scorecard).
- When you are satisfied, invest in the underlying token, which is like buying "stock" in the "company."
These numbers are the blockchain investor’s secret weapon. And because this space is so new, it’s like we’re solving the Da Vinci Code before Robert Langdon gets out of bed. It’s a long-term play, but we’re long-term investors.
It's like buying GOOG in 2004. |
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Health, wealth, and happiness, |
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John Hargrave Publisher Bitcoin Market Journal |
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Hi Everyone,
It's been nearly a week since the media declared Democrat Joe Biden the winner in the most dramatic U.S. election of our lifetime.
Still, about 21% of American's have yet to accept the outcome.
The president's claims of mass fraud have been largely ignored by the general public, but in some corners of the Internet they're currently crescendoing in a great echo chamber, filled with hundreds of videos seeming to verify any number of different types of voter fraud.
Now, I've been trained in how to spot fake news before the term even had a Wikipedia page.
These videos come in on Whatsapp or Facebook showing people dropping off ballots. Then the narrator tells a story insinuating foul play.
In the end, if the video doesn't identify who filmed it, where, when, and under what circumstances, then it's not really valid proof of anything. Always check the source of your information.
Here's an example of California authorities responding to one of these claims: |
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In the meantime, President Donald Trump has made himself scarce to the media, and is even seemingly laying off Twitter this week, but who can blame him when every tweet he sends is tagged as "disputed" by the platform.
The president has filed lawsuits in half a dozen states, but so far, they have resulted in very little progress.
In any case, hopefully all will be resolved on Dec. 14, when the electoral college meets. President-elect Biden has won 290 electoral votes at the time of this writing, according to the Associated Press.
So while it's still technically possible for Trump to pull a win, the odds are probably better for bitcoin to hit $20,000 this weekend. In other words, it's possible, but not bloody likely.
The markets can also give a pretty good insight as to what risks there may be in the future, and as they're reading right now, volatility is about as low as it has been since the start of the pandemic. They're not stressing.
Neither am I, and nor should you, even though it is Friday the 13th.
Sometimes these things have to play out, but there's now some serious light coming from the end of the tunnel.
Have a wonderful weekend.
Best regards, |
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Mati Greenspan Analysis, Advisory, Money Management |
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