| Health, Wealth, and Happiness |
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| “Our favorite holding period is forever.” - Warren Buffett |
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In today's issue: The legendary Silicon Valley VC firm Andreessen Horowitz has invested billions of dollars into crypto startups, so they have a vested interest in knowing where the industry is going.
This week they, unveiled a new tool that's a goldmine for fellow crypto investors.
The "State of Crypto Index" is a constantly-updated feed of how many people are using crypto, and how many people are developing on it.
Below, we'll explain how the tool works, and how to adjust the "recipe" to get a true read on the growth of the crypto industry. Read on. |
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| | | Must Watch Today's most important story for crypto investors. |
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As you know from our Tuesday and Wednesday newsletters, crypto regulation in the U.S. is back in the spotlight. Last weekend's posting of the new (old) stablecoin bill, along with this week's congressional hearings on crypto make it seem like Washington is finally waking up to the need for greater oversight in the crypto industry.
In today's must-watch video, Dante Disparte, Circle’s chief strategy officer and head of global policy, joins Dr. Richard Berner (clinical professor of management practice at NYU Stern) to discuss digital asset regulation.
It's particularly timely as Disparte served as a witness at this week's congressional hearing (linked above). |
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Investor takeaway: Dr. Berner looks at regulation as something that addresses market failure, and protects investors and consumers while ensuring we have fair and effective markets to create a financial system that's resistant to shocks. Finally, regulation is in place to limit illicit activities. As investors ourselves, we should be wholly behind these goals. A lack of regulatory clarity hurts the entire industry. That's the system crypto has been working under since the creation of bitcoin in 2009.
Given bitcoin was created as a result of the 2008 banking crisis, have we learned our lessons regarding cascading risks? Can we incorporate our knowledge into the crypto markets through a regulatory framework that addresses risks and makes the financial industry more resilient and trustworthy without stifling innovation? Take the time to watch the video and gain insights into governance and regulation. It will only benefit your understanding of coming government actions in regard to regulation of the crypto industry. |
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Understanding the State of Crypto Index by John Hargrave |
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Here’s a tool that will give you new reasons to invest in crypto, and it’s not based on price... It’s based on real-life users. It’s the new State of Crypto Index from storied venture capital firm Andreessen Horowitz (also called “a16z”), which has invested billions into crypto startups since 2013. Below, I’ll explain how this tool works, but first, here’s why it’s important for crypto investors. Users are the "Demand" Crypto must be used to be useful. You can measure the price of bitcoin all day long, but measuring the users of bitcoin is a more valuable metric (hint: bitcoin users have stayed about the same since 2020). After all, crypto companies are meant to connect people and to help them transact with new forms of value. If the price is going up, but the number of users is going down, that doesn’t say much about its usefulness. (To the contrary, if the price is going down, but the number of users is going up, that could signal a great bargain.) It seems so obvious that we shouldn’t have to say it... Crypto must be used to be useful, but almost nobody invests this way. Everyone gets excited about price growth. Rarely do people get excited about user growth. User growth is one of our core investing principles: We measure it every Thursday in our Top 10 Fundamentals newsletter for Premium members. If long-term users are growing, then long-term prices will usually grow as well. Measuring Users with the State of Crypto Index Like any index, the State of Crypto Index is meant to give us a high-level snapshot of the industry over time. Is it growing or shrinking? In a16z lingo, users are what they call “demand” (the more crypto users, the more demand for crypto products).
They roll up a bunch of user metrics into a single chart on the bottom right: |
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To the right of the chart, you can see the metrics that go into this chart (like ingredients that go into a recipe):
Active addresses: the number of unique users across top blockchains Transactions: the number of unique transactions across top blockchains Transaction fees: the amount people are paying to use top blockchains (e.g., gas fees on Ethereum) Mobile wallet users: the number of unique users on top crypto mobile wallets DEX volume: the value of tokens exchanged across top decentralized exchanges (e.g., Uniswap) NFT buyers: the number of unique users buying NFTs Stablecoin volume: The value of stablecoins transferred across top blockchains |
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| What I love about this index is you can change the weighting of the ingredients to adjust the recipe. For example, I would weight active addresses more heavily, while I would de-emphasize transaction fees (as they're dependent on prices): |
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| Producing a chart that looks like this: |
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| The important thing is not the weighting, but the overall shape of the chart as you play with the weightings. Is it still moving in a direction of growth? If so, the industry is very likely growing. However, the index does more than measure user growth across the industry. It also measures developer growth. |
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| Image courtesy a16zcrypto Developers are the "Supply" If users provide the demand for crypto products, developers provide the supply (with price attracting both). Take bitcoin, for example. As more people started to buy it, that drove up the price, which got more developers interested in building crypto tokens and projects. This drove higher prices, more users, and so on. It's a virtuous circle. Of course, this never happens in a linear fashion, but in waves. Take this excellent slide that shows when famous tech firms started vs. the overall stock market: |
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Image courtesy a16zcrypto
The long-term trajectory is one of upward growth, with many of today’s most powerful companies started during market downturns. The question mark at the far right of the slide means, "What world-changing crypto company is being built right now?" Developers and users; supply and demand. It’s like the old question about the chicken and the egg. Which came first? As investors, it doesn’t really matter so long as we’re measuring both. |
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Measuring Developers with the State of Crypto Index To measure developers (or the supply side), the ingredients are:
Active developers: the number of developers building crypto projects (e.g., through Github) Interested developers: the number of developers playing around with it Contract deployers: The number of devs deploying new code on public blockchains Verified smart contracts: The number of new applications launched Developer library downloads: The number of downloads of apps to help developers Academic publications: The number of published research papers around crypto topics Job search interest: The number of searches on blockchain and crypto jobs |
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| Just as I see active users as the primary metrics for crypto adoption, active developers are the primary metrics on crypto development. So, my recipe would place way more emphasis on active developers. Something like this: |
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| Creating a chart that's still similar to the defaults provided by a16z: |
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| With my improved recipe, the overall index looks better than a16z's outlook: |
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| It's a picture of astounding long-term growth. As a point of reference, if you invested $1 that grew into $1,727 in three years, you would be considered an investing genius. That’s what investing in this overall industry has been like, and the long-term results have been even better. (Still, be cautious of the roller-coaster ups and downs of the crypto market. Our Blockchain Believers Portfoliowill keep you well-diversified.) Why Not Just Measure Price? No matter how you tweak this index, chances are you’ll still get something that looks a lot like the price of the crypto market, or to put it even more crudely, a chart that looks like the price of bitcoin: |
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Again, price can be deceptive. It’s one data point, and it’s fueled by fear and greed. This index is a powerful tool as it incorporates many data points that show the growth of the underlying infrastructure... both supply and demand.
Investor Takeaway: Apply This to Individual Tokens As investors, we’re after the hidden gems, the undervalued crypto tokens. We can use this same methodology to drill into individual crypto projects to look at their overall demand (users) and supply (developers). To do this, we have a great tutorial onHow to Read Crypto Financial Statements. Using companion reports from Token Terminal, we’ll show you how to find both active developers and active users (supply and demand) for all the leading crypto tokens. Think of a16z’s State of Crypto Index as rolling all this info into one helpful chart that shows us how the industry is growing as a whole. Remember that it’s never a straight shot. That’s not how growth happens. Instead, it’s a rolling series of ups and downs that gradually lead us to more users, more developers, and more long-term wealth. Investing in that long-term future is what we’re here to do. Now, with the State of Crypto Index, we have a new way to measure our progress. |
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| Health, wealth, and happiness, John Hargrave Publisher, Bitcoin Market Journal |
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