“The Value Path of Blockchain Investment”
Author: Pi Ma, Founder of Continue Capital
The underperformance of the cryptocurrency market has raised concerns among many people. In a complex environment with different stages of industry development, increased investment difficulty is inevitable. However, the fundamental problem lies in finding a sustainable business model for long-term project development.
After ten years, I have found that many people, even those who have been in the industry for a long time, still do not understand why public blockchains have consistently dominated the top 100 rankings and why the leading public blockchains have attracted billions or even trillions of dollars in funding, while your own coin is struggling with only millions or tens of millions of dollars. Personally, I prefer to simplify complex things, so I will attempt to analyze this issue.
Starting from first principles, “P = E * PE,” which means “stock price = profit * valuation.” Therefore, in the long run, the factors influencing stock prices are only profit and valuation.
Firstly, valuation (PE) is more complex, with many influencing factors such as growth rate, interest rate, penetration rate, industry space, central bank liquidity, monopoly, and so on. These factors determine the valuation given to different stocks at a certain period of time. Idol Warren Buffett said he doesn’t invest in BTC because it doesn’t generate cash flow (you can think of cash flow as profit). From a long-term perspective, I feel that most of what he said is true. However, in the above stock price formula, only profit (E) is considered, not valuation (PE). Therefore, MEME/BTC can be considered as the same type, both falling under the PE factor, as long as your MEME continues to attract people and there are constant buyers, your MEME can rise to a certain stage without creating cash flow. However, an important premise is that it must be within a certain market cap. The larger the market cap, the more people you have to attract, and without continuous cash flow support, it becomes very difficult to sustain.
Secondly, let’s focus on profit (E). Profit comes from revenue, so for stock prices to rise, revenue must increase. And where does revenue come from? It comes from the business model, which is defined as the activity of making profits by providing goods or services to others. In 2006, Duan Yongping bought Buffett’s lunch for $620,000 and asked him a question that had been bothering him for a long time: What is the most important aspect of investment? Buffett’s answer was the business model. A company cannot sustain long-term development if it doesn’t know how to make money. The core driving force behind the continuous rise of the “Seven Sisters” in the U.S. stock market is profit, not other short-term factors.
In my opinion, the blockchain business model mainly revolves around the following: blockchain space fees, swap fees (including decentralized exchanges and centralized exchanges), lending interest spreads, stablecoin transaction fees, and MEV (parasitic on blockchain space). The blockchain industry has created a new business model: selling blockchain space, which means public chains charge fees based on gas fees for accessing and storing global computing/bandwidth resources.
I used to be confused by the term “value” in the blockchain internet. We know that most of the information on the internet is free, such as images, texts, videos, etc. Information can be infinitely copied, so in the early days of internet development, people didn’t know how to monetize it. It was through exploration that they discovered the business models of the internet, including earning money through SaaS subscription services, advertising, and e-commerce transactions.
So, what is the business model of the blockchain? I later realized that the blockchain internet is a paid internet, where you have to pay gas fees for every click. The blockchain was originally designed to solve the problem of currency attributes and is very different from the free internet. You cannot infinitely copy and repeatedly pay the same money to others in the blockchain. The free internet cannot solve the problem of currency. Therefore, in the process of extending from currency to public chains, the uniqueness lies in making consumers bear the cost of accessing blockchain space. In the past few decades, enterprises in the internet sector leased computing resources by themselves and paid AWS bills to provide products and services to customers, thereby generating profits. But in blockchain applications, users pay for project operation costs. Every year, global consumers pay billions to tens of billions of dollars for gas fees. This is the revenue of public chains. If the annual revenue is 10 billion, giving a 5% bond yield and a 20x PE, the market value is 200 billion. With a 10x PE, it is a trillion-dollar market, and with a 50x PE, it is a 500 billion market. This is the fundamental reason why the public chain market is huge.
For example, the current USDT circulation on TRX has reached 60 billion, occupying a significant share of the USDT market. Looking at TRX’s annual revenue in 2023, it is estimated to be around 400-500 million USD, with 75% of it coming from USDT transfer fees, which translates to a profit of 400 million USD. If we give it a 20x PE and a valuation of 8 billion, it is reasonable. However, the key point is whether this data can increase tenfold or even more in the next ten years. How much market share can SOL gain in the payment and open finance sectors? But let’s not digress further into expansion topics.
You have to understand that I am only trying to explain why the public chain market is huge. I have only touched upon the existing phenomenon of people willing to pay gas fees. I have not gone further into why people are willing to pay gas fees or why more people will pay gas fees in the future. Is it for transfer payments? Is it for getting rich (hoarding gas)? Is it for entertainment (paying for a certain Dapp)? Is it for trading cryptocurrencies, commodities, stocks, or SWAPs? You should know that if no one is willing to pay gas fees in the future, the public chain market will cease to exist. Therefore, when you see fancy terms that are difficult for ordinary people to understand in the industry, it is unclear whether it is due to the early stage of blockchain development or the difficulty of implementation and concretization. These fancy terms, such as scalability, ZK technology, L2, UTXO, chain abstraction, modularity, homomorphic encryption, parallel EVM, and so on, are rarely mentioned in the internet sector, but are heavily promoted in the blockchain industry. I now have reservations about using these terms in narratives. Basically, after familiarizing myself with the basic concepts, I directly ask: How much revenue can this technology bring? How much profit can it generate for me to buy back? Otherwise, where is the market fit for your technology? I can support long-term deep cultivation of fundamental technologies and disciplines, but tell me how long it will take to obtain a clear business model. Two years, ten years, or twenty years? How can we increase revenue from gas fees in the future and who can occupy the top market share? These are the more complex issues to consider. Although I have chosen SOL, in the end
Therefore, since public chains are products with revenue, cash flow, and profit, their business models are clear, and the remaining task is to choose how to expand revenue, increase market share, and reduce costs in line with the path of business development.
Many projects in the cryptocurrency industry lack a business model. They themselves don’t know how to make money. The survival rate of Fortune 500 companies is only 3%. Investment is about finding these 3% of projects and holding them for the long term. Many investment concepts are simple, but implementation is extremely difficult. With tens of thousands of projects in the cryptocurrency industry, how can we determine their value for investment? Seriously, we need to invest.
If the river is clear, how can there be a geometric progression in life? Avoid unnecessary complexity and stay grounded. Otherwise, time will not be on your side.