cryptocurrency yields
Tue Jan 09 2024
The Inevitable Bear Market
As of this writing, the price of Bitcoin has rebounded to two-thirds of its previous all-time high. Cryptocurrencies are waking up from hibernation. Airdrops and the emergence of new narratives are leading many to dust off their wallets.
There's tentative optimism about a new bull market, and hints of greed are beginning to spill through.
Unfortunately, this time appears to be no different from previous cycles. Cryptocurrencies, in general, are still unproductive assets. They entitle the holders to no meaningful cashflows. Intrinsic worth is zero. Only a few things could justify buying:
- The possibility of selling to a later buyer at a higher price
- Collecting yield
- Potentially receiving an airdrop
Because yield in crypto is based on receiving coins, the first two points depend on the same thing: the market price of cryptocurrencies. This circular dependence is why the crypto market has aggressive crashes; when prices inevitably lose momentum and see downward movement, yields become less valuable, the crowds are less excited and less likely buy coins, and prices thus trend further downwards. Resulting liquidations of highly leveraged positions only add fuel to the fire.
The recent airdrop meta is new and interesting. But it still suffers from the fact that airdrop value, like everything in crypto, depends on tightly correlated market prices.
This market cycle is shaping up to be another bubble. Pop. The only way this can end is with another bear market — the crowds will lose their shirts, and a select few will eat their fill. Such is the way of the world.
Theoretical Approach
Our goal is to sell crypto holdings only when the total value of our portfolio reaches a life-changing amount in post-tax dollar terms — an amount such that, for example, we can reasonably expect to never be a laborer again. This is our strategy because of a number of things: laziness, avoidance of market timing, and the winner-take-all power laws which lead us to adopt a venture capital allocation approach.
Our attitude is that we cannot predict what market prices will do. No forecasting is allowed on our team besides basic assumptions of sameness: that human nature will remain largely unchanging, that the shapes of our global financial and legal systems will remain familiar for at least the next decade, etc.
In combination with our view of the inevitable bear market, all this means that we're only interested in opportunities which minimize dependence on market prices, and which are robust to a pessimistic view of long-term valuations. Taking advantage of the new airdrop meta might be a feasible approach under these constraints.
Airdrop speculation feels roughly the same as investing in junk bonds: we buy a risky security because we might receive enough yield to cover our initial costs.
We analyze our ATOM experience for a baseline. It may not be representative, because the situations and criteria are both unknowable and qualitatively different for every coin, chain, and airdropping team. We don't know how the meta will evolve, and we don't know whether valuable airdrops will continue to happen. Yet we look at ATOM because (i) our own drop is confirmed reality, which is more believable than the cheap talk of social media influencers who may be trying to incite FOMO and (ii) it seems so far that ATOM stakers are receiving the smallest airdrop allocations, so it's fair as a conservative estimate.
We've been staking 41 ATOM for almost two years, which has led to an airdrop of 30 DYM. Based on crowd speculation and a perpetual swap pricing, DYM prices may range from $1 to $4. This means the dollar value received per staked ATOM may range from $0.73 to $2.93.
Assuming this kind of airdrop happens on a monthly basis, and assuming it takes three months for us to receive any airdrops after staking, we estimate receiving 9 of these airdrops in 2024. That means, per staked ATOM, we estimate a 2024 airdrop dollar yield of $6.59 to $26.34.
Given this range of ATOM outcomes, we extrapolate that a coin priced at less than $6 would comfortably pay for itself, with airdrops, in a year. And a coin with a market price of up to $26 is a reasonable purchase, but exposes us to dependence on market conditions.
In addition, certain coins provide yield for staking. Once again analyzing our ATOM experience, we find a 15% yield in coin terms, and in dollar terms a yield of $0.90 after the 85% peak-to-trough crash from $40 to $6.
To adjust our expected airdrop yields with respect to a bear market crash, we apply an 85% discount to the range, turning $6.59 to $26.34 into $0.90 to $3.95. Further, in a bear market, it seems unlikely that new teams and projects will enter the space, which means it's unlikely that new airdrops will happen at our assumed monthly rate. Perhaps they would happen every six months at best. We divide by six and find $0.15 to $0.66. Our aggregate dollar yield per coin in a bear market would thus be $1.05 to $1.76.
Assuming we bought ATOM at the very top of last cycle at $40, this implies a P/E ratio between 22 and 38 — higher than the S&P 500's current P/E ratio of 23. This implies that, in a neverending bear market with bi-annual airdrops, it would take anywhere from 22 to 38 years to recoup the original cost of buying the coin.
This doesn't make investment sound attractive.
But for buying at current prices, investment seems roughly decent. For example: ATOM is currently at $9.7, TIA is currently at $15, SEI is currently at $0.68, and INJ is at $39.
Using ATOM as a benchmark is difficult because it doesn't seem to have caught much of the recent pump — but overall, the market seems to be giving us an okay price, even with our pessimistic estimate of yields. Of course, this is assuming that we can generically apply the numbers we've calculated based on ATOM.
These are halfway-decent junk bonds combined with upside exposure to potentially larger airdrops than we've estimated. In aggregate, it seems like a reasonable bet.
NFA; DYOR