| Health, Wealth, and Happiness |
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| “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” - Robert Kiyosaki |
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| In today's issue:The legendary investor John Bogle built his fortune on a key insight: mutual funds don't work.
Because mutual funds did no better than the market average, and charged investors a fee on top of that, he vowed to find a better alternative.
His company Vanguard focused on index funds, targeted to individual investors, with rock-bottom fees. Today Vanguard holds over $7 trillion in assets.
The lesson is one we're still learning in the crypto markets. In today's newsletter, we'll outline the benefits of a simple index fund (supplemented with a few high-quality crypto investments) vs. investing in the new crop of "crypto hedge funds."
Read on. |
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| | | Must Read Today's most important story for crypto investors. |
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| The "Web3 and Crypto Global Survey 2023" by ConsenSys, conducted in collaboration with YouGov, provides a comprehensive view of global and regional perceptions around cryptocurrencies, NFTs, Web3, blockchain, and the metaverse. The survey was conducted in 15 countries across all continents.
Key findings include: |
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| 92% of respondents globally have heard of crypto. The top association with cryptocurrencies globally is that it represents the “future of money.” Among respondents familiar with the concept of NFTs, 76% of respondents in the UK have never owned an NFT, compared to only 24% of respondents in Vietnam. Only 24% of respondents globally are aware of the concept of web3. Respondents in Germany, Vietnam, India, and South Africa are more likely to declare that bankruptcies of centralized cryptocurrency companies had no impact on their trust in the ecosystem.
Investor takeaway: While it appears that global knowledge of cryptocurrencies is strong, more work needs to be done to educate the public on Web3. That means investors in the space are still very early to the game.
As awareness of Web3 increases, adoption is also likely to increase. And where there's adoption, there's typically more capital flowing into the sector, leading to greater revenues and profits for Web3 companies and projects. |
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| Premium Power-Ups Level up your crypto investing game. |
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Not yet a Premium member? Sign up by tomorrow and start earning BMJ Reward Tokens each month! |
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Value Per User: How Much is a Crypto User Worth? by John Hargrave |
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John Hargrave is on vacation this week. Here’s a classic column (updated for today). |
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| One of my heroes is the famous investor John Bogle, who founded Vanguard Investments, which today has over $7 trillion in assets. But it wasn't always that way. Bogle's key insight was that mutual funds didn't work for the majority of investors. Even though they were popular, the mutual fund industry did not beat the stock market over the long term. (If you're skeptical, here's proof, proof, and more proof.) It's still hard to believe, because mutual funds are run by smart financial professionals with access to excellent research. Why would so many people invest in them, if they didn't work? I recommend checking out Bogle on Investing, a 500-page collection of his essays and talks, and it’s astounding how he could find so many ways to come back to one simple idea: most investors will do best by investing in the overall stock market, not by trusting the so-called “experts.” He was firmly, squarely on the side of investors. This is why Bogle founded Vanguard, along with its Total Stock Market Index Fund (VTSAX). Investing in VTSAX is like buying the entire stock market. Since the stock market has averaged a 10% return over the last 100 years, its performance has been better than the majority of mutual funds. (Lower fees, too.) It took some time for investors to understand that Bogle's "simple" strategy was right. In crypto, we're learning this all over again. But instead of mutual funds, it's crypto hedge funds. How Crypto Hedge Funds Work Crypto hedge funds are run by money managers who pool money from investors, then put it to work into various crypto investments. Their goal, of course, is to make money: to outperform the "simple" DIY method of just buying and holding crypto yourself. A report from PricewaterhouseCoopers surveyed hundreds of crypto hedge funds, illuminating their secret inner workings: On average, crypto hedge funds attract about 30 investors, who each put in about $500K. About half of crypto hedge funds are legally incorporated in the Cayman Islands, though the managers are located all over the world. Most crypto hedge fund teams are small, just 6 or 7 people. I think of them as “crypto bros gone pro.” These hedge funds charge outrageous fees: typically an annual 2% on all your money, plus 20% above a certain benchmark return. These funds appeal to high net worth individuals (HNWIs) who can’t or won’t buy and hold crypto themselves. But as the report shows, the rich are paying dearly for putting their money into these hedge funds.
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| In the charts above, I’ve pulled these numbers for many of the leading projects, using monthly active users from Token Terminal. The takeaway is that on a value per user (VPU) basis, Uniswap (UNI) is currently looking like a great deal, while Compound (COMP) looks ridiculously overvalued.
We would expect Ethereum’s VPU to be high. It's the platform used to create all these DeFi projects. ETH is the “meta investment” all these other investments are built upon. If you believe in Uniswap, you believe in Ethereum. If you believe in Compound, you believe in Ethereum. If you believe in DeFi, you believe in ETH.
Unlike bitcoin, which is not good for much of anything in the real world, Ethereum is the platform of choice for blockchain developers. It’s where the next generation of financial services are being built, so we'd expect Ethereum to be much higher on a value per user basis than any other DeFi project.
By this logic, Compound (which is built on Ethereum) looks overvalued in comparison, but Uniswap (also built on Ethereum, as well as many other blockchains) looks like a ridiculously good value. |
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| As I’ve written in previous columns, publicly-traded social media companies are much lower on a VPU basis. Traditional investors value Facebook stock at about $150 per user and Twitter at around $75 per user. Do these numbers make sense?
Well, maybe. Any fool can start a Twitter account, while opening an Ethereum wallet requires a certain amount of technical proficiency. You also have to want to move value around—as opposed to Twitter, where you want to post things that no one will read, so crypto users are more valuable.
However, when we look at the value per user for some of these DeFi protocols, it gets hard to believe an individual user could really be worth $25,000 or more.
Here’s a useful analogy: think of blockchains like businesses. Blockchains as Businesses
In a traditional business, you have customers. In the marketing world, we often talk about the “cost to acquire a ccustomer,” which is abbreviated CAC (also, the noise you make when you get the bill from your marketing agency).
Let’s say you have an online shop that sells custom socks. Your average customer orders two pairs of socks and comes back later for another two pairs. Your average pair of socks costs $25, so the “customer lifetime value” is $100 (four pairs of socks at $25 a pair). To keep it simple, let’s say a new customer is worth $100.
What would you pay to acquire that new customer?
Of course, in a real business, we have to look at what it costs us to produce the socks, the operating costs of our sock sweatshop, etc., but we certainly wouldn’t pay more than $100 to acquire a customer that’s worth $100.
This CAC (gesundheit) is useful for deciding where to spend your marketing money to acquire new customers. For example, you wouldn’t want to buy search advertising if Google is charging you $2 per click and only one in 100 ad clickers end up buying socks ($2 / 1% = $200 CAC).
Now, imagine you own an entirely different business. Let's say you make the ecommerce software that powers the online sock stores. New users pay $1,000 per month, and because it’s such a hassle to switch ecommerce platforms, they stay for an average of three years. Your CAC is $36,000.
As these are more valuable customers, it's reflected in Google's ad prices. Now, your cost to advertise on Google is $20 per click (ecommerce software is a better business than ecommerce itself), but if one in 100 ad clickers end up buying your ecommerce platform, you’ll pay Google all day long ($20 / 1% = $2,000 CAC to acquire a $36,000 customer).
This is why the cost to advertise on some Google keywords (like “ecommerce software”) is so expensive, while the cost on others (like “custom socks”) is so cheap. They’re totally different customers, and one type of customer is easily ten times as valuable as the other.
Now, let’s apply this to blockchains. |
| When you buy a blockchain investment, it's like you're investing in the underlying business. To be clear, you’re not buying a business. There’s often not even a company involved, but the idea is similar. Instead of customers, you have users, and those users have real value... both now and in the future.
This is not how most people invest in blockchain. They go with the crowd, jump on what’s hot, and follow the fools on Twitter. They look at historical prices and try to guess where they're going next. If a price is going up, they jump on the bandwagon, and when that price is going down, they sell to “lock in their losses.”
What I’m encouraging you to think about is the fundamental value of a blockchain project (value investing). A good measure of its value is users, especially when those users are active and engaged. They’re like the loyal customers of a company.
Now, think about what you’d pay to acquire those new customers if you were running the blockchain "business." If you were the CEO of Ethereum (no such thing), would you pay $36,000 per new user?
If you were running the Compound “company,” could you really make the case that each new user is going to bring in $118,000 in long-term value? If we’re paying $36,000 per user on Ethereum, then paying $118,000 per user for an Ethereum-based project seems like a stretch to put it mildly.
Think of it this way... Would Compound pay $118,000 to get a new customer? If so, I want to be in charge of its marketing plan.
The takeaway for me is that a great way to invest in the DeFi ecosystem is to simply buy and hold Uniswap (UNI). At $44 per user, that’s a cheap crypto company.
Like a rising teenage pop star, the blockchain industry is still young and immature, so don’t invest more than you’re willing to lose. Think about blockchain investing as part of a balanced diet. Invest for the long term, as the only thing constant about crypto is change.
Most of all, look at the underlying value of these blockchain investments. As the legendary Ben Graham (the father of value investing) said, “Price is what you pay. Value is what you get.”
When the value far exceeds the price (like this newsletter), that’s a good investment. |
| Health, wealth, and happiness, John Hargrave Publisher, Bitcoin Market Journal |
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