Title: Beyond the ETF: Crypto Innovations to Watch in 2024
As the new year begins, the anticipation surrounding the approval of spot bitcoin ETFs dominates conversations within the crypto community. The potential for retail investors to gain exposure to digital assets without the complexities of crypto is undoubtedly exciting. However, it is important to recognize that the alpha, or excess returns, in this space has largely been exhausted. This begs the question: where else should we be looking for value in the crypto ecosystem?
For those who believe in the fundamentals of various digital assets, such as the team at Hedgehog, it can be beneficial to construct narratives around collections of tokens and identify the key performance indicators that will drive demand for the underlying asset. While past results do not guarantee future returns, reflecting on the lessons learned in 2023 can help uncover unrecognized alpha for the coming year.
One valuable resource in this pursuit is the Dune dashboard developed by @cryptokoryo. This dashboard allows users to easily monitor the performance of different asset baskets and provides sensible defaults that aid in visualizing potential narratives. Looking back at 2023, the big winners were liquid staking derivative tokens on layer 2 protocols (e.g., ALCX, ASX, PENDLE) closely followed by DeFi 2.0 protocols (e.g., DYDX, FXS, INST). These narratives outperformed simply holding Bitcoin. Money Market protocols (e.g., AAVE, COMP, QI) and Decentralized Physical Infrastructure Networks (DePIN, e.g., FIL, RNDR, DIMO) also performed well.
A common thread among these narratives appears to be a combination of leverage and liquidity, which are essential elements for generating higher yields than the 5% Treasury rates observed last year. These traits are particularly advantageous when accessed on a shared database and runtime like a blockchain. However, DePIN does not neatly fit into this thesis. It is possible that alongside narratives like Decentralize Science (DeSci, e.g., VITA, HAIR, GROW) and Real World Assets (RWAs, e.g., MKR, MPL, CPOOL), these more technologically and regulatorily sensitive applications are finally gaining momentum with significant hardware deployment and licensing milestones, leading to real-world adoption.
Another aspect worth considering is where developers are deploying contracts and turning over token inventory. Much of the Ethereum (ETH) volume has started to migrate to its Layer 2 (L2) chains, where transactions are faster and cheaper. Some even propose an appchain thesis, suggesting that the future belongs to individual apps that own their own L2, similar to Coinbase’s BASE. Based on the price action of their hottest assets, Avalanche, Arbitrum, and Optimism have shown strong growth potential.
Regardless of the thesis one chooses to invest in, it is crucial to remember that research and development efforts can take years to materialize and translate into widespread consumer adoption. While speculation may be tempting, a steady and patient approach can yield significant long-term outperformance. Consider the example of Bitcoin, where holding the asset for 15 years was necessary to witness its entire growth trajectory. Perhaps your next thesis will have a similar story.
In conclusion, while the imminent approval of spot bitcoin ETFs garners attention, there are other areas within the crypto ecosystem that offer potential value. By crafting narratives around collections of tokens and identifying key performance indicators, investors can uncover unrecognized alpha. Additionally, monitoring the deployment of contracts and token turnover can provide insights into emerging growth potential. However, it is important to exercise patience and recognize that research and development efforts take time to translate into widespread adoption.