Crypto Doesn’t Care About Cash Flow. That Will Soon Change, Says Pantera Capital

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What to know:

  • Fundamental analysis will soon make a comeback in crypto, says Pantera Capital partner Cosmo Jiang.
  • That’s because institutional investors will be the ones helping the industry grow from now on.
  • Some of the best businesses in crypto include layer 1s, DePIN projects, and memecoin trading platforms, he said.

As a seasoned investor with a background in banking and private equity who made the leap to crypto in 2022, I find myself drawn to Cosmo Jiang’s insights about the future of our industry. His emphasis on fundamental analysis resonates deeply with my traditional investment mindset, and I can’t help but agree that the days of memecoins outperforming legitimate projects are numbered.

Choosing the right cryptocurrency tokens for investment can be quite challenging. However, a common approach among crypto enthusiasts is not to overthink it. Remember, unexpectedly, meme-inspired tokens like those representing dogs, frogs, or cats often show remarkable growth when compared to tokens linked to established projects.

However, as per Cosmo Jiang, a general partner and investment manager at Pantera Capital – a firm specializing in crypto hedge funds and ventures – such a situation can’t persist indefinitely.

Jiang, who previously worked in banking and private equity and now describes himself as a traditional investor, stated during an interview with CoinDesk: “If fundamental investing principles don’t apply to this sector, it implies that we didn’t succeed. Over time, all assets adhere to the principles of gravity. What truly matters to investors in the long run – and this has been consistent for centuries – is cash flow.

Jiang stated that the value of cryptocurrencies has skyrocketed from zero to $3.4 trillion in market cap due to retail interest. However, for this sector to continue growing, it needs to attract institutional investment. Institutional investors are primarily concerned with fundamentals, and focusing on them will be crucial for earning profits sustainably in the future.

According to Jiang, Pantera manages approximately $5 billion in total assets. Around 75% of these assets are invested in venture-related vehicles, while the remaining 25% are in more fluid or easily tradable assets. As the portfolio manager for Pantera’s liquid token fund, Jiang primarily concentrates on tokens that are publicly traded.

He selectively chooses which crypto projects to include in the investment portfolio by focusing on those that align with market demand for their products. His decision-making process primarily revolves around two key considerations:

Jiang commented, ‘To those familiar with traditional assets, this might seem incredibly ordinary, but surprisingly, within the crypto sphere, there’s not a universal agreement on this approach.’

Solana versus Ethereum

In terms of cryptocurrency ventures, first-layer networks are home to some of the most robust and time-tested business structures. These smart contract platforms, such as Ethereum which debuted in 2015, primarily earn revenue through transaction charges. Additionally, their tokens increase in value as more people use their network. Among these, Solana’s SOL and Telegram’s TON have caught Jiang’s interest. However, compared to earlier times, he finds Ethereum’s ether (ETH) less appealing as a potential investment, since it appears that fewer new users are joining the network.

Over the past six months, as a researcher scrutinizing blockchain networks, I’ve observed some striking differences between Solana and Ethereum. According to data from altcoin_analyst’s Dune dashboard, Solana has been averaging approximately 3 million daily active addresses, which is significantly more than Ethereum’s 454,000.

Examine the progress made incrementally in both Solana and Ethereum, and notice the significant difference between the two. However, it’s important to remember that all these advancements hold little value unless they are actually being utilized by people,” Jiang explained.

Jiang noted, “There’s no denying that Ethereum boasts an impressive team of skilled builders. Its roadmap is intriguing, and indeed, its value reflects this, correct?” He continued, “With a market cap of $435 billion, it would place among the world’s most prosperous corporations if compared to equity. However, it’s regrettable that it’s currently experiencing a decline in market share, notably to Solana and other competitors.

The main distinction between these two networks resides in their structure: to address scaling challenges, Ethereum has transitioned to a modular blockchain framework where responsibilities such as network tasks are divided among Ethereum and its related Layer 2 solutions like Arbitrum or Optimism. Conversely, Solana maintains a single, unified blockchain approach.

For Jiang, this implies Solana has an edge when it comes to user interface and its potential to retain the network’s value via SOL. On the other hand, Ethereum distributes its value across numerous tokens and blockchains, leading to a higher volume of transactions required for ETH to surpass SOL. However, Ethereum’s transaction capacity is expanding quickly, which theoretically could lead to enough activity to overtake Solana, but it’s not certain.

Jiang stated that Ethereum’s core principle revolves around achieving the highest degree of decentralization. However, as a tech investor rather than a native of the crypto world, he doesn’t advocate for decentralization just for its own sake. Instead, there might be a minimum level of decentralization that is satisfactory.

We’re still early

Beyond focusing solely on Layer 1s, Jiang’s interests extend to DePIN – a collection of initiatives that aim to develop physical infrastructure using blockchain technology. Notable projects under this umbrella include Render Network (RNDR), which allows individuals to rent out their unused computing resources, and Arweave (AR), which operates as a decentralized data storage network.

“When I’m talking to [liquidity providers] … the only stuff that gets them interested is DePIN, because these are real businesses in the real world, it’s something that people can actually allocate and get behind,” Jiang said.

But he’s not against investing in memecoins too — or, at least, in the projects that enable memecoin trading, if not the coins themselves. “I would never, as a hedge fund investor, invest in a blackjack player,” he said. “But I’ve made a lot of money investing in casinos.” And there’s reason to believe the sector could keep expanding, because at the end of the day, the revenue generated by Pump.fun, trading bots and decentralized exchanges is still small compared to the revenue generated by the $540 billion global gambling market.

Despite his efforts, Jiang’s approach didn’t surpass Bitcoin‘s impressive 132% growth in 2024, as he noted. In his opinion, this is because Bitcoin has progressed further in its bullish phase compared to blockchain technology, which has been slower throughout the year. However, he suggested that potential returns on these tokens could outperform Bitcoin’s, given that the incoming Trump administration is expected to be more supportive of the industry than the Biden administration ever was.

Jiang stated that our performance would be outstanding over the long term when considering compounded growth. If blockchain manages to gain billions of users in the future, it’s reasonable to assume that other aspects will expand at a pace much quicker than Bitcoin.

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2024-12-11 22:06