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Looking for Relative Value in the Crypto Wreckage

May 17, 2022

Read Time 4 MIN

We believe establishing floor valuations for layer 1 protocols may be helpful amid the crypto downturn. Here's our analysis.

Please note that VanEck may have a position(s) in the digital asset(s) described below.

With crypto markets in freefall, Bitcoin and Ethereum are dramatically outperforming all other layer 1 protocols and assorted applications. The MVIS CryptoCompare Smart Contract Leaders Index is down 48% month-to-date vs. Bitcoin (-26%) and Ethereum (-27%).

Amidst the wreckage, it is helpful to establish floor valuations for the layer 1 protocols, which we believe will survive and take share through the downturn. One way to do that is by analyzing the price of blockspace on a given chain vs. the economic output of that blockspace.

Here, the ratio of Avalanche to Ethereum gas prices on blockspace cost equivalent terms is calculated. Clearly, the blockspace price of Ethereum, on a unit for unit basis, is substantially higher than Avalanche. However, as Avalanche usage has taken off, the ratio rose to reflect demand for Avalanche’s blockspace. The gas price ratio is informative, because it gives us an understanding of the relative value of each chain by looking directly at ledger real estate price. Curiously, while Ethereum has more daily transactions than Avalanche, the total output of gas by Ethereum is less per day than Avalanche’s. Therefore, the average Avalanche transaction uses more gas than the average transaction on Ethereum. Because gas is a measure of computational effort, this implies that the average complexity of transactions on Avalanche is either of a higher order than Ethereum’s or that Avalanche’s version of the Ethereum Virtual Machine1 (EVM) is not as efficient. We lean towards the latter.

Avalanche/Ethereum Gas Price and Market Cap Ratios

AVAX/ETH Gas Price and Market Cap Ratios

Source: Dune Analytics, Avascan, Etherscan, as of 5/11/22. Past performance is no guarantee of future results.

The gas price ratio appears to act as a floor price for relative value between the two chains, because both use an EVM and there exist numerous bridges between the ecosystems. If Ethereum becomes too expensive to use, users with higher gas needs will move to Avalanche. This has clearly been the case with the enormous popularity of the Avalanche bridge – which peaked at $7.2B in assets on December 1, 2021 before falling to around $3.6B on 5/11/2022.2 With that dynamic in mind, we apply the relative valuation of the Avalanche blockspace to find considerable support at about 0.003 – which is about 40%-50% lower than where we stood as of 5/11/2022. Indeed, if we examine the ETH/AVAX market cap ratio during the epoch when we last approached the 0.003 level of block space relative valuation, the AVAX/ETH market capitalization ratio also reached levels 40% below 5/11/2022. As a result, we should expect the relative market cap floor to approach that threshold if the blockspace ratio continues to decline.

Avalanche and Ethereum: Market Cap/Sales 30-Day Average Reverse Extrapolated

Avalanche and Ethereum: Market Cap/Sales 30-Day Average Reverse Extrapolated

Sources: Dune Analytics, Avascan, Etherscan, as of 5/11/22. Past performance is no guarantee of future results.

Stepping back to look at output value, we examine Avalanche “price-to-sales” based upon daily market capitalization and rolling 30 days of transaction fees annualized. Using this approach, Avalanche’s relative valuation has declined precipitously as its P/S multiple has compressed. In 2021 and early 2022, this compression appears attributable to the rapid growth of Avalanche’s on-chain fee revenues. By April however, amidst general de-rating of the space, Avalanche and Ethereum price/sales have moved downwards in lockstep. This convergence corresponds to our previous work showing correlation increasing across crypto amid the broader risk-off in financial markets.

Returning to Avalanche fundamentals, Avalanche revenue from transaction fees appears to have room to decline further with the announcement of Crabada moving to its own subnet. Crabada is an on-chain strategy battle game that accounts for nearly 50% of Avalanche’s transaction fees for the month of April and around 30% of the fees generated for the month of March. Losing this source of revenue may slow fee growth trends for Avalanche, a possible negative prospect for relative valuation. This is because the deployment of Crabada’s subnet confirms that future scaling will come by means of subnets. Unless something changes in the economic model of subnets, subnet scaling implies fee revenue will accrue to the sub network constituents rather than to AVAX token holders. Because subnets will off-board a large portion of potential gains in fee revenue, it is possible that Avalanche has found a P/S ceiling, rather than a floor, as its chain-fee growth expectations slow. As a result, a basement multiple valuation may approach the sub 20 P/S mark that Ethereum experienced in January 2022 and early in the fall of 2021.

As we managed a portfolio of layer 1 tokens during this market rout, we sold some AVAX to buy more ETH as prices declined, preserving capital in search of a sustainable bottom. As the above analysis shows, however, there is a price at which we would change our minds. We just aren’t there yet.

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DISCLOSURES

The MVIS CryptoCompare Smart Contract Leaders Index (MVSCLE) is designed to track the performance of the largest and most liquid smart contract assets.

The information herein represents the opinion of the author(s), an employee of the advisor, but not necessarily those of VanEck. The cryptocurrencies discussed in this material may not be appropriate for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any cryptocurrencies, or to participate in any trading strategy. Past performance is no guarantee of future results.

Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. References to specific securities and their issuers or sectors are for illustrative purposes only.

Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.

Investing in cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.

Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.

  • Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
  • An investment in cryptocurrency is not suitable or desirable for all investors.
  • Cryptocurrency has limited operating history or performance.
  • Fees and expenses associated with a cryptocurrency investment may be substantial.

There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies.

1 Ethereum Virtual Machine is the computation engine for creating decentralized applications on Ethereum.

2 Source: defillama, as of 5/11/2022.

Sources: Messari, CryptoCompare, Bloomberg, VanEck research.

Information provided by Van Eck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies. Past performance is no guarantee of future results.

DISCLOSURES

The MVIS CryptoCompare Smart Contract Leaders Index (MVSCLE) is designed to track the performance of the largest and most liquid smart contract assets.

The information herein represents the opinion of the author(s), an employee of the advisor, but not necessarily those of VanEck. The cryptocurrencies discussed in this material may not be appropriate for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any cryptocurrencies, or to participate in any trading strategy. Past performance is no guarantee of future results.

Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. References to specific securities and their issuers or sectors are for illustrative purposes only.

Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.

Investing in cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.

Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.

  • Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
  • An investment in cryptocurrency is not suitable or desirable for all investors.
  • Cryptocurrency has limited operating history or performance.
  • Fees and expenses associated with a cryptocurrency investment may be substantial.

There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies.

1 Ethereum Virtual Machine is the computation engine for creating decentralized applications on Ethereum.

2 Source: defillama, as of 5/11/2022.

Sources: Messari, CryptoCompare, Bloomberg, VanEck research.

Information provided by Van Eck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies. Past performance is no guarantee of future results.