It’s the beginning of a new year and anything is possible, but if you ask around, all anyone can talk about is the imminent approval of spot bitcoin ETFs. We get it, it’s exciting and creates potential for retail to get exposure to digital assets without learning any of the hard parts of crypto. But all that alpha has been scraped clean at this point.
Where else should we be looking for value in the ecosystem?
If you believe in the fundamentals of various digital assets like we do at Hedgehog, it can be helpful to craft a narrative around collections of tokens and try to identify the key performance indicators that are going to drive demand for the underlying asset. While past results are no guarantee of future returns, 2023 offers lessons for recognizing unrecognized alpha in the coming year.
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The good folks at @cryptokoryo have done some amazing work putting together a Dune dashboard that makes it easy to monitor performance of various asset baskets, and they’ve selected some sensible defaults that can help you to visualize what your own narratives might look like.
The big winners from 2023 include liquid staking derivative tokens on layer 2 protocols (eg, ALCX, ASX, PENDLE) followed closely by DeFi 2.0 protocols (eg, DYDX, FXS, INST), the only included narratives that outperformed simply holding Bitcoin. However, Money Market protocols (eg, AAVE, COMP, QI) and Decentralized Physical Infrastructure Networks (“DePIN,” eg, FIL, RNDR, DIMO) followed closely behind.
One could speculate that the unifying feature of these narratives is a combination of leverage and liquidity, necessary elements to generate better yield than the 5% Treasury rates we were seeing last year, and traits that are fundamentally superior when accessed on a shared database and runtime like a blockchain.
However, DePIN doesn’t fit neatly into this thesis. Perhaps, alongside narratives like Decentralize Science (“DeSci,” eg, VITA, HAIR, GROW) and Real World Assets (“RWAs,” eg, MKR, MPL, CPOOL), these more technologically and regulatorily sensitive applications are finally starting to hit their stride with major hardware deployment and licensing milestones, leading to real world adoption.
It can also be helpful to look at where devs are deploying contracts and turning over token inventory. Much of the ETH volume has started to migrate to its L2 chains where transactions are faster and cheaper, and many have even started touting an appchain thesis, where the future will belong to individual apps who own their own L2, like Coinbase’s BASE. Based on the price action of their hottest assets, it seems Avalanche, Arbitrum, and Optimism have been showing strong growth potential.
No matter which thesis you choose to put your capital behind, remember that it can take years for research and development efforts to pan out and translate into end-consumer adoption. As much as we may like to speculate as degens, a steady and patient hand can dramatically outperform over the long term. Just think, you would have had to hold BTC for 15 years to see its entire growth trajectory! Maybe your next thesis has a similar story.