Everyone is talking about the impending approval of spot Bitcoin ETFs. It’s exciting, and it allows retail investors to gain exposure to digital assets while not having to learn the difficult parts of crypto. All that alpha is gone now.

What else can we look for in the ecosystem to add value?

It can be useful to create a narrative that focuses on the core values of digital assets, as we do here at Hedgehog. You should also identify the key indicators of performance which will drive the demand for the asset. Past results do not guarantee future returns. However, 2023 provides lessons on how to recognize unrecognized beta in the upcoming year.

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The @cryptokoryo team has done an amazing job putting together a DUNE dashboard which makes it easy to track performance of different asset baskets. They’ve also selected some sensible defaults to help you visualize how your own narratives could look.

The only narratives included that have outperformed holding Bitcoin are liquid staking tokens on layer 2 protocol (eg. ALCX ASX PENDLE), followed by DeFi 2.0 protocols. Money Market Protocols (e.g. AAVE, Comp, QI) as well as Decentralized Physical Infrastructure networks (“DePIN,” e.g. FIL, RNDR and DIMO) were close behind.

One might speculate that these narratives are united by a combination between leverage and liquidity. These elements are necessary to generate a better yield than the Treasury rates of 5% we saw last year. They also have traits that make them fundamentally superior if they can be accessed through a shared database.

DePIN, however, doesn’t neatly fit into this thesis. Maybe, along with narratives such as Decentralize Science (DeSci), eg. VITA, HAIR and GROW, and Real World Assets (RWAs), eg. MKR MPL CPOOL, these more technology- and regulator-sensitive applications are finally hitting their stride, with major hardware deployments and licensing milestones leading to real world acceptance.

You can also look at the places where developers are using contracts and distributing tokens. Many have started to promote the appchain hypothesis, which states that the future belongs to apps who own their L2, such as Coinbase’s Base. Avalanche Arbitrum and Optimism are showing significant growth potential based on their hottest assets.

Remember that research and development can take many years to be adopted by consumers. Even though we like to speculate, a steady hand and patience can outperform in the long run. Imagine that you would have to hold BTC over 15 years in order to see the entire growth trajectory. Perhaps your next thesis will tell a similar tale.

Benjamin Schiller is the editor.