As crypto networks mature and protocols become more complex, on-chain, trusted data in real-time gives market participants an insight into cash flows, active users and user retention. They can also see the value locked and transaction volumes.

This new method of investing in crypto assets is based on fundamental analysis. Fundamental analysis measures the value of an asset by looking at related economic and financial indicators. If history is any guide, we can expect to see the crypto market mature in the next few years.

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Value Investing & Fundamental Analysis: A Brief History

In the short term, the market is like a voting machine. In the long run, however, the market becomes a weighing device.

Benjamin Graham, pioneer of value investment, said as much. Graham’s first publication, Security’s Analysis was published in 1934, shortly after the Securities Act of 1932 and Securities Exchange Act of 1934, which were passed in response to the Great Depression and stock market crash, had been established.

Graham’s work laid the foundations for concepts like intrinsic value and fundamental analysis. This work helped the market reach a consensus about the best way of valuing equities, and doing a comparative study.

Warren Buffett popularized these ideas in the 1950s, 60s and 70s following Graham’s publication of his second book The Intelligent Investor. In the 1970s, 1980s and 1990s, academic and corporate acceptance of these concepts further helped them to become mainstream. The market had reached consensus on financial data and key metrics, such as the price-to earnings ratio.

In this era, concepts such as “price to book,” “dividend yield,” “debt to equity,” “free cash flow,” “return on equity,” and “net margins” became mainstream. Along with it came investment concepts like “economic moats” and “durable comparative advantages.”

Quality data is essential to the success of any stock trading strategy. Without it, traders would rely on narratives, brand, and speculation.

Hmm. It sounds a lot like crypto today.


Crypto: From Speculation to Utility and Fundamentals

We expect that crypto networks and protocols will reach a similar consensus as traditional markets did on how to value stocks using data.

It’s vital to acknowledge that speculative capital is the foundation of all innovations throughout history. New industries are born from speculative investment. This was the case during the Age of Steel and Electricity. The Age of Oil. Automobiles & Mass Production. Railways was a good example. We’ve seen this more recently with the Age of Information and Telecommunications.

Using history as a guide, speculating leads to capital being put to the best and most productive use. The market will eventually reach consensus on the best way to use, , and value new technology (and businesses using it).

This is what we see today in the Age of Blockchain Technology, or Web3, which introduces a concept of global shared accounting ledgers, and digital property rights.

Below, we can see the number of active users on Ethereum’s top L2 networks.


Data: Token Terminal

This data can be used to project value accumulation at the L2 level vs. L1 within the Ethereum eco-system.

Here is the “GDP” for Ethereum, the total of all the fees generated from the most popular protocols and applications that are built “ontop” of L1’s infrastructure.


Data: Token Terminal

These data can be used to compare alternative Layer 1 networks.

We expect a consensus to eventually form around the key KPIs, metrics and valuations of different sectors within Web3 – just like we have seen in traditional finance.

We should expect new products to be launched based on fundamental analysis. For example, indexes or new frameworks.


What is the take-away message?

We can expect that the next wave “smart money”, which is based on new and improved data, will find the best-quality projects.

To gain an edge in the investment market, you will need to have access to high-quality data before others. This gives regulators all the tools they need to monitor markets and develop sensible new rules for investor protection. The granularity of the data and its near-real-time transmission within crypto networks are unprecedented in finance.

Fundamentals will drive the future of crypto investment.

It all begins with high-quality on-chain data.

Check out the Q4 edition of Ethereum Investment Framework to learn more about on-chaindata and how it can be used for fundamental analysis.

Benjamin Schiller is the editor.