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  • Writer's pictureKai Wu

Value Investor's Guide to Web3

January 2022

Executive Summary

Web3 is attracting a flood of investor interest but is rife with hype and speculation. A value investing approach can help. We adapt our “intangible value” lens to crypto and build a value strategy in small-cap tokens. We also create Web3 industry classifications and crypto stock portfolios.


The Crypto Zeitgeist

The Web3 movement has captured the zeitgeist, uniting far-flung tribes from tech, finance, politics and pop culture behind the vision of remaking today’s corrupt internet, financial, and media institutions.

Central to this utopian dream is the use of cryptocurrencies to coordinate global online communities. Free from the control of governments and tech monopolists, blockchains promise to return power to the people. Celebrities ranging from Snoop Dogg to Paris Hilton have flocked to this burgeoning cultural phenomenon.

Exhibit 1

Satoshi & Friends

Source: Right-click, copy-paste. Sparkline.

Web3 is not only a cultural movement - there is big money in crypto. The industry has already minted several billionaires and thousands of millionaires. Crypto firms are splurging on famous actors, huge events, and stadium naming rights. The market capitalization of all cryptocurrencies has exploded to $1.7 trillion (from a mere $10 billion in Jan 2014).

Exhibit 2

Crypto Market Cap

Source: CoinMarketCap, CoinGecko, Messari, Santiment, CryptoCompare, Sparkline. As of 1/31/2022.

Despite Web3’s meteoric rise, many believe we are still in the early innings of a technological revolution. Web3 has many unresolved problems preventing mass adoption. Talent and capital is pouring into the industry to address these issues. If successful, crypto will disrupt trillion-dollar industries and create a new generation of wealth.

Mainstream investors are taking notice. Venture capitalists funneled $27 billion into crypto startups in 2021. 70-80% of institutional investors surveyed plan to increase their crypto allocation. The BITO ETF reached $1 billion AUM in just two days, revealing significant pent up retail demand.

Even for conservative passive investors, simply comparing crypto’s market cap to that of other major asset classes (e.g., S&P 500) implies the theoretical “market portfolio” should hold a 1-5% allocation to crypto. Many investors view a small crypto allocation as a modern “Pascal’s Wager” in case the Web3 zealots are correct.

Investing in Disruption

“I consider this era an even crazier era than the dot-com era… I wish [crypto] had never been invented.”
💼 Charlie Munger

Even if the Web3 thesis is correct, investing in disruptive technologies is challenging. Munger’s reference to the dot-com bubble is apt. While many internet investors did extremely well, the 1990s were a period of overinvestment, which led to a lot of speculative capital being burned.

Exhibit 3

Echoes of Web1?

Source: Nasdaq, Sparkline. As of 12/31/2021.

Investors in emerging technologies, whether Web1 or Web3, face the triple challenges of picking winners, avoiding hype, and holding through volatility.

First, picking winners from a vast opportunity set can be overwhelming. Digital markets often only have room for a few big winners due to the self-reinforcing nature of network effects. Despite the ultimate success of the internet, many dot-com companies failed to make it to the promised land.

Picking winners in Web3 is no easier. In addition to Bitcoin and Ethereum, investors must now sort through a raft of earlier-stage projects. There are now over 8,600 coins listed on CoinMarketCap, of which 1,800 have market caps over $1 million and 600 have market caps over $50 million.

Exhibit 4

Crypto’s Long Tail 🐍

Source: CoinMarketCap, CoinGecko, Messari, Santiment, CryptoCompare, Sparkline. Tokens with market caps over $50M. Y-axis truncated at $200B. As of 12/31/2021.

Furthermore, most Web3 projects are quite new. In April 2013, there were still only 7 coins listed on CoinMarketCap. However, we have since witnessed a rapid proliferation of tokens. Over 5,400 tokens were added in 2021 alone! Investors cannot afford to ignore these projects, as this vintage may very well contain the next set of multi-baggers.

Exhibit 5

One to N

Source: CoinMarketCap, Sparkline. As of 12/31/2021.

Second, investors need to be wary of attempts to cash in on the hype. These maneuvers range from the playful (e.g., Applebee’s NFTs) to the egregious. Long Island Iced Tea’s stock soared 275% after it did nothing but change its name to “Long Blockchain Corp” (Not an isolated incident)!

Exhibit 6

Gold Rush ⚒️

Source: Applebee’s, Gizmodo, Sparkline.

A similar gold rush is underway in Web3 tokens. While many startup projects are extremely solid, others are hastily built cash grabs. Even worse are the many outright scams (e.g., rug pulls, Ponzis), which Chainalysis estimates led to $7.7 billion of investor losses in 2021.

Third, even legitimate projects may suffer massive price swings due to the prevalence of speculative capital. Almost as a rule, promising new technologies attract speculators. While speculation is to some degree necessary for building new industries, it often leads to overinflated expectations, which invariably gives way to disillusionment.

Exhibit 7

Crypto Hype Cycle 2021

Source: Gartner.

Even the biggest dot-com winners faced epic drawdowns. Amazon is one of the greatest businesses of the internet era. $1,000 invested in Amazon’s 1997 IPO would be worth $2.2 million today. However, to realize this return, investors would have had to HODL through a 95% decline after the dot-com bubble burst! 💎👐

The Web3 Playbook

Investors in emerging technologies face a dizzying array of unproven opportunities, shrouded in hype and speculation. Fortunately, we believe three simple principles can help investors navigate the rise of Web3.

  1. Diversification: Diversification lowers volatility, making holding through the hype cycle more tenable. It helps mitigate losses from failed projects. And spreading one’s bets reduces the risk of missing out on the few big winners that will drive most of the market’s returns.

  2. Value Investing: Value investors seek to buy assets that are cheap compared to fundamentals (e.g., IP, team quality, network activity). This lens helps investors identify projects with real traction, while avoiding overvalued tokens with all hype but no substance.

  3. Data-driven Approach: Quantitative metrics allow us to efficiently process the vast and rapidly evolving Web3 ecosystem. A disciplined use of objective data can help cut through the hype. In fact, Web3 has unique data sets that make this approach especially potent.

While these principles are widely used in equities, they are rarely followed in crypto markets. Crypto bulls tend to hold very concentrated portfolios (e.g., Bitcoin maximalists); hedge fund and retail traders alike tend to trade based on momentum and technicals; and venture capitalists tend to employ mostly qualitative diligence processes.

We believe bringing this playbook from equities to crypto is a natural next step as the market matures. Quantitative value investors can help stabilize this volatile market and potentially earn great returns in the process.

Finding Value in Web3

Intangible Value ✨

In Intangible Value (Jun 2021), we argued that value is becoming increasingly intangible. With the advent of the information age, intangible assets are now the dominant share of the corporate capital stock.

We also showed how to invest in companies by comparing their stock price to various intangible value metrics. The four primary intangible pillars are brand equity, human capital, intellectual property and network effects.

Exhibit 8

Intangible Pillars

Source: Sparkline.

This intangible value framework is useful for investing not only in public equities but also cryptocurrencies.

Cryptocurrencies do not provide cash flows but are commodities with value determined by supply and demand. Supply is usually well-defined (e.g., Bitcoin supply is capped at 21 million), so prices tend to be mainly driven by demand. Demand for a token is in turn generally driven by demand for the underlying project. Since ETH is required to use the Ethereum network (i.e., “gas fees”), its price will rise with demand for the Ethereum platform.

The value of Web3 projects can be analyzed using the four intangible pillars. Exhibit 9 decomposes the value of four well-known coins. Memecoins such as Dogecoin are driven by brand, while infrastructure projects like Filecoin rely more on IP and human capital. Network effects are very important for all cryptocurrencies.

Exhibit 9

Intangible Decomposition

Source: Sparkline. As of 12/31/2021.

In The Platform Economy (Dec 2020), we did a deep dive into network effects. Network effects arise when the value of a network increases as more users join (e.g., Metcalfe’s Law). This self-reinforcing dynamic leads to a monopoly endgame. Network effects enabled Web2 platforms like Google, Apple and Amazon to reach unprecedented dominance.

Network effects are also very important in crypto. DeFi benefits from more liquidity, metaverses from more users, and smart contract platforms from more apps in their ecosystem. Web3 is all about creating communities.

Building in the Open

This framework is particularly powerful in Web3 due to the existence of unique data sets that help investors measure intangible value. Web3 is built on the principle of openness, and public investors benefit greatly from this transparency.

On-Chain Data: Blockchains are decentralized public ledgers of all transactions. Thus, not only can we see all 1.4 billion historical transactions on the Ethereum blockchain but the ledger updates in real time. No more waiting for the 10-Q to drop to learn how a business has grown its user base!

Exhibit 10

Ethereum Transactions

Source: Etherscan, Sparkline.

We can transform on-chain data into useful metrics for categories such as network activity, holder concentration, exchange flows, and money supply.

Importantly, this data allows us to track crypto adoption. We find that the number of daily active users and transactions across all blockchains has increased at a robust +30% and +37% compound annual growth rate (CAGR) since 2014.

Exhibit 11

Network Growth

Source: Sparkline. 1-year moving average. As of 12/31/2021.

GitHub: Web3 is being built on open source standards. This is foundational to the composable design of Web3, where teams can build off each other’s work. Moreover, this means investors have access to the source code and development history of virtually all Web3 projects on GitHub.

Exhibit 12

Solidity GitHub Repository

Source: GitHub, Sparkline.

GitHub allows us to directly examine projects’ intellectual property. We can see how often source code is modified and outstanding issues are resolved. Exhibit 13 shows that development activity across all projects has grown at a torrid pace of +58% per year. The builders are hard at work!

Exhibit 13

Intellectual Property Growth

Source: Github, Sparkline. 1-year moving average. As of 12/31/2021.

In Searching for Superstars (Apr 2021), we showed investors could profit by “following the talent.” GitHub associates each code commit with a developer. This allows us to track the growth of projects’ contributor bases. Across the Web3 ecosystem, developer talent has grown +44% per year. While talent inflows dipped after the crypto crash of 2018, they rebounded strongly and are at all-time highs.

Exhibit 14

Human Capital Growth

Source: Github, Sparkline. 1-year moving average. As of 12/31/2021.

Social Media: Since Web3 contributors and users are spread across the world, they rely on social media to communicate. Popular tools include Twitter, Telegram, Reddit, and Discord.

Exhibit 15

Axie Infinity Discord

Source: Discord, Sparkline.

Social media is usually public, allowing us to track the growth of Web3 communities. We monitor the number of followers and participants across various social channels, as well as the quality of engagement. We also keep tabs on the volume of mentions of specific projects in general-purpose crypto forums, social media and traditional media.

The next exhibit shows the twenty coins with the most Twitter followers. Crypto exchanges, metaverses, and memes punch above their weight.

Exhibit 16

Top Twitter Accounts

Source: Twitter, Sparkline. As of 12/31/2021.

Crypto Market Valuation

Investors use the ratio of price to fundamental value (e.g., Shiller P/E) to assess overall market valuation. While fundamental value has grown significantly, has it kept up with the increase in crypto market capitalization?

We combine dozens of metrics similar to those described in the previous section. We assign each metric to one of the four pillars and calculate the average for each pillar.

Exhibit 17

Intangible Value in Web3

Source: Sparkline. As of 12/31/2021.

The Web3 ecosystem has gained great traction. Over the past eight years, intangible value has compounded at an annual rate of +35% to +65%. The Bitcoin brand is now globally recognized, thousands of Web3 developers have come over from traditional careers, millions of lines of code have been written, and blockchain usage is skyrocketing!

Summing these four pillars provides a composite measure of Web3 fundamental value. Comparing this to crypto market cap provides a measure of valuation.

Exhibit 18

Crypto Price vs. Fundamental Value

Source: CoinMarketCap, CoinGecko, Messari, Santiment, CryptoCompare, Sparkline. As of 1/31/2022.

Web3 is both a real industry and a bubble. Real investment is being made to build real productive assets. Fundamental value has grown at a ~60% CAGR. However, prices have overshot fundamentals over the past two years. Even with the recent selloff, the market still seems a bit overheated. 🖨

Fortunately, this is just the picture on average. The Web3 ecosystem is not a monoculture. There are 8,600 tokens with diverse use cases ranging from providing decentralized storage to building the metaverse. These tokens have widely varying prospects and valuations.

Web3 Token Investing

Searching for Unicorns 🦄

Venture capital is all about power-law distributions. Most startups fail, but those that succeed often deliver 10-100x returns. As a result, venture funds may hold dozens of companies but really only need 1-2 hits to generate solid returns. VC is not a game of inches but of home runs. ⚾

Unfortunately, public investors have limited access to these right-tailed distributions. Firms generally wait until they are mature before issuing shares to the public. Web3 aims to broaden ownership to retail investors, active users and open-source contributors. Crypto tokens can offer the public access to the right-tailed return distributions of startups.

Exhibit 19

Slugging 🚀🌙

Source: CoinMarketCap, CoinGecko, Messari, Santiment, CryptoCompare, Sparkline. As of 12/31/2021.

For public investors, tokens constitute an interesting new portfolio building block. Tokens can provide highly-levered asymmetric exposure to the success of Web3. As options traders know, “a portfolio of call options is more valuable than a call option on a portfolio.” A diversified portfolio of early-stage tokens provides enhanced option value.

In addition, there may be greater alpha potential in small-cap tokens. Most analysts cover the top few coins but lack the tools to cover the entire 8,000+ token universe.

Solana Case Study

In the last section, we used our intangible value lens to analyze the overall Web3 ecosystem. We can also apply this framework to individual Web3 projects.

We’ll run through a quick example on Solana, which was one of the breakout winners of 2021. Solana aims to unseat Ethereum on the back of its faster and cheaper transactions. Only 18 months after launch, it became the 5th largest coin with a $78 billion market cap!

Exhibit 20

The Rise of Solana

Source: CoinMarketCap, CoinGecko, Messari, Santiment, CryptoCompare, Sparkline. As of 12/31/2021.

Solana’s traction would have been evident early. By June 2020, Solana still had only a $10 million market cap but had already created prodigious intangible capital. It’s GitHub activity was in the top 99th percentile of all projects at the time (including much larger ones). Similarly, its social media reach was in the top 90th percentile.

Investors paying attention to this data could have found a top-tier project at a bargain valuation. While anecdotal, this case study provides promising early evidence that intangible value metrics can help uncover winners before they get big.

Intangible Value in Tokens

We will now systematize our Web3 token strategy. We define our investment universe as tokens listed on CoinMarketCap with at least $50 million in market cap. The universe has expanded over time with new listings and market growth.

We rank all tokens in our universe on intangible value and buy the top 15%. We equal-weight the portfolio for diversification. This methodology is nearly identical to the one we used in Intangible Value (Jun 2021) to build a U.S. equity value strategy. However, rather than invest in stocks, we invest in tokens (and use Web3-specific data).

Exhibit 21 shows backtested strategy performance. Turnover is higher than that of traditional value strategies due to crypto’s extreme price volatility, so we include an assumed 1% transaction cost. We benchmark the strategy to an equally-weighted portfolio of all tokens in our universe.

Exhibit 21

Web3 Token Strategy Backtest

Source: CoinMarketCap, CoinGecko, Messari, Santiment, CryptoCompare, Sparkline. Investment universe consists of tokens listed on CoinMarketCap with >$50M market cap. Intangible Value is a long-only portfolio of the top 15% of tokens on intangible score. Market is a portfolio of all tokens. Both are equal-weighted, rebalanced weekly and include a simulated 1% transaction fee. From 6/30/2017 to 12/31/2021. See important backtest disclosure below.

Our backtested strategy outperformed the market by +40% per year with reasonable consistency. It would appear that crypto markets do indeed contain inefficiencies that can be exploited by a value-oriented approach.

So what does the portfolio look like today? Let’s first look at factor exposure. Traditional equity factors do not apply. Instead, we compute intangible value ratios. Similar to dividend yield, these metrics help investors assess how much value (e.g., users, followers, developers) they get per dollar invested. We average many such metrics into four pillar scores, which we then sum into a final valuation score.

The Web3 portfolio has considerably more intangible value than the market. Investors obtain 4x the developers, 2.5x the Twitter followers, and 6x the users. In total, the Web3 strategy has 4x the intangible value as the market.

Exhibit 22

Intangible Value Exposure

Source: Sparkline. Calculations are position-weighted averages. Market is defined as an equal-weighted portfolio of coins listed on CoinMarketCap over $50M. Characteristics refer to the underlying tokens and do not predict future performance. The red metrics are proprietary intangible value scores constructed from the average of metrics such as those shown in blue (after being normalized via Z-Score). *Scaled by billions (e.g. users per $1B market cap). **Scaled by millions. As of 12/31/2021.

Next, let’s look at industry exposure (the next section will explain how we build this taxonomy). The portfolio has exposure to a broad set of industries, led by smart contract platforms, computing & storage, and currencies.

Exhibit 23

Industry Exposure

Source: Sparkline. As of 12/31/2021.

Exhibit 24 lists ten current holdings. Since the portfolio is equally-weighted, we choose ten positions at random (i.e., these are not the top holdings).

Exhibit 24

Current Holdings Sample

Source: Sparkline. Holdings are for illustrative purposes only, are not buy or sell recommendations, and are subject to change. As of 12/31/2021.

We are encouraged that the intangible value framework can be extended from equities into crypto. Not only does this provide a promising path for investors looking to bet on Web3, but it offers a nice “out of sample” test of the theory.

Mapping Web3

The Web3 Jungle 🦁🦕🌱

The Web3 jungle is growing rapidly. The number of tokens listed on CoinMarketCap more than doubled in 2021 to 8,600. These projects target a diverse range of use cases and many new ones crop up each month. Investors need a taxonomy to help organize this burgeoning ecosystem.

In Investment Management in the Machine Learning Age (Jun 2019), we introduced “company embeddings” to help measure the similarity of company business models to each other. We can apply this technique to our crypto universe. Rather than train on 10-Ks, we use descriptions from crypto data providers (e.g., CoinMarketCap).

Exhibit 25

Sample CoinMarketCap Description

Source: CoinMarketCap, Sparkline.

The key insight is that similar projects are described in similar ways. The model understands that Solana is similar to Avalanche but not Dogecoin based on their descriptions. This is captured by their relationship in embedding space.

Exhibit 26

Description Similarities

Source: CoinMarketCap, Sparkline.

While our crypto embeddings are 100-dimensional, we can collapse them into two dimensions for visualization (t-SNE). This allows us to see how the various projects within the Web3 ecosystem arrange themselves. Exhibit 27 shows our ecosystem map for the top 250 tokens.

Exhibit 27

Web3 Ecosystem Map 🗺️

Source: Sparkline. As of 12/31/2021.

The map is intuitive. Uniswap and Sushi occupy the same coordinates, with Aave and Maker nearby. Axie Infinity, Audius and Decentraland cluster together. Doge is near Shiba and Monero is near Zcash. The stablecoins form a clique, while the IoT and BaaS tokens sit together.

Industry Classifications

Industry classifications (e.g., GICS, NAICS) are widely used by equity investors. Investors rely on them for many key tasks, such as building sector indices (ETFs), attribution reports, and risk models (e.g., BARRA).

Taxonomies such as GICS consist of multi-level hierarchies. While hierarchical structures have limitations, they provide an intuitive starting point for exploring new markets. We can transform our crypto embeddings into this structure using a hierarchical clustering algorithm.

Exhibit 28

Hierarchical Clustering Example

Source: Sparkline. As of 12/31/2021.

We run the algorithm on the full crypto universe and add labels to each of the resulting branches. This leads to our crypto industry classification scheme below.

Exhibit 29

Crypto Industry Classification

Source: Sparkline.

The algorithm surfaces four broad sectors and twenty granular industries. Just as GICS has been revised, we expect this structure to evolve over time as new uses come up.

The next exhibit shows the current distribution of projects. Each industry is color-coded based on its parent sector.

Exhibit 30

Web3 Industry Breakdown

Source: Sparkline. As of 12/31/2021.

There are roughly the same number of projects in each of the four major sectors. However, if we weight by market cap, we find that over 80% of market cap is contained in platforms (with another 5% in infrastructure)!

Exhibit 31

Fat Protocols

Source: Sparkline. As of 12/31/2021.

This likely reflects two factors. First, low-level protocols and infrastructure need to be built before consumer apps. Second, per Joel Monegro’s fat protocol thesis, blockchain protocols capture a greater share of value compared to the application layer. This is an important departure from Web2, where aggregators like Google and Facebook captured most of the value created by open protocols like TCP/IP and HTTP.

Thematic Investing

Thematic investing has exploded in popularity as investors clamor for exposure to long-term secular trends, such as disruptive innovation, Gen Z, and the metaverse.

Our embeddings allow us to generate arbitrary thematic baskets on the fly in an automated fashion. Let’s take the example of the metaverse. First, we use our embeddings to find terms related to the word “metaverse.”

Exhibit 32

Metaverse Terms 👾

Source: Sparkline. As of 12/31/2021.

Next, we find tokens associated with these keywords. We follow the methodology in Measuring Culture (Aug 2021). This produces scores for each project based on its loading on the desired theme. The top 10 metaverse projects in our basket today are below.

Exhibit 33

Top Metaverse Tokens

Source: Sparkline. Holdings are for illustrative purposes only, are not buy or sell recommendations, and are subject to change. As of 12/31/2021.

The returns of the metaverse basket have been otherworldly this year. But this theme was chosen with hindsight. How can we identify themes before they break out?

Exhibit 34

To the Metaverse!

Source: CoinMarketCap, CoinGecko, Messari, Santiment, CryptoCompare, Sparkline. Investment universe consists of tokens listed on CoinMarketCap with >$50M market cap. Metaverse Index is a long-only portfolio of the top 15% of tokens on metaverse score. Market is a portfolio of all tokens. Both are equal-weighted, rebalanced weekly and include a simulated 1% transaction fee. From 12/31/2020 to 12/31/2021. See important backtest disclosure below.

In Brand in the Influencer Era (Oct 2021), we showed that social media is a powerful propagator of viral narratives. We can monitor social chatter to predict which narratives (i.e., themes) are primed to break out. Exhibit 35 compares the performance of this strategy to that of the broader crypto market.

Exhibit 35

Narrative Investing Backtest

Source: CoinMarketCap, CoinGecko, Messari, Santiment, CryptoCompare, Sparkline. Investment universe consists of tokens listed on CoinMarketCap with >$50M market cap. Green line compares the performance of a portfolio of tokens with strongly rising social volume to that of all tokens. It is equal-weighted, rebalanced weekly and includes a simulated 1% transaction fee. From 6/30/2017 to 12/31/2021. See important backtest disclosure below.

Our narrative investing strategy has worked well in crypto. This should not be surprising for anyone who has spent time on crypto Twitter. Early-stage markets are especially susceptible to narratives. This could serve as an interesting complement to our core crypto quantitative value strategy.

Web3 Stock Investing

Crossing the Chasm

Crypto tokens can provide direct, high-leverage exposure to the rise of Web3. However, most investors hold only a small percentage of their net worth in crypto. Public equities comprise the bulk of most portfolios, so it is important to consider how Web3 might impact stocks.

Public companies are at varying stages of adoption. On one hand, Jack Dorsey left Twitter to focus on the Bitcoin efforts at Square (which he renamed Block – as in “blockchain”). On the other hand, Warren Buffett has called Bitcoin “disgusting” and said he would never own it. Most firms fall somewhere in between.

Exhibit 36

Crossing the Chasm

Source: Geoffrey Moore, New Breed, Sparkline.

In this section, we will measure each stock’s Web3 exposure based on its IP and human capital investments. This should help us determine where on the adoption curve each company sits. Using this, we can build portfolios of stocks with high crypto exposure.

Disruption Scores

In Value Investing Is Short Tech Disruption (Aug 2020), we identified disruptive companies based on their exposure to leading-edge technologies, such as artificial intelligence, mRNA, and cloud computing. One of these technologies was blockchain. In this paper, we’ll carve out blockchain from the larger set of disruptive technologies.

We create our disruption scores by analyzing textual data. We consume a range of sources including earnings calls, 10-Ks, news, patents, and job postings. Since firms tend to overplay their use of disruptive technologies in investor communications, we have found patent and labor market data to be the most reliable of these sources.

In Investing in the Intangible Economy (Oct 2020), we show how patents can be used to identify firms investing in disruptive technologies. We search patent titles, abstracts and descriptions for blockchain-related language (e.g., “blockchain,” “cryptocurrency,” “bitcoin”). We then map each patent back to its owner (e.g., Bank of America).

Exhibit 37

Sample Blockchain Patent

Source: USPTO, Sparkline.

Exhibit 38 shows the number of blockchain patents granted to U.S. public companies over time. This figure has grown rapidly over the past few years.

Exhibit 38

Blockchain Patents Rising

Source: Sparkline. As of 12/31/2021.

However, crypto patent activity is limited to a narrow subset of the market. Less than 100 public companies own at least one blockchain patent. The top holders are skewed toward large companies in tech and finance (i.e., the industries most likely to be impacted by the rise of Web3).

Exhibit 39

Blockchain Patent Holders

Source: Sparkline. As of 12/31/2021.

In A Human View of Disruption (Feb 2021), we argue that innovation is just as much about people as technology. We showed that labor market data can be used to uncover “hidden tech companies.” We analyze job postings by searching job titles, descriptions, and requirements for crypto terms. We do not restrict ourselves to engineers, but include product managers, salespeople and others working on crypto products.

Exhibit 40

Sample Blockchain Job

Source: Dish Network, Sparkline.

We already know that talent has been rushing into Web3. However, most Web3 employers are crypto native firms (or DAOs) that do not have listed stock. With the exception of Coinbase and a few others, public companies did not have “crypto” in their original mission statement.

However, these incumbent firms are not standing idly by. The next chart shows public companies’ demand for crypto talent. As a check, we also report a more restrictive metric that identifies crypto roles only by job title.

Exhibit 41

Getting in the Game

Source: Sparkline. As of 12/31/2021.

Compared to patents, a broader set of firms is hiring crypto talent. In the past year, 25K crypto jobs have been posted by 300 public companies. In addition, these firms span a wider range of industries. Exhibit 42 shows the firms that most actively recruited crypto talent over the past year (i.e., % of openings that are crypto).

Exhibit 42

Crypto Employers

Source: Sparkline. Includes public companies with more than 10 crypto job posts in the past year. As of 12/31/2021.

Crypto Stocks

We assemble these data to build our disruption scores. In addition to patents and job postings, we consider a few other textual sources. We use data both raw and normalized by overall hiring, patents, etc. The next exhibit shows the stocks investing most heavily in crypto.

Exhibit 43

Top Crypto Stocks

Source: Sparkline. Holdings are for illustrative purposes only, are not buy or sell recommendations, and are subject to change. As of 12/31/2021.

This portfolio has an interesting mix of names. It contains firms that are aggressively pursuing the crypto opportunity (e.g., Coinbase, Diginex, Silvergate). But it also contains companies that are incorporating crypto as part of a more balanced diet (e.g., IBM, PayPal).

Our scores update as new data are published. This allows us to build a portfolio that rebalances as firms start or abandon crypto efforts. Our portfolio consists of firms scoring in the top 15% on blockchain disruption score. Exhibit 44 shows the excess returns of this strategy relative to the market. We overlay Bitcoin for comparison.

Exhibit 44

Crypto Stock Performance

Source: CoinMarketCap, CoinGecko, Messari, Santiment, CryptoCompare, S&P, Sparkline. Investment universe consists of the top 3000 stocks listed on NYSE, Nasdaq, or AMEX. Blue line shows the performance of a long-only portfolio of the top 15% of stocks on blockchain disruption score compared to that of a portfolio of all stocks. Strategy is equal-weighted, rebalanced monthly, and includes transaction costs. From 12/31/2015 to 12/31/2021. See important backtest disclosure below.

Many investors are interested in gaining economic exposure to crypto but cannot hold digital assets directly. Crypto stocks provide a way to do this. We expect this approach to become more robust over time as more crypto companies IPO and legacy firm adoption continues.

Finally, since crypto stocks are just stocks, we can use our standard equity valuation tools to evaluate this basket.

Exhibit 45

Crypto Stock Characteristics

Source: S&P, USPTO, LinkedIn, Sparkline. Calculations are position-weighted averages. Market is defined as an equal-weighted portfolio of the top 3000 stocks listed on NYSE, Nasdaq, or AMEX. Characteristics refer to the underlying tokens and do not predict future performance. Earnings, book, and sales are based on consensus analyst expectations. R&D and patents are calculated over a trailing 12-month window. *Patents and PhDs are scaled by billions (e.g., # patents per $1 billion market cap). As of 12/31/2021.

These stocks are actually not too expensive compared to the market on traditional valuation ratios. In fact, they even appear slightly cheap on intangible value ratios (e.g., PhD yield). Of course, the market itself may be overvalued. Also, crypto stocks have much lower correlation and convexity compared to investing in crypto directly.


Many investors are excited about the promise of Web3 but find themselves underallocated.

Here are four ways to get exposure to Web3:

  1. Mega-cap crypto (BTC, ETH)

  2. Small-cap crypto (Web3 tokens)

  3. Venture capital

  4. Crypto stocks

Each bucket provides Web3 exposure with a varying degree of correlation, convexity, liquidity, and alpha potential. For example, VCs may be able to acquire tokens at a discount but commit to multi-year lockups that preclude recycling capital into promising new projects. Investors may choose to balance these tradeoffs with a multi-pronged approach.

No matter the path chosen, investors benefit from paying attention to valuations. Crypto markets are overrun by hype and volatility. We believe the value lens can help investors make a bet on the long-term future of Web3 while avoiding the many pitfalls of a speculative market.



This paper is solely for informational purposes and is not an offer or solicitation for the purchase or sale of any security, nor is it to be construed as legal or tax advice. References to securities and strategies are for illustrative purposes only and do not constitute buy or sell recommendations. The information in this report should not be used as the basis for any investment decisions.

We make no representation or warranty as to the accuracy or completeness of the information contained in this report, including third-party data sources. This paper may contain forward-looking statements or projections based on our current beliefs and information believed to be reasonable at the time. However, such statements necessarily involve risk and uncertainty and should not be used as the basis for investment decisions. The views expressed are as of the publication date and subject to change at any time.

Backtest Disclosure

The performance shown reflects the simulated model performance an investor may have obtained had it invested in the manner shown but does not represent performance that any investor actually attained. This performance is not representative of any actual investment strategy or product and is provided solely for informational purposes.

Hypothetical performance has many significant limitations and may not reflect the impact of material economic and market factors if funds were actually managed in the manner shown. Actual performance may differ substantially from simulated model performance. Simulated performance may be prepared with the benefit of hindsight and changes in methodology may have a material impact on the simulated returns presented.

Simulated equity model performance is adjusted to reflect the reinvestment of dividends and other income. Equity simulations that include estimated transaction costs assume the payment of the historical bid-ask spread and $0.01 in commissions. Crypto simulations that include estimated transaction costs assume the payment of 1% of notional value per trade. Simulated fees, expenses, and transaction costs do not represent actual costs paid.

Index returns are shown for informational purposes only and/or as a basis of comparison. Indexes are unmanaged and do not reflect management or trading fees. One cannot invest directly in an index.

No representation or warranty is made as to the reasonableness of the methodology used or that all methodologies used in achieving the returns have been stated or fully considered. There can be no assurance that such hypothetical performance is achievable in the future. Past performance is no guarantee of future results.


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