On the Precipice of Exponential Growth: Crypto Asset Allocation and Valuation
Over the past year, crypto asset prices have steadily increased, and we now appear to be entering a speculative phase of price discovery. I anticipate that many crypto assets will experience parabolic upward moves over the coming six months. While this market phase presents opportunities for outsized returns, it also presents risks that prudent investors must actively assess and avoid. In 2017 and 2021, I personally experienced the ecstasy and agony of the market’s wild swings. Now, entering 2025, we have the opportunity to create fundamental societal change by re-inventing the monetary medium of exchange — an opportunity we must not squander in a frenzy of exuberance. The purpose of this essay is to outline my ideal portfolio weights within my crypto asset allocation, test my reasoning for holding particular assets, and make note of sell prices for each asset.
Note to reader: if you’re looking for an introduction to crypto market cycles, I suggest reading this article by Lyn Alden, especially the section on the “halving cycle”.
Asset Allocation:
My crypto asset allocation as of 8th Nov 2024:
Bitcoin portfolio weighting: 65%.
Solana portfolio weighting: 30%.
Altcoin portfolio weighting: 5% (within my altcoin allocation, my largest position is Drift Protocol).
Why have I chosen this asset allocation?
Bitcoin: over the next 50 years, there is a real possibility that Bitcoin becomes the primary reserve asset held by central banks and major institutions worldwide. You might think this is wishful thinking, however we have already seen very early signs of this trend with El Salvador and the Kingdom of Bhutan building strategic Bitcoin reserves at the sovereign level.1 This trend is likely to accelerate, driven by the United States destroying demand for US Treasury bills through unsustainable government borrowing.2 As US Treasury bills slowly lose their status as a safe-haven asset for governments and corporations, commodities beyond the control of any specific government, such as gold, oil, uranium and Bitcoin are likely to see increased adoption. If Bitcoin can achieve a mere 3% portfolio weighting for governments and institutional investors as a “store-of-value” asset, the price per bitcoin could quickly grow to $250,000.3 I anticipate that we will reach this $250,000 price target during 2025, and likely surpass it, as “animal spirits” take hold of rabid market participants nipping at the heels to make a buck.
Other digital assets, such as Solana and Ethereum are unlikely to compete with Bitcoin as a safe haven or store-of-value due to their more centralised structure, shorter track records of reliability, and lack of consistent monetary policy.4 As a result of these factors, Bitcoin is very likely to command a monetary premium that other digital assets do not. I will maintain a minimum Bitcoin portfolio weighting of 50% throughout 2025.
BTC fair value price: $250,000 (3.3x from current price)
BTC sell price: $500,000 (6.6x from current price) — at this price, I will rotate a meaningful portion of my bitcoin position into a basket of other commodities and commodity exposed equities (I particularly like uranium, copper and gold).
Solana: while Bitcoin optimizes for security over speed, the Solana team is building the fastest universal state machine humanly possible, enabling instantaneous settlement of assets on-chain or “Nasdaq on-chain” as Solana co-founder, Anatoly Yakovenko would say. Regarding execution speed, Solana averages real-time transactions per second of 755, in comparison to 13.32 for Ethereum and 7.23 for Bitcoin.5 This 50x improvement in speed for Solana in comparison to Ethereum, and 100x improvement over bitcoin, enables many exciting applications to be built directly on-top of the Solana blockchain that are simply not possible on Ethereum or Bitcoin. One example of innovation on Solana is Drift Protocol, a decentalised perpetual swaps trading platform, which offers comparable execution speeds to centralised exchanges, such as Binance. Another example is Beemaps, which creates high fidelity global maps, rewarding community members with a crypto token “$Honey” in exchange for improving the accuracy of maps as they drive, using the Beemaps dashcam and GPS hardware device.
Creating a valuation framework for Solana is entirely different than Bitcoin, because Solana generates cashflows from transaction fees on the network, and a portion of these cashflows are distributed to SOL token holders (SOL is the native token of the Solana network). Using data from token terminal, we can see that Solana total network fees have grown from $900K per week in Nov 2023 to $25 million per week in Nov 2024 (27x year-on-year revenue growth). In addition, daily active addresses has grown from 140K per day in Nov 2023 to 5.5 million per day in Nov 2024 (39x year-on-year daily active addresses growth). If we project Solana's fee revenue from the past 30 days on an annual basis, the network currently has a $1.03 billion annual revenue run rate.
Given Solana’s 27x annual revenue growth rate, it’s challenging to determine a reasonable revenue multiple for our valuation framework (for instance, an early stage software company, growing recurring revenue by 50% annually, may command a 10x revenue multiple). Let’s take a step back and reason through what Solana’s network usage may look like in five years time under three alternative scenarios.
Solana base case: under the “base case” scenario, daily active addresses on the Solana network grow 40x within five years, while revenue grows by 20x. This implies $20B in network revenue by 2029, a fully diluted market cap of $504 billion, and a SOL token price of $739.
Solana best case: under the “best case” scenario, daily active addresses grow by 80x within five years, while network revenue grows by 50x. This implies $51B in network revenue by 2029, a fully diluted market cap of $1.78 trillion, and a SOL token price of $2,613.
Solana bear case: under the “bear case” scenario, daily active addresses remain unchanged from the current level, as does the annual revenue run rate. However the valuation multiple contracts to 15x token holder revenue share, and as a result, the SOL token value falls to $20 (a 90% decline from the current token price).
SOL fair value price: $739 (3.7x from current price)
SOL sell price: $1,500 (12.5x from current price) — at this price, I will rotate a meaningful portion of my SOL position into a basket of commodities (Bitcoin, uranium, copper and gold).
Altcoins: regarding non-major crypto tokens or so called “altcoins”, I currently hold a few speculative positions in small size, such as Drift Protocol ($Drift) and Virtuals Protocol ($Virtual).
Altcoin investing is early stage startup investing, with greater liquidity — most assets will perform poorly, however a select few will outperform meaningfully. If you’re not careful, you can quickly find yourself “holding the bag” of a failed project, down 99% from the all-time high.
Three rules for investing in atlcoins:
The initial investment should be small in size (<$5K).
Write an investment memo prior to buying the asset.
Dollar-cost average into the investment over 30 days.
In this section, I’ll focus on Drift Protocol — a decentralised exchange, focused on perpetual swaps trading (“perps” are one of the the most popular financial products in crypto). Because the Drift team has chosen to build on-top of the Solana network, they can offer execution speeds that rival centralised exchanges, potentially with cheaper costs, greater user transparency, and less risk of government intervention.6 In the future, a decentralised exchange will be able to provide a broad set of financial products to billions of people in developing countries that currently have near zero access to basic financial products. For instance, if you’d like to buy stock in Tesla or Apple as a citizen of Ghana, there is currently no straight-forward way for the average person to execute this trade. Drift could theoretically create a synthetic Tesla stock that mirrors the return profile of Tesla, with reference to a price oracle, thereby enabling anyone, anywhere to invest in Tesla with complete transparency of the underlying blockchain-based automated agreements.
In terms of growth, Drift’s trading volume is up 52x year-over-year ($5 billion trading volume in Aug 2024, up from $97M in Aug 2023), with $50 billion in cumulative trading volume as of September 2024.7 Considering these metrics, Drift appears to have achieved break-out velocity as the leading decentralised exchange on Solana.
The Drift team has also been shipping product like crazy. For instance, Drift recently launched a “community vaults” product, which enables investors to deposit assets, such as USDC and SOL, into investment vehicles that employ delta neutral strategies within the decentralised finance ecosystem to generate yield, irrespective of the vagaries of the market. Gauntlet, a leading crypto risk modelling firm, has created a Drift community vault, which has already attracted $10 million in deposits. In this case, Gauntlet is using Drift Protocol in two distinct ways: firstly, to attract investor deposits, and secondly, as a hedging venue to create perpetual swap positions in order to execute Gauntlet’s investment strategy. Because Drift has an order book on-chain, Gauntlet has greater transparency and potentially lower counter-party risk in comparison to using a centralised exchange to execute its hedging strategy.
I do not have a specific price target for Drift Protocol, however it’s worthwhile reading this valuation framework for Drift created by Spencer Applebaum and Tushar Jain from MultiCoin Capital, a leading crypto venture firm. MultiCoin has a bull case price target for the Drift token of $7.16 (~5x the current price).
Footnotes
The Kingdom of Bhutan currently holds 12,541 BTC worth $961.68M, and El Salvador holds 5,928 BTC worth $454.52M (BitcoinTreasuries.net). Interestingly, Bhutan began mining Bitcoin in 2019, using the country’s abundant hydropower capacity.
The proportion of central bank reserves held in “non-traditional” currencies (AUD, RMB, CAD) has grown from 2% in 2000 to 11.5% in 2022, while the proportion of reserves held in US dollars has dropped from 71% to 59% over the same period (IMF).
In addition, US federal government currently has $36 trillion in debt (the size of the entire US economy is ~$30 trillion), and federal govt. debt is growing by $1 trillion every 100 days. Interest payments currently account for 15% of total federal govt. spending, which is larger than the budget for national defence (13% of govt. spending).
Back-of-envelope math for BTC $250K valuation:
global bond market = ~$133 trillion; commercial real estate = ~$33 trillion; gold = ~$13 trillion —> total = $179 trillion.
assuming BTC 3% allocation = $179 trillion x 3% = $5.37 trillion BTC market cap.
$5.37 trillion BTC market cap / 21 million BTC = $255,714 BTC price.
The Lindy effect is a theory proposing that the longer a technology has survived, the longer its anticipated life expectancy. The fact that Bitcoin has survived for 15 years without a major security breach, zero successful hard forks, or change in monetary policy, gives credence to Bitcoin’s continued existence. In contrast, Ethereum changed its monetary policy in August 2021, and has undergone 18 hard forks whereby users were forced to accept changes to the rules governing the network.
Transaction-per-second data from Chainspect.
A Binance executive, Tigran Gambaryan, was detained in Nigeria for 8 months, as part of an ongoing probe into Binance’s role in destabilising the Naira (the official currency of Nigeria) by facilitating capital flight and currency speculation.
Spencer Applebaum and Tushar Jain from MultiCoin Capital (a leading crypto venture firm) recently published an excellent analysis and valuation of Drift. MultiCoin also led Drift’s recent $25M fundraising round, and noted that “Multicoin has accumulated a large position across our funds, both liquid and venture, in DRIFT, the native token of Drift”.