Last Updated: 07/26/2022
With the chaos of 2Q22 in the books, it is time for us to roll out our quarterly price target adjustments of the protocol tokens we have under coverage. Crypto volatility is not for the faint of heart, and even by those standards, this quarter was particularly acute.
Global macro-financial conditions in the form of monetary policy, fiscal policy, and energy prices have flipped from record easing to record tightening. While these levels are certainly significant, it is the rate of change that moves markets, and the rate of change in this cycle is unprecedented.
Crypto, as the tip of the risk asset spear, re-priced this liquidity reversal with prejudice.
On the one hand, and from the outside, it looks like a lot of damage was done to the credibility of the asset class as crypto suffered from its first “Minsky” moment — a recurring phenomenon articulated by Hyman Minsky where the excess debt builds in a system until the last unit can no longer be sustained, resulting in a cascading crash of margin calls and liquidations. For those following closely, the failures of Luna, BlockFi, Voyager, Celsius and 3AC were the archetype.
Yet, on the other hand, what really broke in this situation? Despite the deflation of token prices, the Layer 1 protocols that we cover continued to validate transactions and build blocks mostly without disruption. Smart contracts in DeFi were executed as intended when called, and NFTs were minted, bought and sold — robustly — throughout this period. We would argue that while centralized actors failed, the enduring case for further decentralization was made clear.
More importantly, new projects were announced (Solana’s mobile stack commitment) and primitives were released (Polkadot’s XCM). Ethereum developers successfully moved the protocol closer to Proof of Stake. The crypto system, while nascent, in many ways proved their bona fides as the emerging backbone of the next generation internet.
Despite the downturn, we have maintained our positive outlook since the initial release of our large-cap Layer 1 reports. While we acknowledge that token prices are now further away from our targets, our confidence in our analysis of these protocols on a three-year horizon and the value we ascribe to them is very much intact.
As we will do when major changes occur, and at a minimum on a quarterly basis we are tweaking our valuation assumptions to consider new factors and data impacting 1) transaction value growth and 2) network value to transaction (NVT) ratios. We are adjusting our price targets to reflect these assumptions, incorporate the significant macroeconomic developments since the release of our last reports, and include individual factors specific to each chain. We still believe most L1s are in a long run hyper-growth cycle.
Get the Full 2Q22 Analysis Here