Summary: I'm talking about the mind game of investing, particularly as it relates to crypto markets. subscribe here and follow me to receive weekly updates.
Here is a tool that will give you new reasons to invest in crypto.
And it's not based on price, it's based on real life users.
is the new Crypto Index Statusby venture capital firm Andreessen Horowitz (also called "a16z"), which has invested thousands of millions in crypto startups since 2013.
Next I will explain how this tool works. But first, here's why it's so important to cryptocurrency investors.
Users are the โDemandโ
Crypto must be used to be useful.
You can measure the price of bitcoin all day, but measuring the users of bitcoin is a much more valuable metric. (Hint: bitcoin users have stayed about the same since 2020.)
After all, cryptocurrency companies are meant to connect people, to help them process with new forms of value. if the price goes above but the number of users goes belowthat doesn't say much about its usefulness.
(Conversely, if the price goes below but the number of users goes abovethat could indicate a great bargain.)
It seems so obvious that we shouldn't have to say it: crypto must be used to be useful. But hardly anyone invests this way. Everybody gets excited about the price growth; rarely do people get excited about user growth.
The growth of users is one of our basic investment principles: We measure it every Thursday in our Top 10 Fundamentals newsletter for premium members. If long-term users are growing, long-term prices will usually grow like a weed.
Measuring Users with the Crypto Health Index
Like any index, the State of Crypto Index is meant to give us a high-level snapshot of the industry over time โ is it growing or declining?
In a16z lingo, users are what they call "demand". (The more cryptocurrency users, the higher demand for cryptocurrency products.)
They bring together a bunch of user metrics in a single graph on the bottom right:
To the right of the graph, you can see the metrics that are included in this graph (such as the ingredients that are included in a recipe):
- active addressesโ The number of unique users on the major blockchains
- Transaction: the number of unique transactions on the main blockchains
- Transaction fees: the amount people pay to use the major blockchains (for example, gas fees on Ethereum)
- Mobile wallet usersโ The number of unique users on the best crypto mobile wallets
- DEX volumeโ The value of tokens traded on major decentralized exchanges (for example, Uniswap)
- NFT Buyers: the number of unique users buying NFTs
- stablecoin volume: The value of stablecoins transferred through major blockchains
What I love about this index is that you can change the weighting of the ingredients to adjust the recipe. For example, you would give much more weight to active addresses, while downplaying transaction fees (because they depend on price):
Producing a graph that looks more like this:
It's not the weight that's important, but the general shape of the chart as you play with the weights. Is it still moving in the direction of growth? Then, it is very likely that the industry is growing.
But the index does more than measure user growth across the industry. It also measures developer growth.
Developers are the โofferโ
If users provide the demand for crypto products, developers provide the supply. (With the price appealing to both.)
Take bitcoin โ as more people started buying it, the price went up, making more developers interested in creating crypto tokens and projects. This led to higher prices, more users, etc. Virtuous circle.
Of course, this never happens in a linear fashion, but rather in waves. Take this great slide showing when famous tech companies got started vs. the stock market in general:
The long-term trajectory is one of upward growth, and many of today's most powerful companies got their start during market downturns.
The question mark on the far right of the slide means, What world-changing crypto company is being built right now?
Developers and users. Offer and demand. It's like the old chicken and egg question: which came first?
As investors, it doesn't really matter, as long as we're measuring both.
Measuring Developers with the State of Crypto Index
To measure developers (or the supply side), the ingredients are:
- active developers: the number of developers creating crypto projects (for example, via Github)
- Interested developers: the number of developers playing with it
- contract implementers: The number of developers deploying new code on public blockchains
- Verified Smart Contracts: The number of new apps launched
- Developer Library Downloads: The number of app downloads to help developers.
- academic publications: The number of published research papers on cryptographic topics
- Job search interest: The number of searches for jobs related to blockchain and cryptography
as i see it Active users as the primary metric for crypto adoption, active developers is the main metric in cryptographic development. So my recipe would put a lot more emphasis on active developers, something like this:
Create a chart that is still similar to the defaults provided by a16z:
With my improved recipe, the overall index looks even better than the a16z perspective:
It's a picture of amazing long-term growth. As a point of reference, if he invested $1 that grew to $1,727 in three years, he would be considered an investment genius. That's what it's been like to invest in this industry in general.
And the long-term results have been even better.
(Still, beware of the ups and downs of the crypto market roller coaster. Our Blockchain Believers Wallet will keep you well diversified.)
Why not just measure the price?
No matter how you tweak this index, chances are you'll still get something that looks a lot like the crypto market price. Or to put it even more bluntly, a graph that looks like the price of bitcoin:
Again, the price can be misleading. It's a data point, and it's fueled by fear and greed. This index is a powerful tool because it incorporates many data points that show the growth of the underlying infrastructure, both supply and demand.
Investor takeaways: apply this to individual tokens
As investors, we look for the hidden gems, the undervalued crypto tokens. We can use this same methodology to drill down into individual crypto projects, to look at their overall demand (users) and supply (developers).
To do this, we have a great tutorial on How to read crypto financial statements. Using supplemental reports from Token Terminal, we'll show you how to find both active developers and active users (supply and demand) for all the leading crypto tokens.
Think of a16z's State of Crypto Index as putting all this information together into one useful graph, to show us how the industry as a whole is growing.
Remember: it's never a straight shot. This is not how growth happens. Instead, it's a continuous series of ups and downs, gradually leading us to more users, more developers, and more wealth in the long run.
Investing in that long-term future is what we're here for. Now, with the State of Crypto Index, we have a new way to measure our progress.
