J-Curve and the Hype Cycle

The changing relationship between the underlying value of an asset and its perceived market value is a complex and often befuddling process. A "J-Curve" attempts to fit a function on top of this process to predict future price action. 

Applying the J-Curve concept to crypto assets was recently explored in a blog post by Chris Burniske. In the article he compares the Bitcoin price performance to the J-Curve function.

The J-Curve is a concept originally developed in the private equity world to value non-crypto assets that consists of the relationship between:

  • Current Utility Value: The "real" value of the underlying asset and..
  • Discounted Expected Utility Value: The "perceived" value of the asset relative to expected future value

In traditional revenue generating assets CUV can be approximated using WACC and APV methods.

Moving into the blockchain token space CUV becomes much more difficult to define.  We can borrow some elements from traditional analysis methods such as discounting or what risk premium is put on an asset to justify the investment. Though for the bulk of the analysis we must get more creative in defining what underpins the "real" value of the network. 

Note the following J-Curve plotting the "hype cycle" of a new technology relative to Burniske's "crypto J-curve".

hypecycle.png

As we can see there in an uneven distribution in demand (eg price action) for the same underlying asset. First DEUV deviates from CUV during the initial hype phase, followed by a large contraction as hype fades and the value comes back into line with the underlying value of the asset. If the project is strong, eventually both the DEUV and CUV will rise over the long term. 

crypto-jcurve.png

Bitcoin and CUV

Let's start with a basic transnational blockchain like Bitcoin. The value of Bitcoin can be derived from a few different sources.

  • The electricity cost of mining new bitcoins. Comparisons to mining costs for precious metals vs their market value. 
  • The value a non correlated asset has as a hedge to fiat currency. In this case equating the value of Bitcoin as a percentage of the value of the precious metals market. 
  • The value of a transactional network that can send large amounts of money globally with low fees and no disclosure requirements. Comparisons to payment processors like Paypal, Visa, etc.
  • Metcalfe's law and the value of the network as the square of the number of active users.
bitcoindeuv.png

Price action shows Bitcoin as exiting the first major J-Curve and entering into the next.

Again see the Burniske article for reference ->

 

Platform Projects and CUV

Unlike bitcoin, asset registration and smart contracting platforms have an underlying value derived from a different set of metrics as they attempt to disrupt an even larger market than Bitcoin. 

Projects like NEM, Ethereum, Stellar Lumens, and NEO approach the "decentralized internet" in different ways, though they all seek market share to become the dominant "fat protocol"

Success on this level revolves around how many new projects are being created on their platform (eg ICOs), and how many asset transactions are flowing through the system. 

Plotting J-Curves

As Bitcoin's J-Curve takes off with increased real world usage, alt token projects as a whole might be in for a significant correction before a bottoming and an eventual resurgence. 

The recent run up in the price in terms of bitcoin (eg crypto marketshare) for alt coin projects seems to be following the first major J-Curve correction. As these quality platform level projects bottom out, smart money will move in and begin accumulating positions at 75-90% corrections in terms of bitcoin value. 

This logic would set buy targets on NEM in the 3000 to 5000 Satoshi range.

nemfib.png

Stellar lumens has made a complete retracement back to the 400 satoshi level.

stellarfib.png

Note: the Stellar retracement is complicated by their token giveaway strategy. The 11 billion XLM tokens in circulation only represent 10% of the fully diluted value of the project. This is in line with the project strategy to distribute the tokens as widely as possible and spur network effects.

Thus comparing the NEM J-Curve to the Stellar J-Curve becomes difficult given NEM is fully diluted while Stellar is not. 

Takeaways

Visualizing a J-Curve overlay on top of any blockchain asset can help when making macro level investing decisions. J-Curves also pair well with traditional moving average rollover and overbought/oversold technical analysis as they both track changes in the perceived value of projects by market participants.