Last week, Bitwise CIO Matt Hougan published a piece arguing that crypto valuations could potentially double or more as protocols increasingly connect revenues to tokenholders through buybacks and other value-accrual mechanisms.
We agree. In fact, we’ve been waiting a long time for the rest of the market to get here.
For nearly a decade, Arca has argued that digital assets should ultimately be analyzed the same way we analyze every other investable asset: based on fundamental value and expected future cash flows. Tokens aren’t stocks, and the mechanisms through which value accrues to tokenholders are different from those available to shareholders. But the basic principles of investing didn’t suddenly disappear just because the assets live on a blockchain or are issued by a protocol rather than a Delaware corporation.
That hasn’t always been an easy argument to make.
In July 2019, when most of the world still referred to virtually every digital asset as a “cryptocurrency,” we wrote that this characterization made little sense. Digital assets represent a wide range of economic interests. Some are currencies, some are utility tokens, and some are, as we described them at the time, “essentially equity-linked notes of cash-flow producing companies.”
We specifically highlighted exchange tokens that combined product utility with an economic interest in the underlying business, including receiving a percentage of revenue or profit through token buybacks. Six months later, in our December 2019 year-end review, we separated the digital asset universe into four distinct buckets. One of those buckets was simply: “Real cash-flow producing companies that utilize tokens.” At the time, centralized crypto companies were beginning to generate meaningful revenues, while decentralized protocols were mostly still science projects. We wrote that decentralized protocols were probably “5-10 years away from creating any real economic value.”
Apparently, we weren’t too far off.
Six and a half years later, protocols like Hyperliquid (HYPE), Aave (AAVE), Aerodrome (AERO), Maple Finance (SYRUP), and others are generating real fees and real revenue from real customers. In many cases, they’re doing so with margins and capital efficiency that would make most public companies jealous.
The question is no longer whether decentralized protocols can create economic value. The question is what they should do with it. And that’s where things get interesting.
The existence of protocol revenue alone doesn’t necessarily make a token valuable. This distinction is incredibly important, and it’s one we’ve been writing about almost as long as we’ve been writing about digital assets themselves.
In August 2020, while analyzing a then-emerging DeFi protocol called Aave, we distinguished between inflationary token rewards and actual economic earnings generated by customers elsewhere in the ecosystem. At the time, we wrote: “In our view, exogenous cash flows are the key to long-term value accretion for tokenholders.”
Six years later, Aave is still here. So is the question. If a protocol generates $500 million in annual revenue, but none of those earnings ever accrue to the token, why should the tokenholder care? This is where digital assets differ meaningfully from equities.
When you buy stock, you own a residual claim on a company. Earnings can be reinvested into the business, distributed through dividends, or used to repurchase shares. And even if the company never returns a dollar of capital directly to shareholders, there is always another potential endpoint: Someone can buy the entire company.
A startup can spend years reinvesting every dollar it earns because investors believe those investments will produce greater earnings in the future. Eventually, the company might mature enough to pay dividends or buy back shares. Or another company or private equity firm might simply acquire it at 20x earnings, with shareholders receiving the proceeds, often at a premium to the prevailing stock price.
Crypto protocols generally don’t have that final escape hatch.
Nobody is going to acquire the Aave protocol for 20x EBITDA and send AAVE tokenholders a check. Nobody is going to buy Hyperliquid and cash out every HYPE holder at a 30% takeover premium. These protocols are decentralized networks designed, at least theoretically, to exist indefinitely. There is no exit multiple waiting at the end.
That makes the connection between protocol economics and token economics arguably more important for tokens than it is for equities.
Because if a protocol generates billions of dollars over its lifetime but none of those dollars ever accrue to tokenholders, there may never be a terminal event that closes the gap between the value of the protocol and the value of the token.
This is why we increasingly believe buybacks are the cleanest and most direct mechanism for connecting protocol success to tokenholder value. But that does not mean every protocol should immediately spend all its revenue on buying its own token. In fact, doing so would often be terrible capital allocation.
Many of today’s leading protocols are still in their startup phase. They’re growing extraordinarily quickly and have enormous opportunities to reinvest their capital. They can improve their products, incentivize liquidity, enter new markets, acquire teams or technology, build insurance reserves, subsidize new products, or invest throughout their ecosystems.
If a protocol can reinvest $1 today and create $5 of future value, we’d much rather see it do that than buy $1 worth of its token.
This isn’t unique to crypto.
Amazon didn’t become one of the greatest investments of all time by maximizing dividends and share repurchases during its early growth years. Great companies reinvest capital when the expected return on that capital exceeds what shareholders could earn elsewhere.
Protocols should do the same.
But there is a huge difference between “we aren’t buying back tokens today because we have better uses for the capital” and “there is no reason to believe this revenue will ever accrue to tokenholders.”
The former can be an excellent capital allocation. The latter makes valuation nearly impossible. Put differently: Buybacks don’t need to happen today. But investors need to believe they will happen someday.
Morpho (MORPHO) founder Paul Frambot recently reignited this debate when he argued against aggressive token buybacks, suggesting that young, rapidly growing protocols should reinvest their profits rather than distribute them. He made the same argument in a blog last year. We largely agree. Protocols should be judged just like companies: invest when the expected return on incremental capital is high and return capital when it isn’t.
But there is one important difference between Morpho and the technology companies Frambot compares it to. Meta shareholders own Meta. Even before Meta began returning capital, shareholders owned a legal residual claim on the company’s growing earnings and assets and theoretically could ultimately monetize that value through dividends, buybacks, or an acquisition. MORPHO holders don’t have quite the same luxury.
Reinvesting protocol revenues can therefore postpone tokenholder value accrual, but it cannot replace it indefinitely. Eventually, there has to be a bridge connecting the economic success of the protocol to the economic value of the token. And this is where crypto Twitter (as usual) ran with this incorrectly. It is not a black-and-white argument of “buybacks are good” or “buybacks are bad”; it’s a timing issue of when (as we argued in March 2025). Buybacks don’t have to happen today, but at some point, the protocol has to answer the question: what exactly does a tokenholder own?
For most of crypto’s history, capital allocation wasn’t much of a discussion because there wasn’t much capital to allocate. Projects raised money, spent money, and issued tokens to incentivize users. And if they ran out of money, they simply raised more.
That’s changing.
Once a protocol begins generating meaningful free cash flow, its founders and governance participants suddenly face the same problem that Jamie Dimon, Warren Buffett, and every public company CEO has faced forever: What do we do with the money?
These are capital allocation decisions. And increasingly, digital asset investors should judge protocols not simply by how much revenue they generate, but by what they do with that revenue.
Consider two hypothetical protocols. Both generate $100 million of annual revenue. Both are growing by 30%. Both have similar margins and competitive positions.
Those tokens should not trade at the same multiple. Protocol B has created a credible bridge between the success of the business and the value of the asset. Protocol A hasn’t.
Even the word “buyback” requires some scrutiny. A protocol that generates $100 million of revenue, spends $50 million buying its token, and then distributes $50 million of those same tokens as incentives hasn’t necessarily returned $50 million to tokenholders. It may simply have recycled its emissions.
A buyback-and-burn permanently reduces supply. A buyback followed by distributions to tokenholders or stakers transfers economic value more directly. A protocol that accumulates repurchased tokens in a treasury may also create value, but only if that treasury is ultimately managed for the benefit of tokenholders. The details matter.
But the larger principle is straightforward.
If a protocol creates economic value, there eventually needs to be a mechanism through which tokenholders participate in that value. Otherwise, “protocol revenue” is just an interesting statistic.
By 2021, we were beginning to see this framework work in real time. In July of that year, we highlighted digital assets backed by what we called: “real companies, with real cash flows, a token that accrues economic value, and a way to measure its success.” At the time, we argued that these projects were beginning to do what we had always expected digital assets to eventually do: turn customers and users into economic owners.
The problem was that there simply weren’t enough of them. Today there are. And that’s what makes Hougan’s argument so interesting.
The significance of his piece isn’t the idea that revenues should accrue to tokenholders. The significance is that this framework is finally becoming mainstream at exactly the same time that the assets themselves have matured enough for it to matter. And that has enormous implications for valuation.
If a protocol grows revenue by 50%, its token can obviously become more valuable because the underlying economic engine is becoming more valuable. But something else can happen simultaneously. The multiple investors are willing to pay for those earnings can rise.
Imagine a protocol growing earnings 50% annually while its valuation increases from 8x earnings to 16x earnings as investors gain confidence that those earnings will ultimately accrue to tokenholders. The protocol’s earnings didn’t need to double for the token price to double. The market simply became willing to pay more per dollar of earnings because the probability that those earnings would eventually reach tokenholders increased.
This is essentially Hougan’s argument that crypto valuations could double or more as protocol revenues become explicitly connected to tokens. And we think he’s right. Profitable crypto protocols have historically traded at enormous discounts to comparable public companies. Some of that discount is absolutely justified.
Equity holders have legally enforceable ownership rights. Corporate governance structures are well established. Financial statements are audited. Securities laws provide investor protections. Management teams have fiduciary responsibilities. And shareholders have decades of precedent establishing exactly what they own.
Tokenholders often have none of those things. A token, therefore, probably should trade at a discount to an otherwise identical equity.
But how large should that discount be?
If a protocol has hundreds of millions of dollars of recurring revenue, extraordinary margins, rapid growth, global distribution, limited capital requirements, and a transparent mechanism that uses excess cash flow to continuously purchase its token, should it really trade at a fraction of the multiple assigned to a slower-growing public company?
Maybe.
But increasingly, we suspect the answer is no. And that means one of the biggest opportunities in digital assets today may not simply be identifying protocols with growing revenue. It may be identifying the protocols where the market is still applying an outdated valuation framework.
None of this meant the market was ready for fundamental investing back then. Frankly, most of the assets weren’t ready either. The framework wasn’t wrong. The industry simply hadn’t matured enough for the framework to work consistently.
Now it has.
Protocols have customers. They generate revenue. They produce profits. Their operators have to make capital allocation decisions. And increasingly, excess cash flow is being used to purchase tokens.
Which means the questions digital asset investors should be asking are beginning to sound remarkably familiar:
In other words, crypto investing is finally becoming fundamental investing. After 15+ years of trying to invent entirely new ways to value tokens, the next great innovation in digital assets may be one that equity investors discovered a very long time ago: Make money. Grow earnings. Allocate capital intelligently. And eventually return the profits to the people who own the asset.
Turns out the P/E ratio wasn’t such a bad idea after all.
And That’s Our Two Satoshis!
