“That’s Our Two Satoshis” - The Reddit IPO is Crypto Without the Crypto

Jeff Dorman, CFA
Feb 26, 2024

Thats Our 2 Satoshis Logo

Screenshot 2024-02-26 at 9.15.45 AM

Source: TradingView, CNBC, Bloomberg, Messari
Uniswap fee switch is a win for crypto projects with real cash flows
DeFi materially outperformed the rest of the market last week.  If you have to do a double-take when reading that, it’s understandable.  It’s been a minute.  We’ll get into the reason behind DeFi’s rally shortly, but it’s nice to see one of the eldest sectors lead the market.  Granted, the sectors we have been highlighting in this blog for the past 6 years are probably a bit stale at this point.  When we started tracking sectors, most market participants still had difficulty distinguishing cryptocurrencies like Bitcoin from smart contract platforms and DeFi projects.  Today, there are so many different sectors and sub-categories of digital assets that a single table wouldn’t even fit them all.  But looking at the market on a sector-by-sector basis is still helpful to truly understand the market gyrations.  While many of the large-cap tokens remained range-bound again last week, several other sectors stood out in addition to DeFi.  Following Nvidia's blow-out earnings, AI tokens rallied, but their collective $17 billion market cap still looks paltry compared to NVDA’s $2 trillion market cap.  DePin tokens also had a strong week, partially fueled by the AI hype and partially due to the continued real-world use cases that DePin is uncovering. Ethereum (ETH) benefited from all of the above in addition to the anticipation of its own technical upgrade this spring and a possible ETH ETF down the line. 
Source: Artemis
But the DeFi rally was definitely the most newsworthy, and it was driven almost entirely by Friday’s announcement that the Uniswap (UNI) Foundation issued a proposal that will lead to Uniswap finally turning on the fee switch. Recall, Uniswap is the largest decentralized exchange (DEX) by both market capitalization and volumes, annualizing over $500 billion in trading volumes and predicted to generate an estimated $1 billion in revenue from fees over the next 12 months (an Arca estimation).  Turning on the fee switch will direct some portion of those enormous fees to UNI holders, and immediately turn a once worthless governance token into a cash-flow-producing token. Naturally, UNI rose +42% week-over-week. You could argue that nearly all of the value of the UNI token prior to the news was in anticipation of eventually participating in Uniswap’s revenue, and the discount-to-fair value closed upon the actual news.  We estimate that UNI is now trading at roughly 10x forward sales, which is on the low side of valuations for DEXs and other revenue-producing entities' tokens. 
As mentioned, the Uniswap news led to a broad-based DeFi rally, with several tokens that have disappeared from the limelight for years generating large, double-digit weekly gains.  But the market may be slightly misinterpreting the news by sending DeFi higher.
Yes, this was partially good for DeFi, but this was less about DeFi specifically and more about a regulatory regime shifting for any project that generates real cash flows.  For years, token issuers have been (in our opinion erroneously) hiding behind bad legal advice. The belief was that if a token issuer gave explicit financial value to tokens, it would put their tokens in the regulatory cross-hairs. We have consistently argued that Silicon Valley VCs, their lawyers, and the projects they have funded have been hurting token holders for no valid reason. We wrote the following in January 2023:
The Uniswap Foundation decision last week shows that at least one large, VC-funded project has finally had some sense knocked into them.  Perhaps all the recent crypto wins versus the SEC (Ripple, Coinbase, Grayscale) have given projects like Uniswap a yellow, if not green, light to be more proactive and less defensive.  One by one, crypto companies are indicating that they are willing to fight against ambiguous rules.
While some other DeFi projects will likely follow suit, given crypto's copy-cat nature, very few DeFi projects generate significant cash flows.  
But projects in other sectors do.
For instance, the leading NFT trading platform.  We’ve already seen the Blur team hint at possible fee switches.  Gambling sites like Rollbit (RLB) are likely paying attention too.  And stablecoin issuer Frax Finance has joined the “if Uniswap can do it, we can do it” bandwagon. For the past few years, traditional financial analysis of real cash flows has been a fool’s errand as the market has shunned actual revenues in favor of growth for the sake of growth.  It’s possible this is about to shift. 
The Reddit IPO is pretty crypto-y for not being about crypto
Reddit plans to place a big chunk of its IPO shares in the hands of its users, an unusual move that could build loyalty, but seems too little, too late.  Ideally, Reddit shares will rise in their stock-market debut for the company and its underwriters, bestowing big gains on those who buy in at the IPO price. Sure, for those Reddit users eligible to participate in the IPO, it’s better than the alternative of getting stiff-armed at the expense of large institutional investors who will get a sweetheart price on the IPO.  But why do the customers who turned Reddit from a nothing message board into a multi-billion dollar business have to wait so long to finally get a piece of the revenues they created?
If we’ve learned anything from the past 8 years in digital assets, giving your users a chance to invest in the early stages of a project’s growth (via tokens) builds sticky customers, power users, and evangelists for life.  We often say that tokens are the greatest capital formation tool in history by aligning customers and shareholders in a way never seen before. Projects grow faster in crypto BECAUSE their customers are incentivized to be early adopters and evangelists.  
As Matt Levine wrote regarding Reddit:  “We created $5 billion of value and get none of it,” some Redditors will probably complain. Letting them buy stock at the IPO price doesn’t really address that complaint — they still have to pay for it! — but it sort of symbolically responds to it. “We let our users share in our success by paying full price for the stock,” Reddit can say; "it's fine, whatever.”
Reddit has an estimated 70 million users. The first few users who took a chance on Reddit’s future success have financially benefited no more from Reddit than someone who signed up just yesterday.  And this same problem exists everywhere – Starbucks customers are not the same people as Starbucks customers.  Delta Miles are cute but don’t align you with Delta’s financial success. The majority of McDonald’s customers don’t even have brokerage accounts. The list goes on. The Reddit IPO access is a nice smokescreen to temporarily hide the fact that Reddit founders and VCs are the only ones who have benefitted from the work done by 70 million other people.  
Meanwhile, ask a Binance customer, or a Bitcoin user, or a Bittensor validator, or a Uniswap LP, or an Ethereum staker, or a Rollbit customer, or a dYdX trader or just about any other crypto customer how they feel about the success of the projects they support.  They are all financially aligned with the project’s success.  
Once in a while, we really are reminded of why crypto is creating a better system. 


And That’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.

The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Katie Talati - Director of Research
Sasha Fleyshman - Portfolio Manager
David Nage - Portfolio Manager
Wes Hansen - Director of Trading and Operations
Michal Benedykcinski - Senior Vice President, Research
Nick Hotz, CFA - Vice President, Research
Kyle Doane - Vice President, Trading
Alex Woodard - Associate, Research
Christopher Macpherson - Research Analyst
Andrew Masotti - Associate, Trading and Operations
To learn more or talk to us about investing in digital assets and cryptocurrency
call us now at (424) 289-8068.

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