I recently read an academic study called Network Effects and Store-of-Value Features in the Cryptocurrency Market, and I literally pumped my fist in the air.
That’s because it is scientific proof of the investment strategy we’ve been telling you about for years.
I recommend you read the article – or at least the summary – but I’ll pull out the juicy bits for you below.
Active Wallet Addresses Make a Crypto More Valuable
The authors studied the top 100 crypto investments over a long period of time (2010-2023), making it one of the most comprehensive studies to date on what drives long-term crypto prices.
The primary finding is that the number of active wallet addresses drove up the price in 94% of the crypto investments they studied.
To simplify, as users go up, so does the price.
Which is what we’ve been saying for years.
To some degree, it’s common sense: money becomes more valuable as more people use it. (Which reinforces the idea that a one-world money would be the most valuable of all – see my TED talk.)
This is not how most crypto investors think, of course.
Active Wallet Addresses is not even a metric that’s listed on top crypto listing sites like CoinMarketCap. You’ve got to really dig to find this number – but in our view, the number of users should be the first number that we see.
Active Wallet Addresses – which is similar to Daily Active Addresses (DAA) or Monthly Active Addresses (MAA) – basically tells you how many people are actually using it. If cryptos are businesses, then this number is their customers.
Cryptos become more valuable as more people use them. Now we have the proof.
Number of Transactions is a Booster
In about half of the crypto investments they studied, a higher number of transactions was correlated with a higher price. In other words, if the token was being used more often, it was more likely to appreciate in value.
Again, this makes logical sense, but it’s a less reliable indicator than number of users, because while you can fake both numbers, it’s even easier to fake the number of transactions (for example, wash trading).
It helps to think of crypto networks like social media networks. If you had a social media network with plenty of active users, it would be very likely to snowball in size and scale, because of network effects: more users lead to even more users.
But if you had a social network with a limited number of users who happen to post a lot, you have, well, Friend.tech. It’s a lot of “sound and fury, signifying nothing.”
In other words, the number of transactions matters, but it matters even more when the number of users is growing. (If you found a crypto with a growing number of users, consider number of transactions a “+1” on your score.)
Again, this is not a number that most crypto investors monitor, because it’s so hard to find. Most crypto sites instead report on trading volume, which is not at all the same thing as number of transactions.
Which would you rather own: a currency that is used only by a few very rich people (giving the illusion of a lot of money moving around), or a currency that’s used by everyone? That’s the difference between trading volume and number of transactions.
Limited Supply is Another Booster
Much has been made of bitcoin’s limited supply: there will only be 21 million ever created. By contrast, most crypto projects can mint new tokens infinitely, diluting your value over time.
The study found that crypto investments with a limited supply could make the token more scarce, and thus more valuable. But limited supply alone is not enough to predict a good investment.
Again, this makes logical sense: a bitcoin clone that no one uses would be, well, Bitcoin Cash.
Think of limited supply as a potential “accelerant” for an investment that has lots of active users.
To sum up:
- Look for investments with lots of active users (ideally this number is growing over time).
- Of these investments, if they also have lots of transactions, that’s a +1.
- If they have a limited supply, that’s also a +1.
Of course, these are not the only factors that should be considered. The team and the technology are important (see our Investor Scorecards). The regulatory risk and potential problems also matter (see our Risk Scorecards).
But if our investments pass these other criteria, these three metrics – active users, transactions, and supply — are powerful signals for which investments are likely to grow over time.
This Knowledge is Gold
Sometimes, you find these nuggets of information gold – but they’re buried in so much academic formalese that it’s hard to see their value. This report is gold.
Here’s how to use it to find crypto investing gold:
- Use our Investor Scorecards and Risk Scorecards to find potential winners
- Then look at their active wallet addresses (or daily active users) as a powerful accelerant
- Consider number of transactions and limited supply as further boosters
One final note: the study also found that mature crypto investments (like bitcoin and Ethereum) demonstrate a strong correlation with gold. So finding these winners is literally like investing in digital gold.
That’s worth a fist-pump, for sure.
Thanks to Steve Gordon of Babson College for passing this study on to me.
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