Crypto Doesn’t Care About Cash Flow. That Will Soon Change, Says Pantera Capital

It’s not easy to pick what crypto tokens to invest in. Conventional wisdom among crypto natives is that you shouldn’t think too hard about it — after all, coins named after dogs, frogs or cats will regularly outperform tokens tied to legitimate projects.

But that state of affairs cannot last forever, according to Cosmo Jiang, a general partner and portfolio manager at crypto hedge fund and venture capital firm Pantera Capital.

“If fundamental investing does not come to this industry, it just means that we failed,” Jiang, a self-described classically trained investor who worked in banking and private equity before joining crypto in 2022, told CoinDesk in an interview. “All assets eventually follow the laws of gravity. The only thing that matters to investors at the end of the day — and this has been true for millennia — is cash flow.”

“Crypto went from nothing to $3.4 trillion in market cap now on the back of retail interest,” Jiang said, “but the only way for this asset class to keep growing is by attracting institutional capital. And institutional capital will only care about fundamentals. Logically, that will be the only way to make money on a sustainable basis going forward.”

Pantera has roughly $5 billion in assets under management, Jiang said, with about 75% of those funds locked in venture vehicles and the rest in liquid assets. As the portfolio manager of the firm’s liquid token fund, Jiang’s focus lies in publicly traded tokens.

How does he pick which ones to add to the fund’s portfolio? By looking at product-market fit — meaning, at crypto projects that are developing products in areas where there’s huge demand. There are wwo basic questions at the forefront of his mind: whether the team can execute on their vision, and whether there’s a chance their token will capture some of the economic surplus generated.

“This will sound so stupid to anyone that works with normal asset classes, because it’s so normal,” Jiang said. “But in crypto, for whatever reason, this method is non-consensus.”

Solana versus Ethereum

When it comes to crypto projects, layer-1 networks offer some of the most battle-hardened business models. Smart contract platforms are relatively old — Ethereum launched in 2015 — and generate revenue through transaction fees. Their tokens also accrue value when their networks see increased usage. Solana’s SOL and Telegram’s TON have been two of Jiang’s favorites. But Ethereum’s ether (ETH), to him, isn’t as attractive of an investment as it used to be, because new users aren’t flocking to the network.

Solana saw almost 3 million in average daily active addresses in the last six months, according to a Dune dashboard by altcoin_analyst, while Ethereum only saw 454,000. Moreover, Solana has increased its revenue by 180% in the last 30 days, compared to Ethereum’s 37%, per TokenTerminal. And that means the difference in annualized revenue is shrinking: Solana made $1.27 billion in the last 12 months and is quickly catching up to Ethereum’s $2.4 billion. Despite that, Solana’s market capitalization is still four times lower than Ethereum’s.

“Take a look at incremental growth and compare how much has gone to Solana versus Ethereum. The numbers are stark,” Jiang said. “None of this stuff is worth anything if no one uses it.”

“Ethereum clearly has a lot of very talented people building on it. It has an interesting roadmap, but it's also valued for that, right?” Jiang added. “It is a very large asset. At $435 billion, that would rank it amongst one of the most successful companies in the world if it were compared to equity. And the unfortunate fact is it's currently losing market share [to Solana and others].”

Another big difference between the two networks lies in their architecture. In its attempt to solve scaling issues, Ethereum has switched to a so-called modular blockchain design, meaning that various network tasks are split between Ethereum and its associated layer 2s like Arbitrum or Optimism. Solana, meanwhile, has kept it monolithic — everything happens on one blockchain.

For Jiang, that means Solana has an advantage in terms of user interface, and also in terms of capturing the network’s value through SOL. Ethereum, meanwhile, ends up splitting its value across an array of tokens and blockchains, which means the network needs to facilitate a lot more transactions for ETH to outmatch SOL. However, Ethereum’s throughput is rapidly increasing, so in theory the network could develop enough activity for that to eventually happen, but it’s not a guarantee.

“The driving force behind Ethereum philosophy has been maximum decentralization,” Jiang said. “I'm not a crypto native, I'm really a tech investor, so I don't believe in decentralization for the sake of decentralization. There's probably a minimum viable decentralization that's good enough.”

We’re still early

Jiang’s attention isn’t confined to layer 1s, however. DePIN — an umbrella term for projects focused on building physical infrastructure with the help of blockchain technology — is another source of interest for him and his team. DePIN (short for "Decentralized physical infrastructure network") projects include Render Network (RNDR), which enables people to lease unused computing power, and Arweave (AR), which functions as a data storage network.

“When I’m talking to [liquidity providers] ... the only stuff that gets them interested is DePIN, because these are real businesses in the real world, it's something that people can actually allocate and get behind,” Jiang said.

But he’s not against investing in memecoins too — or, at least, in the projects that enable memecoin trading, if not the coins themselves. “I would never, as a hedge fund investor, invest in a blackjack player,” he said. “But I've made a lot of money investing in casinos.” And there’s reason to believe the sector could keep expanding, because at the end of the day, the revenue generated by Pump.fun, trading bots and decentralized exchanges is still small compared to the revenue generated by the $540 billion global gambling market.

Even so, Jiang’s strategy failed to outperform bitcoin's (BTC) 132% return in 2024, he said. In his view, that’s due to bitcoin being relatively advanced in its own bullish cycle, whereas blockchain technology has lagged behind throughout the year. That being said, prospective returns on such tokens should ultimately be higher than for bitcoin, he said, especially since the incoming Trump administration will likely be much friendlier towards the industry than the Biden one ever was.

“On a compounded multi-year basis, we will do extremely well,” Jiang said. “If blockchain reaches billions of users over time, then almost logically, you have to believe that everything else will grow a lot faster than bitcoin.”