Recent discussions in the cryptocurrency space have sparked debate about the intrinsic value of popular digital assets. While it’s common to dismiss many cryptocurrencies as lacking real worth, a deeper examination reveals a complex landscape that investors must navigate carefully.
Investors often mistakenly assume that purchasing the native tokens of major blockchain platforms equates to ownership similar to buying stocks. This expectation can lead many to sell off their holdings in well-known cryptocurrencies like XRP, Ethereum, and Solana—tokens that may actually hold merit when evaluated under different criteria.
A fundamental misunderstanding lies in the realization that most blockchains do not directly distribute their economic value to token holders. Unlike traditional stocks that pay dividends, many decentralized applications (dApps) generate revenue in various formats that do not guarantee increased demand for their native coins. This disconnect raises questions about what investors are truly acquiring when they purchase these tokens.
For instance, data surrounding decentralized finance (DeFi) activities highlights this disparity. In a recent 24-hour snapshot, Ethereum recorded approximately $316,815 in chain fees and around $15.3 million in app fees. Solana appeared more productive, generating about $1 million in chain fees alongside $12.1 million in application fees. Despite these significant fee earnings, coinholders do not receive any share of these profits, nor is there an expectation that such a distribution will occur in the future.
Investors banking on high on-chain activity easily translating into higher returns may be missing an essential value capture mechanism. However, rushing to liquidate these assets might be premature. These cryptocurrencies exhibit characteristics akin to commodities and platforms rather than traditional equities, suggesting alternate paths for generating returns.
One way that cryptocurrencies can yield benefits for investors is through supply contraction, staking rewards, demand from institutional users, and a monetary premium linked to the blockchain’s utility as a venue for financial activities.
Using Ethereum as an example, each transaction incurs a base fee that is burned, which seemingly does not resemble a dividend. However, as the supply of available coins decreases, each remaining coin’s share of the network’s value may increase over time. Additionally, the staking process allows coinholders to lock their assets to support network security, earning rewards in the process.
Solana employs a similar approach, combining rewards for stakers with supply reduction mechanisms through coin burns.
Conversely, XRP functions differently. The XRP Ledger (XRPL) destroys transaction fees rather than redistributing them to validators, which precludes staking opportunities for a yield. However, the XRPL requires users to maintain specific XRP reserves for account functionalities, leading to a structural demand for the token that could grow alongside increased usage of the ledger.
Ultimately, the hidden connections between economic activity and coin value are not necessarily a deal breaker for investors. A comprehensive understanding of how returns are generated is crucial in navigating these complexities successfully. Recognizing the different mechanisms at play can transform how investors perceive the value of their holdings in the cryptocurrency market.
