The best risk-adjusted returns on investments are often the product of a combination of both.
Written by: Jon Charbonneau
Translated by: Chopper, Foresight News
The latest popular narrative in the crypto space revolves around "yield" and "DAT (crypto treasury)," highlighting two distinctly different investment approaches:
Fundamental investing: Buying an asset because you expect to achieve quantifiable economic returns (such as cash flow) under a set of clear assumptions. These returns create intrinsic value for the asset.
Speculative investing: Buying an asset solely because you believe someone will buy it from you at a higher price in the future (even if the market price is already above intrinsic value).
In other words, are you primarily betting on fundamentals or on capital flow? This short article will provide a simple framework to help you understand the value of both.
Fundamentals vs. Capital Flow
The Core is the Future
Compared to purely betting on capital flow, fundamental investing is generally considered to be lower risk and less volatile:
Lower downside risk: Fundamental investors often manage to avoid significant losses. Because the asset has intrinsic value, you have some downside protection. This may be reflected in the asset's market price or its ability to generate cash flow for you.
Smaller upside potential: Fundamental investors often miss out on the biggest winners. You may completely miss out on purely speculative investments (like a meme coin that rises 1000 times) and often sell positions too early (for example, exiting before reaching peak valuation).
While the above situations are often marginal returns, both investment approaches ultimately rely on predictions about the future — and your predictions can be right or wrong. You are betting on future fundamentals (for instance, you believe protocol X will generate Y dollars in revenue next year) or future capital flow (for example, you believe token X will see Y dollars in net inflow next year).
Thus, the core of both approaches lies in how confident you are in these predictions. In fact, fundamental investing often allows for more confident predictions. For example:
Fundamentals: You can see companies like Tether or protocols like Hyperliquid consistently generating high revenue. With an understanding of the core business, you can reasonably predict future cash flows. A quality project won't lose all its customers or revenue overnight and ideally will grow.
Capital flow: Betting on how long the DAT frenzy can last, I don't see many advantages (except for insider trading). It could cool off tomorrow or last a year; I really don't know.
Growth vs. Value
Fundamentals do not equate to being dull or low-return. Purely betting on fundamentals can also lead to explosive winners. In this case, you typically focus more on betting on improvements in future fundamentals (i.e., growth investing) rather than maintaining current fundamentals (i.e., value investing). Betting on high growth usually means higher risk, so you expect to receive higher returns as compensation.
This is also a gradient process; growth and value investing are not mutually exclusive. Given that the crypto space is primarily early-stage investing, most fundamental investments here lean more towards growth rather than value.
Assets that are currently unprofitable but have high growth potential may be more suitable for fundamental investing than those that are currently profitable but have low growth potential (or even declining profitability). Would you rather hold OpenAI or Ethereum? This confuses many crypto participants, as high P/E investments can also be fundamental investments. The key distinction is:
Fundamental investing: You believe the protocol has the potential for extremely high future growth, which can translate into high future returns.
Speculative investing: You do not expect growth or returns; you simply hope someone will buy it from you at a higher valuation.
Fundamental-Driven vs. DAT-Driven
Based on all of the above, I still prefer to hold fundamentally sound underlying assets. This includes mature projects with strong current fundamentals that I expect to continue, as well as early projects with high future growth potential.
Conversely, we have not participated in any DAT to date (though I am open to its value proposition in specific cases). I also take a cautious stance towards underlying assets whose investment logic relies almost entirely on DAT capital flow rather than strong fundamentals. Once the DAT frenzy subsides, the price support for these assets may collapse rapidly. I believe this is primarily driven by speculative trends based on capital flow, and I see little room for capturing excess returns. To invest in advantageous areas, DAT can also buy fundamentally strong assets.
Reducing Dependence on Human Psychology
Buffett and Bitcoin
Confidence in predictions is often inversely related to the degree of reliance on the "unpredictable human psychology and behavior assumptions."
The core of fundamental investing is: you do not need others to agree with you. A simple test is: "Would you still hold this asset even if you could never sell it?" Warren Buffett does not need the market to agree with his views. The stocks he buys generate enough cash flow to not only recoup the investment but also provide a certain rate of return.
Bitcoin: Buffett has stated that he wouldn't spend $25 to buy all the Bitcoin in the world because it does not generate any income for holders; it only has value when sold to someone else.
Apple stock: In contrast, anyone would be willing to spend $25 to buy all Apple stock, even if they could never sell it. Because Apple can generate $25 in income in an instant.
Clearly, fundamental investors can usually sell their assets, but at least they are clear when they buy: the market value of the asset may deviate from intrinsic value for a long time, and they are willing to endure that period. In extreme cases, they might say: "If you are not willing to hold a stock for 10 years, don't even think about holding it for 10 minutes."
Fundamental investors will still consider human behavior because it affects predictions of future returns (for example, whether people will continue to pay for the protocol's products). But they do not have to take the additional, more difficult step: believing that others will agree with their logic and buy the asset. Even when an asset can clearly create value through product sales, predicting market reactions is often very difficult (i.e., the market may be irrational for a long time, underestimating fundamentally strong assets); and when an asset clearly cannot create value through product sales (like meme coins), predicting market reactions becomes even harder.
Even with capital flow investments, you can enhance predictive confidence by reducing dependence on human psychology. For example, instead of purely relying on predictions driven by narrative-induced emotions, you can predict sell-off capital flows by quantifying token issuance, investor unlocking timelines, and unrealized profits held by investors.
Additionally, identifying certain long-term behavioral patterns can also reduce uncertainty. For instance, humans have used gold as a store of value for thousands of years. Theoretically, it is possible that tomorrow everyone suddenly believes gold is only worth its actual use value, but that is nearly impossible. If you hold gold, this is usually not the biggest risk.
Bitcoin, Ethereum, and Meme Coins
Similarly, Bitcoin's rise over the past 16 years has made it increasingly clear when and why people buy Bitcoin. This helps us reduce our investment's dependence on human psychology (for example, do people buy Bitcoin when global liquidity increases?) and instead rely more on the underlying investment logic we actually want to bet on (for example, will global liquidity continue to increase?). Therefore, even though Bitcoin is largely a capital flow-driven investment, it may still be the most confidently held investment by most crypto investors.
This also helps us understand why the investment logic of Ethereum is inherently more complex. It requires making more uncertain assumptions about human behavior and market psychology. Most investors generally believe that, based solely on fundamentals, the cash flow generated by Ethereum is insufficient to support its valuation. Its continued success is more likely to stem from becoming a lasting store of value (more like Bitcoin), which requires making some or all of the following predictions:
Multiple crypto stores of value: You might predict that people will start assigning relatively higher value storage premiums to assets beyond Bitcoin (like Ethereum), making Bitcoin no longer special. But we have not seen this happen yet, and historically, people tend to favor one asset for such functions (for example, gold is primarily priced based on monetary value, while silver is primarily priced based on use value).
Replacing Bitcoin as a store of value: You might predict that Bitcoin will ultimately fail (for example, due to security budget issues or quantum computing), and Ethereum will naturally become the successor to "digital gold." But it is very likely that once confidence collapses, all crypto assets will decline.
Value storage tied to specific utility: The logic of Ethereum is often linked to its additional utility relative to Bitcoin, which can be measured by various indicators, such as "collateralized value," EVM activity, "Layer 2" activity, or DeFi usage. However, unlike the cash flow generated by Ethereum (i.e., revenue), these indicators do not provide intrinsic value — they are merely the story of value storage. Therefore, Ethereum is far from a pure expression of the underlying logic that "network-level indicators will grow"; while you are betting on these trends, you are also betting on how the market will price Ethereum as a result.
It is important to clarify that making these bets is not inherently wrong. Buying Bitcoin in 2009 also required making similar uncertain assumptions about human behavior, and the outcome was quite good. Investors just need to be clear about what they are actually betting on and how their views differ from market consensus. To achieve sustainable excess returns, one must understand where the market is wrong.
On the extreme end, there are purely meme coins. They are destined to lack a lasting monetary premium; you are entirely betting on human psychology and the market's short-term reaction to new narratives. Is this meme stimulating enough? Is it interesting enough? Or is it too boring? It’s like a game of "chicken."
Conclusion
The two investment approaches we discussed are not inherently right or wrong. For investors, the key is whether you can systematically make confident predictions using them. More confident predictions can reduce volatility and downside risk; predictions that are more confident than market consensus can help you achieve excess returns.
In most cases, especially for long-term investments, I find that I can better leverage strategies that rely more on fundamentals to replicate alpha. But as mentioned earlier, this is not absolute. Investments like Bitcoin may lie between "fundamental investing" and "speculative investing," depending on how you quantify monetary utility. You may have high confidence in betting on Bitcoin (primarily based on capital flow) while lacking confidence in betting on a DeFi project (primarily based on fundamentals).
Ultimately, these two approaches are not mutually exclusive. You can invest based on both fundamentals and capital flow. In fact, the best risk-adjusted returns on investments are often the product of a combination of both.
Historically, as a crypto investor, being primarily capital flow-oriented has been worthwhile. This makes sense: previously, tokens would inexplicably surge every four years, interest rates were zero, investors raised too much capital, and very few projects could generate enough cash flow to support high valuations. But looking ahead, as the industry matures, I believe that focusing on fundamentals may ultimately yield more excess returns.
I also hope that fundamentals become more important, as this is crucial for the long-term health of the industry. I have no objections to meme coins (most of them are just interesting gambles), but narrative trading around assets that do not create value is essentially a zero-sum game. In contrast, allocating capital to projects that can generate cash flow may be a positive-sum game. Building projects that can generate cash flow requires creating products that customers are willing to pay for; whereas issuing tokens purely for narrative purposes does not have such a requirement, as the token itself is the product.
The crypto space needs this feedback loop created by fundamental investing:
Fortunately, the overall trend in the crypto space is:
Cryptocurrency investments are becoming increasingly driven by fundamentals. We finally have more tokens that can generate substantial cash flow, the framework for token transparency is becoming widespread, and the framework for token valuation is increasingly easier to understand. As a result, the differences in token returns are also becoming more pronounced.
Traditional financial investments are becoming increasingly driven by capital flow. The world is becoming stranger and more degenerate, with meme stocks and crazy IPO first-day surges becoming more common. Understanding the next hot narrative is important.
One day, the two will converge, and we will only talk about "investing." But one thing will not change: both fundamentals and capital flow will remain important.
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