Presto Research - Crypto Fundamentals: A Failed Experiment?

Keep up with the latest in crypto market commentary as we share the insights from our institutional research partners.

In this edition, Presto Research delves into whether a fundamentals-based approach to crypto valuations raise more questions than answers.

Introduction

Crypto is always plagued by the “what’s the value?” question and therefore, as the asset has become institutionalised, it has given rise to the popularity in “fundamentals”. However, the premise that coins with strong fundamentals (as represented by market capitalisation to fees ratio) outperform appears fundamentally flawed. Bitcoin, despite ranking 45th in fee-based fundamental metrics, consistently outperformed the fundamentals-based index over the analysis period. Even with quarterly rebalancing to capture changing fundamentals, the underperformance persisted, suggesting structural issues with fundamental analysis in the crypto space. Meanwhile, Dogecoin—the epitome of a fundamentals-lacking asset—delivered a staggering 125% return over the same period, further undermining the fundamental analysis narrative. There has been a rise in the launch of liquid funds and a persistent desire for more and more liquid funds, particularly in contrast to VCs, to play the role of absorbing the never-ending flow of unlocks and token launches (i.e., absorb the bloated FDV so to speak), but environments like this make it hard to justify (or to raise money).

The Fundamentals Ranking Approach

Unlike traditional equity markets, fundamental analysis in cryptocurrencies faces inherent limitations. While equity investors can leverage a robust toolkit including P/E ratios, EV/EBITDA, discounted cash flow models, management quality assessments, competitive positioning, and governance structures, crypto assets lack many of these analytical anchors. Most tokens generate no earnings in the traditional sense, possess no tangible assets, and operate through decentralised governance rather than executive management. This analytical vacuum has led crypto investors to develop crypto-native metrics. Among these, the market capitalisation to fees ratio has emerged as one of the leading proxies for fundamental value, attempting to quantify the relationship between a protocol's valuation and its ability to generate actual revenue through usage, often referred to as “run rate fees”. While imperfect and singular compared to the multifaceted approach of equity analysis, this metric represents the crypto market's one of the more reliable attempts to identify value based on measurable economic activity rather than pure speculation, and this section of the report will focus on this fee-based metric.

Figure 0.1 ranks cryptocurrencies based on their market capitalisation to fees ratio as of 01st January 2023, a date chosen as a clean date to mark the start of this bull market. 30-day annualised fees are used and a lower ratio indicates stronger fundamentals, with $CVX, $LDO, and $GMX leading the rankings at the start of 2023

The index methodology reflects typical institutional approaches to fundamental analysis, excluding assets below $50mm market capitalisation to eliminate market noise and focusing on the most liquid and fundamentally sound projects available to institutional investors.

Performance Against Bitcoin

Figure 0.2 reveals the alarming underperformance of the fees-based index against Bitcoin. While the fundamentals index spent considerable time in negative territory, $BTC delivered substantial returns, reaching peaks of approximately 550% gain and over 400% by the end of February 2025.

This performance gap creates an acute dilemma for fund managers. Institutional mandates often demand Bitcoin alternatives with proven fundamentals that ostensibly represent "smarter" allocations than Bitcoin itself. Asset allocators, particularly traditional finance entrants, gravitate toward fundamentally sound narratives that mirror their equity selection processes. Yet the data conclusively demonstrates that such mandates would have significantly underperformed a simple Bitcoin allocation.

The Rebalancing Consideration

A natural counterargument emerges: fundamentals evolve over time, suggesting the need for periodic rebalancing. Figure 0.3 displays the results when using a quarterly rebalancing approach, which dynamically adjusts the top 10 components based on the latest market cap to fees ratios (refer to Figure 0.1 for the quarterly rebalancing components). As the results unequivocally demonstrates, even with quarterly rebalancing, the fundamental index continued to underperform Bitcoin substantially whilst maintaining a high correlation (Figure 0.4).

The peak differential between Bitcoin and the index approached over 400 percentage points since 2023 - a catastrophic relative performance gap - and has finished the period with a 350 percentage point difference. It’s impossible to say without hindsight what stage of the bull run crypto is currently in, but it’s clear that even during periods where $BTC has returned triple-digit-percent, the absolute return renders the fee-based fundamental approach unjustifiable, even from a risk-adjusted perspective when comparing the magnitude difference with $BTC.

Figure 0.5 compares the 30-day returns of the rebalanced index with $BTC’s to see if there are any obtainable insights around trends, but it seems like apart from a few brief days of sharp fundamental relative rallies, $BTC tends to simply be consistent in outperforming. Of the 761 days observed in the chart, $BTC outperformed in 500 of those days - put another way, for 65.70% of this current 2+ year bull run, $BTC has outperformed the “best” fundamental coins.

Perhaps most damning to the fee-based fundamental thesis, Dogecoin—a cryptocurrency famously lacking substantive fundamentals or meaningful utility beyond meme value and with an already bloated fully diluted valuation—delivered a remarkable 187% return during this analysis period with a peak return of 590%. Compare this to the 53% period return and 247% peak return for the index, this outperformance of a fundamentals-devoid asset over supposedly fundamentally sound protocols represents a profound challenge to conventional investment wisdom in the crypto space.

The empirical evidence presented throughout this analysis delivers a sobering verdict on the application of traditional fundamental metrics to cryptocurrency investments. While the market capitalisation to fees ratio has gained prominence as a seemingly logical framework for evaluating crypto assets, its practical utility as an investment selection tool has proven remarkably ineffective during the 2023-2025 bull market cycle. Bitcoin's consistent outperformance, and even Dogecoin's surprising returns, despite ranking poorly in fundamental metrics, thoroughly undermines the premise that strong fundamentals lead to superior performance in this asset class.

This creates a challenging paradox for the industry: fundamental theses provide an accessible framework for capital raising and help skeptical investors rationalise crypto allocations, yet the data suggests these approaches may be serving the interests of fund managers rather than investors. For institutional investors navigating this space, these findings necessitate a painful reassessment of conventional wisdom. The crypto asset class demands approaches that incorporate its unique characteristics—including narrative shifts, network effects, and liquidity patterns—rather than simply importing analytical frameworks from traditional finance. Until the industry develops more effective cryptocurrency-native evaluation metrics, investors seeking exposure to this asset class may be better served by simpler allocation strategies than those predicated on conventional fundamental analysis.

Author:

Rick Maeda, Research Analyst | X, LinkedIn

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