Author: Santiago Roel Santos
Compiled by: Luffy, Foresight News
Original title: Cryptocurrencies without compound interest can't outperform stocks ?
As I write this, the crypto market is experiencing a crash. Bitcoin has hit the $60,000 mark, SOL has fallen back to its price level at the time of FTX's bankruptcy liquidation, and Ethereum has also dropped to $1,800. I won't go into the details of those long-term bearish arguments.
This article aims to explore a more fundamental question: why tokens cannot achieve compound growth.
For the past few months, I have maintained the view that, from a fundamental perspective, crypto assets are severely overvalued, Metcalfe's Law cannot support the current valuation, and the divergence between industry applications and asset prices may continue for several years.
Imagine this scenario: "Dear liquidity providers, stablecoin trading volume has increased 100-fold, but the returns we've generated for you are only 1.3 times. Thank you for your trust and patience."
What is the strongest objection among all these? "You're too pessimistic and don't understand the intrinsic value of tokens at all; this is a completely new paradigm."
I have an excellent understanding of the intrinsic value of tokens, and that is precisely the crux of the problem.
Compound interest engine
Berkshire Hathaway's market capitalization is now approximately $1.1 trillion, not because of Buffett's precise market timing, but because the company has the ability to grow through compound interest.
Every year, Berkshire Hathaway reinvests its profits into new businesses, expands profit margins, and acquires competitors, thereby increasing the intrinsic value per share and driving up the stock price. This is an inevitable result, as the economic engine behind it continues to grow.
This is precisely the core value of stocks. It represents ownership of a profit-reinvesting engine. After management earns profits, it allocates capital, plans for growth, cuts costs, and buys back shares. Every correct decision becomes the cornerstone of the next growth, creating compound interest.
$1, growing at a 15% compound interest rate for 20 years, will become $16.37; $1, deposited at a 0% interest rate for 20 years, will still only be $1.
Stocks can turn a $1 profit into a $16 value; tokens, on the other hand, can only turn a $1 transaction fee into a $1 transaction fee, with no added value.
Please showcase your growth engine.
Let's consider what happens when a private equity fund acquires a company with $5 million in annual free cash flow:
Year 1: Achieve $5 million in free cash flow, which management will reinvest in R&D, establish a stablecoin custody channel, and repay debt. These are three key capital allocation decisions.
Year Two: Every decision yielded returns, and free cash flow increased to $5.75 million.
Year 3: The previous earnings continued to compound, supporting the implementation of a new round of decisions, and free cash flow reached $6.6 million.
This is a business with a 15% compound annual growth rate. The $5 million grew to $6.6 million not because of bullish market sentiment, but because every capital allocation decision made by the individual was mutually reinforcing and progressively amplified. If this is maintained for 20 years, the $5 million will eventually become $82 million.
Let's look at how a crypto protocol with annual transaction fee revenue of $5 million might develop:
Year 1: Earn $5 million in transaction fees, all of which will be distributed to token stakers, and the funds will completely flow out of the system.
The second year: It might be possible to earn another $5 million in fees, provided that users are willing to return, and then all of it is distributed again, with funds flowing out again.
Year 3: How much profit you make depends entirely on how many users participate in this "casino".
There is no compound interest to speak of, because there is no reinvestment in the first year, and naturally there will be no growth flywheel in the third year. Subsidy programs alone are far from sufficient.
This is how tokens are designed.
This is not accidental, but a strategic design at the legal level.
Looking back at 2017-2019, the U.S. Securities and Exchange Commission (SEC) launched a rigorous investigation into all assets that appeared to be securities. At that time, all the lawyers advising the crypto protocol teams gave the same advice: never let tokens look like stocks. Token holders should not be granted cash flow claims, tokens should not have governance rights over core R&D entities, and they should not retain profits. They should be defined as utility assets, not investment products.
Therefore, the entire crypto industry deliberately distances its tokens from stocks when designing them. They lack cash flow claims to avoid resembling dividends; they lack core R&D entity governance rights to avoid resembling shareholder rights; they lack retained earnings to avoid resembling corporate treasury; and staking rewards are defined as network participation returns, not investment returns.
This strategy worked. The vast majority of tokens successfully avoided being classified as securities, but at the same time, they lost all possibility of achieving compound growth.
This asset class was deliberately designed from its inception to be unable to achieve the core action for creating long-term wealth—compound interest.
The developers hold equity; you only receive "coupons."
Behind every leading cryptographic protocol lies a for-profit core development entity. These entities are responsible for developing the software, controlling the front-end interface, owning the brand, and connecting with corporate partners. And what about token holders? They only gain governance voting rights and a floating claim on transaction fees.
This model is ubiquitous in the industry. Core R&D entities control talent, intellectual property, brand, corporate cooperation contracts, and strategic choices; token holders only receive floating "coupons" linked to network usage, and the "privilege" of voting on proposals that are increasingly being ignored by R&D entities.
This explains why, when Circle acquired protocols like Axelar, the acquiring party purchased equity in the core R&D entity, rather than tokens. Equity can compound, while tokens cannot.
The lack of clear regulatory intent has led to this distorted industry outcome.
What exactly do you hold?
Put aside all market narratives and ignore price fluctuations, and look at what token holders can really gain.
By staking Ethereum, you can earn approximately 3%-4% in returns. This return is determined by the network's inflation mechanism and is dynamically adjusted based on the staking ratio: the more stakers there are, the lower the return; the fewer stakers there are, the higher the return.
This is essentially a floating-rate coupon linked to a pre-existing agreement mechanism; it is not a stock, but a bond.
While Ethereum's price may rise from $3,000 to $10,000, the price of junk bonds may also double due to narrowing spreads, but that doesn't turn it into a stock.
The key question is: what mechanism drives your cash flow growth?
Stock cash flow growth: Management reinvests profits, achieving compound growth. The growth rate = return on capital × reinvestment rate. As a shareholder, you participate in an ever-expanding economic engine.
The token's cash flow depends entirely on network usage × transaction fee rate × staking participation. All you get are coupons that fluctuate with the demand for block space. There is no reinvestment mechanism or engine for compound growth in the entire system.
The sharp price fluctuations mislead people into thinking they are holding stocks, but from an economic perspective, they are actually holding fixed-income products with an annualized volatility of 60%-80%. This is a lose-lose situation.
The vast majority of tokens, after adjusting for inflation, have a real yield of only 1%-3%. No fixed-income investor in the world would accept such a risk-reward ratio, but the high volatility of these assets always attracts wave after wave of buyers, which is a true reflection of the "greater fool theory".
The power law of timing, not the power law of compound interest.
This is why tokens fail to achieve value accumulation and compound growth. The market is gradually realizing this, and it's not being foolish; it's starting to turn to crypto-related stocks. First, digital asset bonds, and then increasing amounts of capital began flowing into companies that leverage crypto technology to reduce costs, increase revenue, and achieve compound growth.
Wealth creation in the crypto space follows a power law of timing: those who make a fortune buy early and sell at the right time. My own portfolio follows this rule, and there's a reason why crypto assets are called "liquidity venture capital."
Wealth creation in the stock market follows the power law of compound interest: Buffett did not buy Coca-Cola by timing the market, but rather bought it and held it for 35 years, allowing compound interest to take effect.
In the crypto market, time is your enemy: hold too long, and your gains will evaporate. High inflation, low circulation, and highly diluted valuations, coupled with insufficient demand and an oversupply of block space, are key underlying factors. Highly liquid assets are one of the few exceptions.
In the stock market, time is your ally: the longer you hold assets that grow with compound interest, the more substantial the returns will be from the mathematical laws.
The crypto market rewards traders, while the stock market rewards holders. In reality, far more people become wealthy by holding stocks than by trading.
I had to repeatedly check these figures because every liquidity provider would ask, "Why not just buy Ethereum?"
Let's look at the price charts of stocks with compound growth potential – Danaher, Constellation Software, and Berkshire Hathaway – and compare them to Ethereum's performance: the curves of stocks with compound growth potential steadily climb upwards and to the right because the economic engines behind them grow stronger every year; while Ethereum's price fluctuates wildly, and the final cumulative return depends entirely on your entry and exit timing.
The final returns of both might be comparable, but holding stocks allows you to sleep soundly at night, while holding tokens requires you to be a market strategist. "Long-term holding is better than market timing"—everyone understands this principle, but the difficulty lies in truly sticking to it. Stocks make long-term holding easier: cash flow supports the stock price, dividends give you the patience to wait, and buybacks continue to compound interest during your holding period. The crypto market, however, makes long-term holding incredibly difficult: transaction fee income dries up, market narratives shift constantly, you have no support, no price floor, no stable dividends, only unwavering faith.
I would rather be a holder than a prophet.
Investment Strategy
If tokens cannot compound interest, and compound interest is the core way to create wealth, then the conclusion is self-evident.
The internet has created trillions of dollars in value, but where does that value ultimately go? Not to protocols like TCP/IP, HTTP, and SMTP. These are public goods, immensely valuable, yet they don't provide any returns to investors at the protocol level.
The value ultimately flowed to companies like Amazon, Google, Metaverse, and Apple. They built their businesses on the foundation of the agreement and achieved compound growth.
The crypto industry is repeating the same mistakes.
Stablecoins are gradually becoming the TCP/IP of the monetary world, with extremely high practicality and adoption rate. However, whether the protocol itself can capture the value commensurate with its value remains to be seen. USDT is backed by an equity-owned company, rather than a simple protocol, which contains important implications.
Companies that integrate stablecoin infrastructure into their operations, reduce payment friction, optimize working capital, and cut foreign exchange costs are the true drivers of compound growth. A CFO who saves $3 million annually by switching cross-border payments to stablecoins can reinvest that $3 million in sales, product development, or debt repayment, and that $3 million will continue to grow exponentially. The agreement that facilitated this transaction, however, only earned a transaction fee, offering no compound interest whatsoever.
The "fat protocol" theory posits that crypto protocols capture more value than application layers. However, seven years later, public blockchains account for approximately 90% of the total market capitalization of the crypto market, yet their share of transaction fees has plummeted from 60% to 12%; application layers contribute about 73% of transaction fees, but their valuation share is less than 10%. The market is always efficient, and this data speaks for itself.
The market is still fixated on the "fat protocol" argument, but the next chapter of the crypto industry will be written by crypto-enabled stocks: those companies that have users, generate cash flow, and whose management can use crypto technology to optimize business and achieve higher compound growth rates will outperform tokens.
The portfolios of companies like Robinhood, Klarna, NuBank, Stripe, Revolut, Western Union, Visa, and Blackrock will definitely outperform a basket of tokens.
These businesses have a real price floor: cash flow, assets, and customers, while tokens do not. When token valuations are inflated to outrageous multiples based on future revenue, the extent of their subsequent decline is predictable.
Be bullish on crypto technology in the long term, but choose tokens carefully and invest heavily in stocks of companies that can leverage crypto infrastructure to amplify their advantages and achieve compound growth.
The frustrating reality
All attempts to solve the problem of compound interest in tokens have inadvertently confirmed my point.
Decentralized autonomous organizations (DAOs) that attempt to allocate actual capital, such as MakerDAO's purchase of government bonds, establishment of sub-DAOs, and appointment of specialized teams, are gradually reshaping corporate governance models. The more an protocol aims to achieve compound growth, the more it has to resemble a corporate structure.
Digital asset bonds and tokenized stock packaging tools also fail to address this issue. They merely create a second claim on the same cash flow, competing with the underlying token. These tools don't make the protocol better at compounding growth; they simply redistribute the profits to token holders who never actually held the tool.
Token burning is not the same as stock buybacks. Ethereum's burning mechanism is like a thermostat at a fixed temperature, unchanging; while Apple's stock buybacks are flexible decisions made by management based on market conditions. Intelligent capital allocation and the ability to adjust strategies according to market conditions are the core of compound interest. Rigid rules cannot generate compound interest; flexible decision-making is essential.
And what about regulation? This is actually the most worthwhile part to discuss. The root cause of the current inability of tokens to compound interest lies in the fact that protocols cannot operate as businesses: they cannot register as companies, retain profits, or make legally binding commitments to token holders. The GENIUS Act demonstrates that the US Congress can integrate tokens into the financial system without stifling their development. When we have a framework that allows protocols to operate using corporate capital allocation tools, it will be the biggest catalyst in the history of the crypto industry, with an impact far exceeding that of Bitcoin spot ETFs.
Before that, smart capital will continue to flow into stocks, and the compound interest gap between tokens and stocks will continue to widen every year.
This is not a bearish view on blockchain.
I want to make one point clear: blockchain is an economic system with immense potential, and it will inevitably become the underlying infrastructure for digital payments and smart agent commerce. My company, Inversion, is developing a blockchain precisely because we firmly believe in it.
The problem isn't with the technology itself, but with the economic model of tokens. Current blockchain networks merely transfer value, rather than accumulating and reinvesting it to achieve compound interest. But this will eventually change: regulation will improve, governance will mature, and some protocol will find a way to retain and reinvest value like successful companies. When that day comes, tokens, aside from their name, will essentially become stocks, and the engine of compound interest will truly begin.
I am not pessimistic about that future, but I have my own judgment on when it will arrive.
One day, blockchain networks will be able to achieve compound growth in value, and until then, I will choose to buy into companies that use cryptography to achieve faster compound growth.
I might make mistakes in timing the market; the crypto industry is an adaptive system, which is one of its most valuable qualities. But I don't need to be absolutely precise; I just need to be right about the big picture: the long-term performance of assets with compound growth will ultimately outperform other assets.
And that is precisely the power of compound interest. As Munger said, "It's amazing that people like us gain such a huge long-term advantage simply by trying not to be stupid, rather than by striving to be exceptionally clever."
Encryption technology significantly reduces the cost of infrastructure, and wealth will ultimately flow to those who utilize this low-cost infrastructure to achieve compound growth.
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