(1/11) Hyperliquid Valuation Framework: Update 🧵

It has been about 6 months since I initially posted my valuation framework for $HYPE. A lot has changed since then, but also much has remained true

I am as bullish on $HYPE as I have ever been

Let's walk through some numbers👇

https://twitter.com/Keisan_Crypto/status/1881510915813564451

(2/11) Revenue Underwriting --

The hardest part of the valuing $HYPE is underwriting an annual revenue (cash flow) number that you can be comfortable with. Hyperliquid is a startup, growing extremely fast. So you would think to include growth in your number. But it is also in a cyclical industry, where bear market volumes can be ~50% lower

Personally, my view has been that Hyperliquid's rapid user growth, inflows, and other catalysts will outpace any reduction in volume from a bear market. We saw this come true over the last 6 months on the growth front, where avg. daily revenue figures have risen substantially. Regarding bear market volumes, I do not think any near-term bear markets for $BTC will be as bad as they have been in the past due to ETF flows and the current crypto-friendly state of US politics

Of course, still a factor to consider and revenues could very well take a ~50% hit for a couple of years, so we will be conservative and use recent average bull market volumes for our go-forward base case ($3m) i.e. no growth

Who will be the next buyers of $HYPE?
1. Retail / normies
2. Liquid funds
3. OG Crypto whales, funds, and companies
4. Trad-fi HNW's and firms
5. Assistance fund

"But liquid funds already bought a lot of $HYPE!" Elaboration below on each of these 1. Retail / normies
- Currently, there are only 111,358 wallets holding $HYPE. This is extremely small when compared to any major L1 token, or even memecoin
- Most of my friends and many ex-colleagues of mine have bought $BTC, $ETH, and $SOL at some point. None of them have bought $HYPE
- $HYPE does no marketing, the EVM ecosystem is still young, and the thesis / "hype" has not reached the public masses yet
- Most of the buyers who own $SOL are younger and work in finance or tech. These are the kinds of people that will very quickly wrap their heads around how $HYPE generates >$1b of cash flow per year for buybacks, while other L1s do a small fraction of this, particularly when compared to their market caps
- US perps legalization, new front-ends being spun up for $HYPE, and just broader adoption (literally time, it's only been ~6months since TGE), should result in broad adoption

(1/7) Altcoins are pumping -- are these fundamental driven pumps, or are alts simply following $BTC with squeezing-PA after months of down-only?

For 99% of coins, nothing has changed, but for Hyperliquid, the fundamentals continue to improve

Some data below 👇 (2/7) User Growth

After bottoming out at about ~500 new users per day, growth has accelerated this past week and we are back to ~1,800 new users per day

New users are extremely important in driving adoption, distribution, and stickier trading volume. Increasing # of users is also a network effect which continues to push growth forward

(1/6) $HYPE Is Programmed to Go Up 🧵

For the same reason that stocks continuously rise over any meaningful time horizon -- earnings!

When I say stocks, I mean profitable companies that have some sort of established business moat, as there are obviously exceptions (2/6) There are 3 main ways stocks use their earnings: dividends, buybacks, and re-investing in the company (R&D/CapEx)
(1) Dividends -- don't help stock price appreciation directly, but they do contribute to total return
(2) Buybacks -- company buys back shares and burns them, resulting in buy pressure + taking supply off the market
(3) R&D/CapEx -- helps grow earnings, which are eventually used for (2) or (3) once the company is mature, or once the ROI is no longer there to re-invest

(1/6) Hyperliquid Valuation Framework 🧵

Ok I put together some simple multiples / comps on $HYPE $SOL $ETH $COIN $SPY

Let's dive in a bit on my methodology, what numbers to focus on, how $HYPE comps to others, and other factors to consider

This is a long read so grab a snack (2/6) Methodology

A multiple has two components: price (valuation) and earnings (fees)

At the top I break out fees into different time frames

Then, I take a look at token count in 2 different ways: circulating and adjusted fully diluted

Circulating is obvious, that is what is on the market at present, effectively the airdrop amount less HIP burns and assistance fund buybacks

Fully diluted is where I think people get confused on. and assume this is the correct valuation figure. $HYPE has a fixed fully diluted supply (it is not inflationary) and 38.888% of supply has been set aside for future emissions and community rewards. Further, 3% is for community grants. 1.2% has been bought back by the assistance fund, and 0.1% has been burned from HIP trading fees.

I removed buybacks and burns. And I have also removed future emissions / community grants. My assumption is that a significant amount of this 38.888% is reserved for staking rewards over a long period of time. And any community grants are +EV and a positive way to spend funds to bolster the community or ecosystem.

The remaining non-circulating supply is reserved for the team / future team (23.8%), and the foundation (6.0%). I am including these full amounts in my adjusted supply figure; however, I think that is conservative as there is no way the team is selling / distributing this amount of tokens anytime soon. These will be distributed over a very long period of time and thus should be treated in a highly discounted manner. Reminder that this team does not need a liquidity event

Personally, I think the correct supply number is somewhere in between circulating and adjusted fully diluted

(1/10) Hyperliquid Thread 🧵

One thing I haven’t seen discussed on my timeline yet is the monopolistic nature of exchanges, and what that means for $HYPE.

Quite simply: more users = more liquidity. More liquidity = better product. Better product = more users (2/10) More users also means more mindshare and free marketing, which turns into even more users.

This is an endless flywheel and we have seen it before with the top CEX’s.