Cryptocurrencies Without Compounding Interest Can’t Outperform Stocks?
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Cryptocurrencies Without Compounding Interest Can’t Outperform Stocks?
Bullish on crypto technology in the long term; select tokens cautiously, and overweight stocks of companies that can leverage crypto infrastructure to amplify advantages and achieve compounding growth.
Navigating Web3 tides with focused insightsBy Santiago Roel Santos
Translated by Luffy, Foresight News
I wrote this article amid a sharp crypto market downturn. Bitcoin hit the $60,000 mark; SOL fell back to levels last seen during the FTX bankruptcy asset liquidation; and Ethereum dropped to $1,800. I won’t dwell on the perennial bearish narratives.
Instead, this article tackles a more fundamental question: Why can’t tokens generate compounding growth?
For months, I’ve maintained a consistent view: fundamentally, crypto assets are severely overvalued; Metcalfe’s Law fails to justify current valuations; and the growing disconnect between real-world adoption and asset prices may persist for years.
Consider this scenario: “Dear liquidity providers, stablecoin trading volume has surged 100-fold—but the returns we’ve delivered to you amount to just 1.3x. Thank you for your trust and patience.”
What is the strongest rebuttal to all these objections? “You’re far too pessimistic—you simply don’t understand token value. This is an entirely new paradigm.”
In fact, I understand token value perfectly—and that understanding is precisely where the problem lies.
The Compounding Engine
Berkshire Hathaway’s market capitalization stands at roughly $1.1 trillion—not because Warren Buffett times the market well, but because the company possesses a compounding growth engine.
Each year, Berkshire reinvests its earnings into new businesses, expands profit margins, or acquires competitors—thereby increasing intrinsic value per share, which in turn lifts the stock price. This outcome is inevitable, because the underlying economic engine grows continuously.
That’s the core value of stocks: they represent ownership in a profit-reinvestment engine. After earning profits, management allocates capital, pursues growth, cuts costs, and repurchases shares. Every sound decision becomes the foundation for the next round of growth—creating compounding.
$1 compounded annually at 15% for 20 years becomes $16.37; $1 held at 0% interest for 20 years remains $1.
Stocks convert $1 of earnings into $16 of value; tokens convert $1 of fees into $1 of fees—with zero appreciation.
Show Me Your Growth Engine
Consider what happens when a private equity firm acquires a business generating $5 million in annual free cash flow:
Year 1: $5 million in free cash flow is generated. Management reinvests it—in R&D, building a stablecoin custody channel, and paying down debt. These are three critical capital allocation decisions.
Year 2: Each decision yields returns, lifting free cash flow to $5.75 million.
Year 3: Earlier gains compound further, supporting new initiatives and pushing free cash flow to $6.6 million.
This is a business compounding at 15%. The rise from $5 million to $6.6 million isn’t driven by market euphoria—it’s powered by successive, mutually reinforcing capital allocation decisions. Sustained over 20 years, $5 million becomes $82 million.
Now consider an encrypted protocol generating $5 million in annual fee revenue:
Year 1: It earns $5 million in fees—distributed entirely to stakers, draining capital from the system.
Year 2: It might earn another $5 million—if users return—and again distributes everything, draining capital once more.
Year 3: Revenue depends entirely on how many users remain active in this “casino.”
There is no compounding, because Year 1 involves zero reinvestment—and thus no flywheel to drive Year 3 growth. Subsidy programs alone are insufficient.
Token Design Is Intentional
This isn’t accidental—it’s a deliberate legal strategy.
From 2017–2019, the U.S. Securities and Exchange Commission (SEC) aggressively scrutinized any asset resembling a security. At the time, every lawyer advising crypto protocol teams gave the same advice: “Tokens must not look like stocks.” No cash-flow claims for holders; no governance rights over core development entities; no retained earnings. Tokens must be defined as utility assets—not investment instruments.
So the entire crypto industry designed tokens explicitly to distinguish them from stocks: no cash-flow claims (to avoid appearing like dividends); no governance rights over core development entities (to avoid resembling shareholder rights); no retained earnings (to avoid looking like corporate treasuries); and staking rewards were framed as network participation incentives—not investment returns.
The strategy worked. Most tokens successfully avoided classification as securities—but at the cost of forfeiting all potential for compounding growth.
This asset class was intentionally engineered at birth to exclude the central mechanism for long-term wealth creation: compounding.
Developers Hold Equity; You Hold a “Coupon”
Every leading crypto protocol corresponds to a for-profit core development entity—responsible for software development, front-end control, brand ownership, and enterprise partnerships. Token holders? They receive only governance voting rights and a variable claim on fee revenue.
This model is ubiquitous across the industry. Core development entities retain talent, intellectual property, brands, enterprise contracts, and strategic decision-making authority. Token holders get only a usage-linked, floating “coupon,” plus the “privilege” of voting on proposals increasingly ignored by those very entities.
That explains why Circle acquired Axelar—not the token, but the equity of the core development entity. Because equity compounds; tokens do not.
A lack of clear regulatory intent has produced this distorted industry outcome.
What Are You Actually Holding?
Set aside market narratives and price volatility. Look instead at what token holders actually receive.
Staking Ethereum yields ~3–4% returns—determined by network inflation and dynamically adjusted based on staking participation: higher staking participation lowers yields; lower participation raises them.
This is essentially a floating-rate coupon tied to protocol mechanics—not a stock, but a bond.
True, Ethereum’s price may rise from $3,000 to $10,000—but junk bonds can also double in price due to narrowing yield spreads without becoming equities.
The key question is: What mechanism drives your cash flow growth?
Stock cash flow growth: Management reinvests earnings to compound growth. Growth rate = Return on Capital × Reinvestment Rate. As a holder, you participate in an expanding economic engine.
Token cash flow: Entirely dependent on network usage × fee rate × staking participation. You receive only a coupon fluctuating with demand for blockspace—no reinvestment mechanism, no compounding engine.
Extreme price volatility leads people to believe they hold stocks—but structurally, they hold fixed-income instruments—accompanied by 60–80% annualized volatility. A worst-of-both-worlds proposition.
Most tokens deliver only 1–3% real returns after inflation dilution. No rational fixed-income investor would accept such risk-adjusted returns—yet high volatility consistently draws wave after wave of buyers. That’s the “greater fool theory” in action.
Power Law of Timing, Not Power Law of Compounding
This is why tokens cannot accumulate value or compound. Markets are gradually recognizing this—they aren’t foolish, but rather shifting toward crypto-related equities. First came digital asset treasury bills; now, more and more capital flows into companies using crypto technology to cut costs, increase revenues, and compound value.
Wealth creation in crypto follows a power law of timing: those who profit most buy early and sell at precisely the right moment. My own portfolio reflects this pattern—and “liquid venture capital” is no misnomer for crypto assets.
In equities, wealth creation follows a power law of compounding: Buffett didn’t time his Coca-Cola purchase—he bought and held for 35 years, letting compounding work.
In crypto markets, time is your enemy: holding too long erodes returns. High inflation mechanisms, low circulating supply, high fully diluted valuations, and oversupplied blockspace amid weak demand—all contribute. Highly liquid assets are among the few exceptions.
In equity markets, time is your ally: the longer you hold a compounding asset, the more mathematically compelling the returns become.
Crypto markets reward traders; equity markets reward holders. In reality, far more people build wealth through holding stocks than through trading.
I repeatedly verify these figures—because every liquidity provider asks: “Why not just buy Ethereum?”
Pull up the chart of a compounding stock—Danaher, Constellation Software, Berkshire—and compare it to Ethereum’s: compounding stocks trend steadily upward and rightward, because their underlying economic engines grow each year; Ethereum’s price surges and crashes cyclically, with cumulative returns wholly dependent on entry and exit timing.
Final returns may be comparable—but holding stocks lets you sleep soundly; holding tokens demands you become a market-predicting oracle. “Long-term holding beats timing”—everyone knows this principle, but executing it is hard. Stocks make long-term holding easier: cash flow supports the share price; dividends foster patience; buybacks compound while you hold. Crypto makes long-term holding extraordinarily difficult: fee revenue dries up; narratives shift; you have no anchor—no price floor, no stable coupon—only faith.
I’d rather be a holder than an oracle.
Investment Strategy
If tokens cannot compound—and compounding is the core driver of wealth creation—the conclusion is self-evident.
The internet created trillions of dollars in value. Where did that value ultimately flow? Not to TCP/IP, HTTP, or SMTP—the foundational protocols. They are public goods: immensely valuable, yet incapable of delivering returns to investors at the protocol layer.
Value flowed instead to Amazon, Google, Meta, Apple—companies built atop those protocols, achieving compounding growth.
Crypto is repeating this pattern.
Stablecoins are becoming the TCP/IP of money—highly practical, widely adopted—but whether the protocol itself captures commensurate value remains uncertain. USDT sits behind an equity-backed company, not just a protocol—a telling distinction.
Companies integrating stablecoin infrastructure into operations—reducing payment friction, optimizing working capital, cutting FX costs—are the true compounding entities. A CFO who shifts cross-border payments to stablecoin rails and saves $3 million annually can reinvest that $3 million into sales, product development, or debt repayment—and that $3 million will compound. Meanwhile, the protocol enabling the transaction earns only a one-time fee—zero compounding.
The “fat protocol” thesis posited that crypto protocols would capture more value than application layers. Yet seven years later, public blockchains command ~90% of total crypto market cap—but their fee share has plummeted from 60% to 12%; applications generate ~73% of fees but command less than 10% of valuation. Markets are efficient—and the data speaks volumes.
Markets still cling to “fat protocol” rhetoric—but the next chapter of crypto will be written by crypto-enabled equities: companies with users, cash flow, and management teams leveraging crypto to optimize operations and accelerate compounding. Their performance will dwarf tokens.
Robinhood, Klarna, NuBank, Stripe, Revolut, Western Union, Visa, BlackRock—their portfolios will outperform any basket of tokens.
These companies possess real price anchors: cash flow, assets, customers. Tokens have none. When token valuations are inflated to absurd multiples of future revenue, the magnitude of subsequent declines is predictable.
Be bullish on crypto technology long-term; selective with tokens; and overweight equities of companies that leverage crypto infrastructure to amplify advantages and compound value.
An Uncomfortable Reality
All attempts to solve the token compounding problem inadvertently reinforce my argument.
Decentralized autonomous organizations (DAOs) attempting real capital allocation—like MakerDAO buying Treasuries, launching sub-DAOs, or appointing domain-specific teams—are slowly converging on corporate governance models. The more a protocol strives for compounding, the more it must resemble a corporation.
Digital asset Treasuries and tokenized equity wrappers don’t resolve this either. They merely create a second claim on the same cash flow—competing with the underlying token. Such tools don’t make protocols better at compounding; they merely redistribute returns from non-holders to holders.
Token burns are not share buybacks. Ethereum’s burn mechanism operates like a thermostat set to a fixed temperature—unchanging. Apple’s buybacks reflect management’s flexible, market-aware decisions. Intelligent capital allocation—adjusting strategy based on conditions—is the heart of compounding. Rigid rules cannot produce compounding; adaptive decisions can.
And regulation? That’s arguably the most intriguing part. Tokens cannot compound today because protocols cannot operate as corporations: they cannot incorporate, retain earnings, or make legally binding promises to token holders. The GENIUS Act demonstrates that Congress can integrate tokens into the financial system without stifling innovation. Once we have a framework allowing protocols to deploy corporate capital allocation tools, it will be crypto’s single greatest catalyst—far surpassing the impact of spot Bitcoin ETFs.
Until then, smart capital will keep flowing to equities—and the compounding gap between tokens and equities will widen every year.
This Isn’t Bearish on Blockchain
Let me be clear: blockchain is an economic system with immense potential—destined to become foundational infrastructure for digital payments and agent-based commerce. My firm, Inversion, is building a blockchain precisely because we believe this deeply.
The issue isn’t the technology itself—it’s the token economic model. Today’s blockchain networks transfer value, rather than accumulating and reinvesting it to compound. But this will change: regulation will mature; governance will evolve; eventually, some protocol will discover how to retain and reinvest value like great corporations do. When that day arrives, tokens—beyond name alone—will effectively become equities, and the compounding engine will ignite.
I’m not bearish on that future—I simply hold my own view on its timing.
One day, blockchain networks will compound value. Until then, I’ll invest in companies using crypto to compound faster.
I may misjudge timing—crypto is an adaptive system, and that adaptability is among its most valuable traits. But I needn’t be perfectly precise—only directionally correct: compounding assets will outperform others over the long term.
That’s the magic of compounding. As Charlie Munger put it: “It’s astonishing how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
Crypto slashes infrastructure costs—and wealth will flow to those who use those low-cost foundations to compound value.
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