THORChain: The Party May Be Just Getting Started
RUNE is the native asset of THORChain. It has rallied by 600% since late-July. Can we possibly justify this rip? Turns out probably yes.
The one thing about crypto that is equal parts frustrating and exhilarating is that there isn’t a great way to accurately value anything. There are certain metrics that we can try to look at to gauge when something is overvalued or undervalued but there is no real standard. What compounds that difficulty is that the metrics we may consider for valuation signals often differ between networks/tokens.
For instance, we may look at something like Market Cap to Total Value Locked (MC/TVL) on Ethereum but that wouldn’t make sense for valuing Bitcoin because Bitcoin isn’t a smart contract chain with a robust DeFi footprint. So with that out of the way, how does one value what we’re currently seeing in this crypto altcoin market? This is what I wrote about the ridiculous rip in THORChain’s native asset $RUNE-USD just a week ago:
Even after a 300% run since my July post, this remains one of my favorite ideas and I have not sold. This is a long hauler for me.
You can read my thoughts on Bitcoin and three additional alts in the link above if you’re curious. Now to the elephant in the room; in the week since that post, RUNE has continued its surge and is now up an absolutely face-ripping 600% since my late-July THORChain article right here on Heretic Speculator.
RUNE’s chart is absolutely friggin’ bonkers. Overbought? Without question. This is crypto though. These things can move wildly high, wildly quickly. Of course, I am of the opinion that when we see things like this, it makes sense to lock in some profit. To this day, my best percentage gainer ever when playing the crypto coins was buying Decentraland $MANA-USD at about 8 cents and then selling it for close to $3.
Why did I sell that coin? Because the fundamental story for the metaverse-linked MANA token simply didn’t justify the move. It was rallying almost entirely due to Facebook changing its corporate name to Meta Platforms META 0.00%↑ to signal the company’s transition to prioritizing the metaverse.
Take the win there. Easy call at the time and it’s proven to be the right decision 2 years later as MANA now trades for around 45 cents again. How about THORChain right now though? Is RUNE ripping entirely on some newsy headline that is loosely related to the asset? From what I can gather, it is not. There is a fundamental story happening with THORChain as a cross-chain swaps protocol that I think is incredibly compelling:
RUNE’s price is moving in line with the TVL growth of the network. I know this may be Greek for many of you. But if your eyes haven’t glazed over yet, TVL (or Total Value Locked) is a way of measuring how much decentralized financial activity (DeFi) is happening on a particular network. THORChain’s DeFi activity is growing, which is an indication that the network is exhibiting strength in demand. Because THORChain is essentially just a decentralized liquidity pool for various other cryptocurrencies, the more the value of that pool increases, the more likely we are to see RUNE increase as well.
Thus, given the token economic structure for RUNE, this THORChain TVL growth is very positive for RUNE and it isn’t surprising seeing the coin’s price increase. Of course, just because RUNE’s move may be driven largely by fundamentals, that doesn’t mean RUNE can’t still be overvalued. If we look at the previously mentioned MC/TVL ratio, THORChain is sort of in the middle of the pack versus leading chains. Here’s the current MC/TVL levels from DeFiLlama:
Ethereum - 9.4
Binance Smart Chain - 12.6
Polygon - 9.7
Avalanche - 12.1
Solana - 44.4
Cronos - 7.1
Cardano - 52.3
Thorchain - 11.1
At slightly above 11.1, THORChain is a bit pricier than Ethereum or Polygon but far cheaper than the 44 MC/TVL ratio we observe on Solana or the 52 from Cardano. Like I mentioned above though, there are multiple ways to value these blockchain network assets and these MC/TVL ratios may not be the best way to do that for THORChain. But based purely off that metric, I still don’t think we can say RUNE is egregiously overvalued. What else can we look at?
Turns out there is metric specific to RUNE that is actually very handy at a time like this…
There’s an interesting detail that I left out from a previous paragraph that is important to understand for RUNE specifically. The Total Value Locked can increase two different ways:
More coins can come into the THORChain ecosystem
The coins already in the THORChain ecosystem can increase in value
We’re seeing both happen currently but that won’t continue forever. THORChain has compatibility with nine different blockchain networks, but the two biggest pools by far are unsurprisingly Bitcoin and Ethereum and we’ve seen the value of those pools surge from a combined $104 million to $246 million in just 6 weeks:
Something else to consider though is what THORChain actually does. It’s a cross-chain swap protocol and the liquidity providers get paid the fees from those cross-chain swaps. We clearly see the increase in demand for the protocol through the swaps data below:
This is important: when demand for the protocol goes up, fees from those swaps increase and if the growth in the pooled assets doesn’t increase as quickly as the demand for the liquidity increases, the yields on the network spike. This is exactly what we’re seeing play out right now:
The swap count is going up faster than the liquidity. So for THORChain, we’re seeing liquidity move up, protocol usage spiking, and the assets that are backing this protocol keep going up in price as well. It’s quite the fundamental setup. But it still doesn’t address the valuation question. As I teased above, there is a way to look at this that is unique to THORChain.
THORChain’s developers have created what they call the “deterministic value” of RUNE. For simplicity’s sake, we can think of deterministic value as the “fair value” of RUNE. You can read this post if you want more details on how the developers calculate deterministic value. But the main takeaway is that THORChain’s developers see RUNE’s fair value to be 3x the value of the non-RUNE assets in the liquidity pool. So if THORChain’s non-RUNE liquidity pool is $300 million, then the total supply of RUNE tokens should be worth $900 million.
So when BTC, AVAX, and ETH all rip at the same time, RUNE’s “fair value” will rip as well so long as those coins aren’t coming out of THORChain liquidity pools. Now here’s where it gets interesting, RUNE’s deterministic value is $1.64. Yet RUNE is well over $6. Overvalued? I can’t get there yet and here’s why:
RUNE has essentially always traded at a premium to its deterministic value. The question is what deterministic multiple is too high? Naturally, I’m not going to give an answer to that because I have no idea. We’ve seen that multiple surge to over 40 during the October 2021 price peak. It was generally in the 4-5 range in the months preceding the LUNA collapse. The average this year has been 3.12. And the multiple is currently 3.73.
So we’re absolutely ahead of the YTD average. But we’re nowhere near peaks from the previous cycle price tops. To be clear, we certainly don’t need to revisit those multiple peaks, but I’m not personally selling RUNE until I see this multiple get to a level that I believe is out of hand. And we’re just not there yet. I’m letting it ride, guys.
Of course, you should do what you believe is right for your own portfolio if you’re also holding RUNE. I’m certainly not going to tell you what to do. But this is how I’m seeing this market behavior at the moment. Hope you find the insights beneficial.
Disclaimer: I’m not an investment advisor. Crypto is risky AF.