Cryptocurrencies without compound interest can't outperform stocks?

Author: Santiago Roel Santos

Compiled by: Luffy, Foresight News

When writing this article, the crypto market was experiencing a sharp decline. Bitcoin touched the $60,000 mark, SOL fell back to the price levels during FTX’s bankruptcy asset liquidation, and Ethereum also dropped to $1800. I won’t reiterate the long-term bearish arguments.

This article aims to explore a more fundamental question: why tokens cannot achieve compound growth.

In recent months, I have maintained a view: from a fundamental perspective, crypto assets are severely overvalued, and Metcalfe’s Law cannot justify current valuations. The disconnect between industry real-world applications and asset prices may persist for years.

Imagine this scenario: “Dear liquidity providers, stablecoin trading volume has increased by 100 times, but the returns we deliver are only 1.3 times. Thank you for your trust and patience.”

What is the strongest opposition to all these objections? “You’re too pessimistic, you don’t understand the intrinsic value of tokens; this is a whole new paradigm.”

I am precisely very clear about the intrinsic value of tokens, and this is exactly the core issue.

The Power of Compound Growth

Berkshire Hathaway’s market cap is now about $1.1 trillion, not because Buffett’s timing is perfect, but because the company has the ability to grow via compounding.

Every year, Berkshire reinvests profits into new businesses, expands profit margins, acquires competitors, thereby increasing intrinsic value per share, and the stock price follows suit. This is an inevitable outcome because the underlying economic engine is continuously strengthening.

This is the core value of stocks. It represents ownership of a profit-reinvestment engine. After management earns profits, they allocate capital, plan growth, cut costs, buy back shares—each correct decision becomes a foundation for the next growth cycle, creating compounding.

$1 growing at 15% annually for 20 years will become $16.37; $1 at 0% interest for 20 years remains $1.

Stocks can turn $1 of earnings into $16 of value; tokens, on the other hand, can only turn $1 of fees into $1 of fees, with no appreciation.

Show Your Growth Engine

Let’s consider what happens when a private equity fund acquires a company with an annual free cash flow of $5 million:

Year 1: Achieves $5 million in free cash flow; management reinvests it into R&D, building stablecoin custody channels, and debt repayment—three key capital allocation decisions.

Year 2: Each decision yields returns; free cash flow increases to $5.75 million.

Year 3: The previous gains continue to compound, supporting new decisions; free cash flow reaches $6.6 million.

This is a business growing at 15% via compounding. Going from $5 million to $6.6 million isn’t due to market hype but because each capital allocation decision empowers the next, layer by layer. Persisting for 20 years, $5 million can eventually grow to $82 million.

Now, consider a crypto protocol earning $5 million in annual fees:

Year 1: Earns $5 million in fees, distributed entirely to token stakers, funds flow out of the system.

Year 2: Might earn another $5 million, assuming users return, and again distribute all, funds flow out again.

Year 3: The total earnings depend entirely on how many users participate in this “casino.”

There’s no compound growth here because there’s no reinvestment in Year 1; naturally, there’s no growth wheel in Year 3. Relying solely on subsidy programs is far from enough.

Token Design Is Deliberate

This is not accidental but a strategic design at the legal level.

Looking back at 2017-2019, the U.S. SEC conducted strict investigations into all assets that appeared to be securities. At that time, all lawyers advising crypto protocol teams gave the same advice: tokens must not look like stocks. They cannot grant holders cash flow rights, governance rights over core R&D entities, or retained earnings. They must be defined as utility assets, not investment products.

Thus, the entire crypto industry, when designing tokens, deliberately drew a line between tokens and stocks. No cash flow rights to avoid dividend-like appearances; no governance over core R&D entities to avoid shareholder rights; no retained earnings to avoid resembling corporate treasuries; staking rewards are defined as network participation returns, not investment income.

This strategy worked. Most tokens successfully avoided being classified as securities, but at the same time, they lost all potential for compound growth.

From its inception, this asset class was intentionally designed to be incapable of generating long-term wealth through compounding.

Developers hold equity, you only hold “coupons”

Every leading crypto protocol is backed by a profit-oriented core development entity. These entities develop software, control front-end interfaces, own branding rights, and coordinate enterprise partnerships. What do token holders get? Only governance voting rights and a floating claim on fee income.

This pattern is ubiquitous in the industry. The core R&D entity controls talent, intellectual property, branding, enterprise contracts, and strategic choices; token holders can only receive a floating “coupon” tied to network usage, and a “privilege” to vote on proposals increasingly ignored by the R&D entity.

It’s not hard to understand why, when Circle acquires protocols like Axelar, the acquirer is buying equity in the core R&D entity, not the token. Because equity can compound, tokens cannot.

Lack of clear regulatory intent has led to this distorted industry outcome.

What Exactly Are You Holding?

Setting aside all market narratives and price volatility, what do token holders truly get?

Staking Ethereum yields about 3%-4%, a return determined by network inflation mechanisms and dynamically adjusted based on staking rates: more stakers mean lower yields; fewer stakers mean higher yields.

This is essentially a floating coupon linked to the protocol’s established mechanism, not stock, but bonds.

Sure, Ethereum’s price might rise from $3,000 to $10,000, but junk bonds can also double in value due to narrowing spreads—this doesn’t turn them into stocks.

The key question is: what mechanism drives your cash flow growth?

Stock cash flow growth: management reinvests profits, achieving compound growth; growth rate = return on capital × reinvestment rate. As a holder, you participate in a continuously expanding economic engine.

Token cash flow: entirely depends on network usage × fee rate × staking participation; what you get is just a coupon fluctuating with block space demand. There’s no reinvestment mechanism or engine for compound growth in the entire system.

The large price swings lead people to mistakenly think they hold stocks, but from an economic structure perspective, what they hold is actually a fixed-income product with 60%-80% annual volatility. It’s a lose-lose situation.

Most tokens, after accounting for inflation dilution, yield only 1%-3%. No fixed-income investor would accept such a risk-return profile, yet the high volatility of these assets continually attracts new buyers—this is the true picture of the “fool’s gamble” theory.

Timing Power Law, Not Compound Power Law

This is why tokens cannot achieve value accumulation and compound growth. The market is gradually realizing this; it’s not stupid, but shifting toward crypto-related stocks. First, digital asset government bonds, then more capital flows into companies that leverage crypto technology to reduce costs, increase revenue, and achieve compound growth.

Wealth creation in crypto follows a timing power law: those who make huge gains buy early and sell at the right time. My own portfolio also follows this rule; crypto assets are called “liquidity venture capital” for a reason.

In stocks, wealth creation follows the power law of compounding: Buffett didn’t buy Coca-Cola to flip it; he bought and held for 35 years, letting compound growth work.

In crypto, time is your enemy: holding too long erodes returns. High inflation mechanisms, low liquidity, high fully-diluted valuations, and excess block space due to insufficient demand are key reasons. Ultra-liquid assets are among the few exceptions.

In stocks, time is your ally: the longer you hold assets with compound growth, the greater the returns due to mathematical laws.

Crypto rewards traders; stocks reward holders. In reality, far more people get rich from holding stocks than from trading.

I keep recalculating these data because every liquidity provider asks: “Why not just buy Ethereum directly?”

Let’s compare the growth curves of a compound-growth stock—Dun & Bradstreet, Constellation Software, Berkshire Hathaway—and Ethereum: the stock’s curve steadily climbs upward and to the right because its underlying engine grows stronger each year; Ethereum’s price swings wildly, cycling through peaks and troughs, and the total return ultimately depends on your entry and exit timing.

Perhaps their final returns are similar, but holding stocks allows you to sleep peacefully every night; holding tokens requires you to be a market prophet. “Long-term holding beats timing,” everyone understands this, but the challenge is actually sticking to it. Stocks make long-term holding easier: cash flows support stock prices, dividends give patience, buybacks continue to compound during your holding period. Crypto makes long-term holding extremely difficult: fee income dries up, narratives shift, you have no fallback, no price floor, no stable coupon—only faith.

I prefer to be a holder, not a prophet.

Investment Strategies

If tokens cannot compound, and compounding is the core way to create wealth, then the conclusion is obvious.

The internet created trillions of dollars in value—where did that value ultimately go? Not to TCP/IP, HTTP, SMTP protocols. They are public goods, hugely valuable, but cannot generate returns for investors at the protocol layer.

Value ultimately flows to companies like Amazon, Google, Meta, Apple. They build businesses on top of protocols and achieve compound growth.

The crypto industry is repeating this pattern.

Stablecoins are gradually becoming the TCP/IP of the monetary realm—highly practical, with a high adoption rate—but whether the protocol itself can capture matching value remains uncertain. USDT is backed by a company with equity, not just a protocol, which offers important insights.

Those that embed stablecoin infrastructure into their operations, reduce payment friction, optimize working capital, and cut foreign exchange costs are the true compound-growth entities. For example, a CFO switching cross-border payments to a stablecoin channel saving $3 million annually can reinvest that savings into sales, R&D, or debt repayment, and this amount will continue to compound. The protocol facilitating this transaction only earns a fee, with no compounding.

The “Fat Protocol” theory suggests crypto protocols capture more value than application layers. But after seven years, public chains account for about 90% of the total crypto market cap, yet their fee share has plummeted from 60% to 12%; application layers contribute about 73% of fees but less than 10% of valuation. Markets are always efficient—these data say it all.

Today, the industry still clings to the “Fat Protocol” narrative, but the next chapter in crypto will be written by crypto-enabled stocks: companies with users, cash flow, and management that leverages crypto tech to optimize business and accelerate compound growth—these will outperform tokens.

Investments in Robinhood, Klarna, NuBank, Stripe, Revolut, Western Union, Visa, BlackRock will outperform a basket of tokens.

These companies have real price floors: cash flow, assets, customers. Tokens do not. When token valuations are driven up to absurd multiples based on future income, the downside can be devastating.

Long-term bullish on crypto tech, cautiously select tokens, and heavily invest in stocks of companies that leverage crypto infrastructure to amplify advantages and achieve compound growth.

The Harsh Reality

All attempts to solve the token compound growth problem inadvertently confirm my view.

Decentralized autonomous organizations (DAOs) trying to make real capital allocations—like MakerDAO buying government bonds, establishing sub-DAOs, appointing specialized teams—are gradually reshaping corporate governance models. The more a protocol aims for compound growth, the more it must resemble a company.

Tokenized stocks and digital asset bond tools cannot solve this problem either. They merely create a second claim on the same cash flow, competing with the underlying token. These tools do not make protocols better at compound growth; they just redistribute returns from token holders who do not hold the tool to those who do.

Token burning is not stock buybacks. Ethereum’s burn mechanism is like a thermostat at a fixed temperature—unchanging; Apple’s stock buybacks are flexible decisions made by management based on market conditions. Smart capital allocation, adjusting strategies according to market dynamics, is the core of compound growth. Rigid rules cannot generate compounding; flexible decisions can.

And regulation? That’s actually the most worth exploring. Today, tokens cannot compound because protocols cannot operate as companies: they cannot register as corporations, retain earnings, or make legally binding commitments to token holders. The GENIUS Act shows that the U.S. Congress can incorporate tokens into the financial system without stifling their development. When we have a framework allowing protocols to use corporate capital allocation tools, it will be the biggest catalyst in crypto history—far beyond Bitcoin spot ETFs.

Until then, smart capital will continue flowing into stocks, and the gap in compound growth between tokens and stocks will only widen each year.

This is not a bearish view on blockchain

Let me be clear: blockchain is an economic system with immense potential. It will become the foundational infrastructure for digital payments and intelligent business. My company, Inversion, is developing a blockchain precisely because we believe in this.

The issue is not the technology itself but the economic model of tokens. Today’s blockchain networks merely transfer value, not accumulate and reinvest to achieve compounding. But this will change: regulation will improve, governance will mature, some protocol will find a way—like successful enterprises—to retain and reinvest value. When that day comes, tokens will essentially become stocks, aside from their name, and the engine of compounding will be officially activated.

I am not bearish on that future; I only have my own judgment on its timing.

One day, blockchain networks will achieve value’s compound growth, and until then, I will choose to buy companies leveraging crypto tech to accelerate their growth.

I may be wrong in timing, but crypto is an adaptive system, and that is one of its most valuable traits. I don’t need perfect accuracy—just to get the big picture right: assets designed for compound growth will outperform others in the long run.

And that’s the true power of compounding. As Munger said: “It’s astonishing that people like us, simply by avoiding stupidity, rather than being super smart, gain such a huge long-term advantage.”

Crypto technology drastically reduces infrastructure costs, and wealth will ultimately flow to those who utilize these low-cost infrastructures to achieve compound growth.