GM. This is Milk Road PRO, the newsletter that helps you make the right moves, so you can stay zen throughout the market’s mood swings.

In crypto, attention is everything. 

Hype drives prices, memes become billion-dollar assets, and fundamentals? Many say they don’t matter at all. 

But let’s put that theory to the test. 

DeFi is one sector built on real utility, with strong fundamentals to back it up. 

So we can use DeFi sector fees as a key benchmark for fundamentals. They reflect real usage, demand, and the value these protocols bring to the market.

In December 2024, DeFi fees skyrocketed to an all-time high of $1.17 billion—more than triple the levels seen at the start of the year. 

This massive surge signals strong user activity and growing fundamentals across the sector. But is this growth reflected in token prices? Let’s find out.

At the start of 2024, DeFi’s market cap was around $70 billion and closed the year at $118 billion—a 69% gain (nice)! 

If prices had truly kept up with the 218% surge in fundamentals, DeFi should be sitting closer to $210 billion or higher. 😱

✍️ Prices haven’t climbed as much as fundamentals have improved, but the connection is still clear—both charts peaked in March and December, which is no coincidence.

That said, we know crypto isn’t a purely rational market. Sentiment, liquidity, narratives, and macro trends all influence price action, making the link between fundamentals and market cap far from predictable.

But this raises a critical question: If a decent part of our portfolio is built on the idea that fundamentals drive prices—while that is somewhat true—shouldn’t the market be reflecting this growth in fundamentals more aggressively?

👉 Think about it: If fundamentals grow 10x, but prices only rise 5x, that’s not the outcome we want. In most markets, such rapid growth is rare, and when it happens, prices usually rise even faster, reflecting a premium on fast growth and future potential. 

Yet, in our example above, the market isn’t fully reflecting that same growth in prices. What if it never does? And more importantly, what does that mean for our strategy?

This seems like the perfect time to step back and reassess our thesis – so here’s the agenda for today:

We’re going to tackle all these questions. And just to be clear, when we talk about fundamentals, we’re mainly referring to DeFi. Why?

✍️ DeFi is the most mature sector in crypto, with proven product-market fit and solid fundamentals. 

While we’re excited about emerging sectors like DePIN or AI agents, they’re still in their early stages. For now, DeFi gives us the best benchmark for analyzing how fundamentals translate into market value.

So, without further ado, let’s dive in! 🚀

BACK TO THE BASICS

We hope you don’t mind if we start with a simple question: What exactly is investing?

✍️ Investing means using your money to buy things like stocks, bonds, or property that you believe will increase in value over time. 

The key word here is "believe". 

When more people believe in something, more people buy into it. And that simple logic has been driving markets for centuries!

Why? Because more and more people believe in their worth. That collective belief is what drives these assets higher in value!

Some beliefs are stronger than others. A great mental exercise is to try pitching an investment to a friend who’s open to listening and eager to invest. 

You can probably craft a compelling story about almost anything that exists today. 

But a friend who thinks critically might start questioning your arguments—and that’s where the real test begins!

Nothing is ever black and white, and there’s no such thing as a free lunch. Investing is ultimately a game of probabilities. 

But some “beliefs” have a much higher chance of delivering the desired results than others. 

Actually, how about using “approach” instead of “belief”? That sounds better. Because we want to use a robust approach to manage our portfolio—not just belief.

To do so, let’s dive into the historical data to see which investing approach has performed best. 👀

FUNDAMENTALS IN TRADFI

If you're a serious long-term investor, you understand that investing is a constant balance between risk and reward. 

✍️ Higher risk means greater potential upside.

There’s no way around it, which is why you and many other investors might be looking for a systematic, repeatable approach. 

The one that follows a clear framework for evaluating markets, can be back-tested, and adapts to an ever-changing market environment. But does one actually exist?

Let’s explore different asset classes and their performance to get a clearer picture.

Stocks have outperformed every other asset class by a wide margin. So, what exactly drives stock prices?

The chart above clearly shows a strong correlation between stock prices and earnings. Simply put—the more money businesses make, the higher their stock prices climb. It’s not that surprising. 🤣 

TL;DR: Investing in stocks with growing earnings has always been the best strategy. But now, you don’t have to handpick individual stocks—but you can just buy the S&P 500. It does the work for you while offering a well-diversified approach.

But hold on for a sec – there’s another thing we need to be aware of.

Stock earnings have been fairly steady over the past 15 years, with one major exception—during COVID, they temporarily dropped by 15% as businesses struggled.

But outside of that, the trend has been consistently positive! 

The only real difference is the pace of growth. On average, earnings have increased by about 8% per year, making them a solid long-term driver of stock market gains.

Now, here’s something interesting—guess how much the S&P 500 has appreciated on average? Around 10% per year. It’s pretty clear where that growth comes from!

The formula for stocks is pretty simple:

✍️ The growth rate of earnings = the growth rate of stock prices.

In simple terms: If you’re an investor, the best approach is to focus on a company’s fundamentals, especially its earnings. Get that right, and you’ll be in a strong position.

That might be obvious to some, but not necessarily to everyone. We wanted to highlight this because we use traditional markets—and what works there—as the foundation for applying the same time-tested investing approach to crypto.

But it’s not an apples-to-apples comparison—stock markets are mature, well-established, and relatively efficient, whereas crypto is still evolving.