Why Cryptocurrency Tokens Are Destined to Fail to Achieve Compound Growth

The market is going through a new round of correction. Bitcoin hovers around $65.87K, Solana drops to a low of $81.86, and Ethereum is only at $1.93K. Some might say this is the rhetoric of permanent bears, but the core issue isn’t whether prices will rebound, but a deeper economic dilemma: most cryptocurrencies are destined not to achieve true compound growth like equity.

This isn’t a denial of blockchain technology but a calm assessment of the current token economy structure. Technology will first become widespread, and wealth will flow to those companies that can truly turn this technology into a compounding machine.

What the Market Is Demonstrating

“Dear LPs, stablecoin trading volume has increased 100-fold, but our returns are only 1.3 times. Thank you for your trust and patience.”

This hypothetical dialogue reveals a harsh reality: adoption rates and prices can diverge for years. Fundamentally, the entire crypto asset class is overvalued, and investors are gradually realizing this. They are shifting toward crypto-related equity assets—those companies that genuinely reduce costs and increase revenue using this technology.

The Compound Machine and Cash Flow Traps

To understand this, first look at how compounding occurs.

Berkshire Hathaway’s market cap is about $1.1 trillion, not because Buffett times the market perfectly every time, but because it grows via compounding. Every year, Berkshire reinvests its earnings into new businesses, expands profit margins, acquires competitors, and increases intrinsic per-share value. Price is just the outcome, ultimately catching up because the underlying economic engine keeps expanding.

That’s the essence of equity—it’s a claim on a “reinvestment machine.” Management takes profits and allocates capital: investing for growth, reducing costs, buying back shares. Every correct decision becomes the foundation for the next, layering upon layer, creating compound growth.

Mathematically: $1 at 15% annual compound over 20 years = $16.37. $1 at 0% over 20 years = $1. Equity can turn $1 profit into $16. But tokens can only keep transaction fees at $1.

What happens when a private equity fund acquires a company generating $5 million in free cash flow annually?

Year 1: $5 million FCF. Management reinvests—R&D, stablecoin treasury, debt repayment.

Year 2: These decisions take effect, FCF becomes $5.75 million.

Year 3: Profits roll into the next decision cycle, FCF becomes $6.6 million.

This is a business growing at 15% compound annually. Persist for 20 years, and $5 million becomes $82 million.

Now, consider what happens inside a protocol with $5 million annual fee revenue:

Year 1: $5 million in fees, distributed to stakers. Then it’s gone.

Year 2: Maybe another $5 million. If users still use it. Then it’s gone again.

Year 3: Depends on whether there are still users in the casino.

Nothing is growing via compounding. Because there’s no reinvestment in Year 1, there’s no flywheel in Year 3. Subsidies and grants are far from enough.

Flaws Embedded in the Original Design

This isn’t an accident but a legal strategy.

Back in 2017-2019, the SEC was cracking down on anything that looked like a security. Nearly all lawyers advising protocol teams would say the same thing: don’t make your tokens look like equity.

Thus, a set of design principles emerged:

• No cash flow claim rights, avoiding dividends
• No governance rights over Labs entities, avoiding shareholder rights
• No retained earnings, avoiding treasury-like functions
• Staking rewards described as “network participation,” not yields

This design worked. Most tokens successfully avoided being classified as securities. But it also meant they avoided all mechanisms that could generate compound growth. The entire asset class was deliberately designed to prevent doing that one thing—creating long-term wealth.

What Token Holders Truly Own

Almost every major protocol has a profit-oriented Labs company beside it. Labs handles coding, controls the front end, owns branding, and manages enterprise partnerships. And what do token holders get? Governance voting rights plus a floating claim on transaction fees.

The pattern is identical everywhere: Labs takes talent, IP, branding, corporate contracts, strategic options; token holders get a “floating interest” that fluctuates with network usage, and increasingly indifferent voting rights on Labs proposals.

This isn’t surprising. When someone acquires a protocol ecosystem (like Circle acquiring the Axelar team), they’re buying Labs’ equity, not tokens. Because equity compounds, tokens do not.

Take Ethereum as an example: staking ETH yields 3-4% annually, based on network inflation curves, dynamically adjusted by staking ratios. The more stakers, the lower the yield; fewer stakers, the higher. What is this? A floating interest rate tied to protocol rules.

It’s not equity. It’s a bond.

Yes, ETH price can rise from $3,000 to $10,000. But junk bonds can also double when spreads narrow. That doesn’t turn it into equity. The real question is: through what mechanism does your cash flow grow?

In equity: management reinvests → growth = ROIC × reinvestment rate → you participate in an expanding economic engine.

In tokens: cash flow = network usage × fee rate × staking participation rate → what you get is a floating coupon that fluctuates with block space demand, with no reinvestment mechanism, no compound engine.

Price volatility leads people to think they hold equity. But the economic structure clearly shows: what you hold is a fixed income, just with 60-80% volatility. That’s the worst combination.

Market Timing vs. Compound Growth

Crypto wealth creation follows a “power law of timing.” Those who make money are early buyers and accurate sellers. This investment style is called “liquid venture”—because you must be ready to exit at any moment.

In equity markets, wealth follows a “power law of compounding.” Buffett didn’t buy Coca-Cola precisely timing the market; he bought and let it compound for 35 years.

The fundamental difference:

In crypto, time is your enemy. Holding too long erodes returns. High inflation curves, low liquidity, high FDV, insufficient demand, excess block space—all erode returns. Hyperliquid is an exception.

In equities, time is your friend. The longer you hold a compounding asset, the more mathematically advantageous it becomes.

Crypto rewards traders; equity rewards owners. And the reality is: wealthy owners vastly outnumber wealthy traders.

That’s why, when asked “Why not just buy ETH?” the answer is clear. Show a real compounding machine (like Danaher, Constellation Software, Berkshire Hathaway)—their charts are steadily trending upward because their engines grow every year.

Now, show ETH’s chart: boom, crash, boom again, crash again. The final total return depends entirely on when you entered and exited.

Two charts may end up at the same point, but one lets you sleep well; the other demands you be a prophet. “Long-term holding beats timing,” everyone understands. The question is: can you truly stay in the market long-term?

Equities make this easier: cash flows underpin prices, dividends pay you while waiting, buybacks continue to compound during your holding period. Crypto is brutally different: fee exhaustion, narrative shifts, no bottom, no coupons—only faith.

So, inevitably, some will choose to be owners, not prophets.

Stablecoins as the New Infrastructure

The internet created trillions of dollars in value. Where does that value ultimately flow? Not to TCP/IP, HTTP, or SMTP. These are public goods: extremely important, extremely useful, but almost no investment return at the protocol layer itself.

Value ultimately flows to Amazon, Google, Meta, Apple—companies built on these protocols that can sustain compound growth.

The crypto world is repeating this pattern.

Stablecoins are becoming the “TCP/IP of money.” They are extremely useful, widely adopted, but the protocols themselves may not proportionally capture value. Interestingly, Tether is a company with equity, not just a protocol. That itself holds the answer.

The true “compound machine” will be those companies that embed stablecoin infrastructure into their core business—using stablecoins to reduce payment friction, improve working capital, and cut foreign exchange costs.

A CFO who saves $3 million annually by switching to stablecoins for cross-border payments can reinvest that $3 million into sales, product development, or debt repayment. That $3 million compounds.

And what about the protocol facilitating these transfers? It takes a fee. It doesn’t compound.

The market isn’t stupid. The “fat protocol” theory once suggested that crypto protocols would capture more value than applications. But after seven years, reality shows: Layer 1s account for about 90% of total market cap, but their fee share has fallen from ~60% to ~12%; applications generate about 73% of fees but account for less than 10% of valuation. The market still clings to old narratives, but the data tells the story.

Who Will Own the Next Wealth

The next phase of crypto will be defined by crypto-enabled equity. These companies have users, generate cash flow, have management teams, and can leverage crypto to cut costs, boost revenue, and accelerate compounding.

Think of this basket: Robinhood, Klarna, NuBank, Stripe, Revolut, Western Union, Visa, BlackRock. This “company basket” will almost certainly outperform a “token basket.”

Why? Because these companies have real fundamentals—cash flow, assets, customers. Tokens do not. When tokens bet heavily on future income at high multiples, the downside is brutal.

Long exposure to technology itself, with a high selectivity for tokens that can turn infrastructure advantages into equity-like compounding—this is a winning combination.

All efforts to “fix” this problem inadvertently confirm the point. Once DAOs start attempting real capital allocation (MakerDAO buying bonds, creating sub-DAOs, appointing domain teams), they are slowly recreating corporate governance. The more protocols seek to compound, the more they must operate like companies. DATs and tokenized equity wrappers can’t fix this—they just create a second layer of claims on the same cash flow, competing with the original tokens.

Regulation is actually the most interesting variable. Today, tokens can’t compound because protocols can’t operate like companies. They can’t be formalized, can’t retain earnings, can’t make enforceable promises to token holders. But the GENUIS Act has shown: Congress can bring tokens into the financial system without killing them.

Once we have a framework allowing protocols to use “enterprise-grade capital allocation tools,” it will be the biggest catalyst in crypto history—bigger than ETFs. Until then, smart money will flow into equity. And the “compound gap” will only widen year after year.

Crypto is an economic system—powerful and poised to become the backbone of digital payments and agency-based business. The problem isn’t technology; it’s token economics. Today’s networks are about “transmitting value,” not “creating compound value.”

That will change. Regulation will evolve, governance will mature, and eventually, some protocol will learn to operate like a great enterprise—retaining and reinvesting value. When that day comes, tokens will essentially be equity in economic substance. The compound machine will truly activate.

But that day is not here yet. Before it arrives, crypto will inevitably make infrastructure cheaper, and wealth will flow to those who leverage this cheap infrastructure to create compound growth. This is the lesson the internet taught us 25 years ago.

As Munger said: “Surprisingly, people like us, simply by consistently avoiding stupidity rather than trying to appear clever, gain enormous long-term advantage.”

It’s time to act according to this logic.