How Correlated are the Web 2 and Web 3 Software Markets?
Tomasz TunguzVenture Capitalist at Redpoint If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. How Correlated are the Web 2 and Web 3 Software Markets?
In the last few weeks, public software company multiples have halved. As have cryptocoins. Solana and Etherum followed Snowflake and Elastic downwards. So much for the Santa Claus rally. Both declines seem to have been catalyzed by the Fed’s intention to hike the Fed Funds rate three to four times in 2022. Beyond the most recent cycle, how often do the web2 and web3 software markets move in synchrony? After all, Web3 is a future incarnation of software and infrastructure. Like high growth startups, cryptocoins are considered risk assets by the market. Is historical data compelling enough to hypothesize that investors' rotation out of high-growth software should be mirrored in crypto? I’ve indexed the performance of four assets over the last five years: public software companies (CLD), Bitcoin (BTC), Ethereum (ETH), and the 10 Year Treasury yield (TNX). BTC, ETH and Software have all increased over the last five years (notice the y-axis is log10 scale). The cryptocoins appreciated much more than software. Meanwhile, the yield on the 10 year Treasury declined. Over that period, the correlations between these assets are tight.
BTC and ETH chart a 0.76 and 0.61 correlation with software suggesting the markets do move in parallel. In contrast, the 10 Year Treasury yield negatively correlates at -0.67 implying software market value tends to increase with lower rates. Plotting the pairwise correlations by year uncovers a few trends not apparent in the five year analysis.
Over longer epochs, the web2 and web3 markets seem to move in parallel. But the data makes plain that investors don’t view these two asset classes interchangeably. Some years, crypto moves with software. Others, cryptocoins move the opposite way. Both web2 and web3 software are risk assets but each market marches to its own beat. |
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