As we experience the onslaught across equities and cryptocurrency markets due to perilous macro conditions, I think it is important to take a step back and look at fundamentals. Downward price action wipes out traders and offers an opportunity for new first principle investors to step in. We especially experience this with an asset such as HYPE, given a large portion of the holder base are perpetual futures traders (as a nature of the airdrop distribution). As such, downward market trends result in margin calls for said perp traders who sell their HYPE to cover collateral – resulting in a HYPE fire sale across the board. On the converse, volatile market conditions often result in higher trading volume and, by extension, higher fees making HYPE more lucrative to fundamental investors.

Below, we will discuss:

• Why am I excited about Hyperliquid today?
• A long-term time horizon view on Hyperliquid
• Potential roadblocks
• A comparative valuation model for HYPE

Why am I excited about Hyperliquid today?

I believe a performant on-chain order book offers a step function improvement over existing paradigms. Marketplaces are meant to be a meeting point for investors on equal terms, but markets today cater to institutions and HFT firms from the ground up. On-chain order books change that, and Hyperliquid offers the means to do that.

In traditional finance, HFT firms pay several millions to move their servers an inch closer to stock market servers while independent users have to pay several thousand dollars to set up and maintain personal co-location servers. Similarly, centralized crypto exchanges create unequal markets by having internal market making agreements and preferential server co-location. On the other hand, by enabling access to order flow through on-chain order books, Hyperliquid offers anyone the ability to spin up their own Citadel and Jane Street for essentially zero cost basis. Furthermore, Hyperliquid’s powerful and easy-to-use SDKs offer easy onboarding for non-crypto native users to try out strategies.

While users probably will not outperform Wintermute at market making, they at least get an equal shot on goal while existing paradigms do not even let them step onto the field. Moreover, users can leverage Hyperliquid’s native market making vault HLP and earn a cozy ~10-20% APY on their dollar.

Through the above, Hyperliquid creates equal markets. In particular, I am excited about the following things to come for Hyperliquid:

1. Non-custodial BTC/SOL/ETH and associated apps: People want an on-chain venue to trade and borrow against their BTC. Through @hyperunit, Hyperliquid offers one of the most seamless ways to bridge your BTC to an on-chain venue. Hyperliquid allows low latency settlement for trading strategies through spot and perps offering on the same platform. Thus, I am excited to see use cases such as on-chain spot future basis trades, spot delta hedging, and real-time settlement of option positions.
2. Equities and other RWAs + Hyperliquid backend/TradFi frontend: The Unit team is supposedly building out solutions for bringing stocks and RWAs onto the Hyperliquid orderbook. While I expect on-chain demand for this, I am more excited to see use cases where Hyperliquid serves as the blockchain and liquidity rails for bringing otherwise inaccessible opportunities to EMs. For instance, it would not be farcical to assume AAPL stocks being offered to non-US markets through an interface that uses Hyperliquid’s order book on the backend and obscures the “blockchain” part of the onboarding experience from the end user.
3. BTC and HYPE as collateral: Currently Hyperliquid only allows USDC as perps collateral. As we see BTC and HYPE being offered as perps collateral, which causes traders to liquidate their assets for margin calls. Offering BTC and HYPE can allow for reduced selling pressure and improved capital efficiency.
4. Native USDC: Hyperliquid currently offers Arbitrum bridged USDC. Thus, it is not redeemable for dollars without bridging back to Arbitrum since it is locked up in a smart contract. Furthermore, bridged USDC is not compatible with CCTP. Thus, with native USDC deployment, Hyperliquid will unlock more capital efficiency. To read more about the need for native USDC or another native stable on Hyperliquid, read @0xBroze‘s post here: https://x.com/0xBroze/status/1896935589309567031
5. Lending markets going live: Will lead to more activity as HYPE airdrop holders can now borrow against their HYPE and be more active market participants. Here, I am excited to see lending protocols such as @felixprotocol among several others to go live.
6. Direct onboarding: Solutions such as @HanaNetwork allow you to on/offramp directly from Apple Pay, PayPal, Wise, debit card. Reducing onboarding friction will result in increased activity.
7. Bringing non-crypto users on-chain: Hyperliquid is the first crypto app that several of my non-crypto friends have begun using. Most of them were onboarded through @pvp_dot_trade where we engaged in trading competitions with each other. Even after the points program, they remain sticky users.

Long-term time horizon view

Based on the above factors, I see Hyperliquid becoming a powerful liquidity magnet. As we have seen several times in crypto, liquidity begets liquidity. As such, I see Hyperliquid becoming the leading trading and liquidity hub for all on-chain activity.

As discussed above, native non-custodial BTC will unlock a new set of opportunities at the intersection of a performant CLOB and BTC liquidity. This will result in deeper liquidity for the CLOB itself, AMMs on the EVM, and lending pools. To some extent, we might also witness migration of spot ETH/SOL + other alts to Hyperliquid. This will steal market share from DEXs on other chains and dry up those order books and liquidity pools.

I also believe Hyperliquid will compete with CEXs for token listings. This is already evident through projects such as Swell and Plume buying tickers on Hyperliquid. Buying a ticker on Hyperliquid provides you access to Hyperliquid’s liquidity. Given ticker auctions happen every 31 hours, there can only be ~282 auctions in a given year. As Hyperliquid becomes the de facto on-chain trading venue, “tickerspace” will become increasingly expensive yet will probably remain cheaper than giving Binance 5% of your token supply. If Hyperliquid executes on being a liquidity hub, I believe we can expect average ticker auctions of ~$500k.

Lastly, as alluded to above, I think Hyperliquid backend/Retail frontend applications will bring otherwise inaccessible financial opportunities to non-US markets and unlock liquidity from user segments currently untouched by crypto.

Potential roadblocks

1. Regulatory pressure: Hyperliquid is not MAGA-aligned while several other chains have been pandering to the politicos in DC. This is well evidenced by the World Liberty Finance token purchases. Furthermore, several VCs are investors in competitive chains and DEXs from which Hyperliquid steals liquidity and mindshare from and have been very vocal against Hyperliquid’s regulatory legitimacy since its infancy. Hyperliquid does not have a vocal-voice like such in the US and thus it would not be unnatural to expect some regulatory pressure on that end.
2. EVM Rollout: Hyperliquid’s EVM’s alpha release has not been executed with the same quality as HyperCore was. Low gas limits, occasionally slow block times, lack of native USDC among other things has led to slower deployment of apps on the HypeEVM. As such, improvements are needed and are expected to rollout soon. Furthermore, if EVM applications are not able to offer net new applications or if they witness low TVL/volume, we might witness a loss of mindshare and, by extension, TVL to other L1/L2s such as Monad, MegaETH. However, from my conversations with developers, the Hyperliquid team is actively working with applications to get feedback on the HyperEVM and are implementing improvements with extremely fast turnarounds.
3. Validator network: While Hyperliquid is moving towards a permissionless validator system, the exact details of what validators do is obscured by an opaque binary. To become a secure hub of liquidity through true decentralization, Hyperliquid would need to become more transparent about validator operations over time.

A comparative valuation model for HYPE

Below, I try to project a simple P/E analysis for Hyperliquid’s native token HYPE for the next four years.

I think this is important to conduct this analysis in the context of understanding the effects of the Assistance Fund buybacks. Inspired by @Keisan_Crypto‘s analysis, we introduce the concept of the Adjusted FDV where Adjusted FDV = Price * Adjusted Fully Diluted Supply. Here, we define Adjusted Fully Diluted Supply for the next year as Fully Diluted Supply for the previous year - AF buybacks - Burn

For those unfamiliar with the Assistance Fund, fees collected on Hyperliquid are directed to the Assistance Fund, which buys HYPE back from the open market, thereby reducing supply. For the purposes of this analysis, we shall make the assumption that HYPE bought back by the Assistance Fund will never enter the open market again and is akin to being burnt.

Hyperliquid has three broad sources of revenue: Trading fees, EVM fees, and Auction fees.

Note: We perform the calculations below by assuming HYPE token price = $15.

Trading fees are collected when users open and close perps positions. For projecting Hyperliquid’s annual trading fee, I first obtained weekly revenues for the 12 months from December 23 through March 10. We then annualized the 4-week rolling weekly average eight instances of annualized revenue to obtain a balanced estimate of trading fees. As such, I estimate that Hyperliquid should collect ~$600 million in trading fees for 2025.

However, while this serves as a decent proxy for the 2025 year, it is difficult to extrapolate YoY growth rates for 2025-2028 from this method. As such, we look to smoothed historical perps trading volume on CEXs and posit that Hyperliquid will capture a certain percentage share of the total CEX volume. This allows us to better capture the cyclical nature of trading volumes in crypto. We then assume that Hyperliquid’s percentage share for each year lies within a certain range for a year. Just applying a blanket 5% market share capture for a given year might generalise to the point of error. Thus, we assume for 2025, Hyperliquid captures between 3-6% of volume and frame the volume capture as 3% + [(6%-3%) * RAND()]. This randomised range-based analysis offers a more realistic picture of monthly volume capture. Furthermore, assuming that Hyperliquid’s average fee comes out to be 0.025% of the trading volume, we can conclude that Hyperliquid will earn ~$600 million in trading fees in 2025. We observe that this number is close to our earlier 4-week rolling average method above, allowing us to reinforce our findings.

Moving forward with the volume capture analysis, we assume Hyperliquid’s market share capture increases over the years. As such, we will assume Hyperliquid captures 3-6% in 2025, 6-8% in 2026, 8-10% in 2027, and 10-12% in 2028. We summarise our findings below.

We estimate EVM fees as a function of annual revenues of other L2s such as Base. Given a combination of HypeEVM’s nascency and innately lower gas fees, I expect HypeEVM to capture 50% of Base’s annual revenue in 2024. As such, I estimate that Hyperliquid should collect ~$54 million in EVM fees for 2025.

Lastly, as alluded to earlier, Hyperliquid holds an auction for tickers for its spot market. To estimate revenue from ticker sales, we first need to think about the distribution of ticker prices itself. After analyzing previous data and in accordance with our thesis on tickerspace earlier, I believe a normal distribution is sufficient to map out auction prices for a year. The figures below depict the distribution and the revenue from each price segment. As such, I estimate that Hyperliquid should collect ~$40 million in Auction fees for 2025.

This implies that in 2025 alone, Hyperliquid will collect ~$700 million in fees. Given most fees are expected to be directed to the Assistance Fund to buyback HYPE, this translates to $700 million of buy pressure for HYPE in 2025 from the Assistance Fund alone.

Assuming the HYPE held by the Assistance Fund is akin to being burnt (will never enter the market again) along with the projected 176,113 HYPE burned from transaction fee on HyperCore, approximately 46 million HYPE tokens will be removed from circulation in 2025.

Thus, as fees increase and supply decreases, HYPE’s P/E ratio decreases over the years making it a more valuable asset with time. Furthermore, this regular removal of HYPE from supply also helps better absorb token unlocks from the Hyper Foundation, Team, and Future Emissions & Community Rewards.

We will assume that the EVM and Auction fees broadly follow the same YoY growth rate as the trading fees. This allows us to compile our final financial statement which we present below:

Lastly, we compare and contrast HYPE’s P/E ratio based on both its FDV P/E and Market Cap P/E against incumbents such as Solana and Ethereum, relative equities such as Coinbase and Robinhood, and TradFi assets such as Apple, Nvidia, and the S&P 500.

PS: A note on the Hyperliquid community

I have often written about the Hyperliquid community on Twitter so I will not dwell on it much here since it distracts from the main aim of this article, but I just want to share this one excerpt from an earlier tweet that I feel really encapsulates the Hyperliquid community for me:

“make money or lose money, i’m walking away with new friendships from this. Hyperliquid is the first crypto app to enable this for me — and to me that is a very important feature.”

If you are interested in reading more of my thoughts on the Hyperliquid community feel free to do so here:

On the note of communities, it would be remiss not to shoutout @HypioHL which has done a really amazing job at creating powerful communities around NFTs (never thought I would end up saying this).

In parting,

Zoom out, sit back, relax, and enjoy the ride (and don’t get chopped and sell your hype to cover margin).

Thanks to @Keisan_Crypto for inspiring the basis for the valuation framework. Thanks to @0xBroze @rpal_ @0xDuckworth for offering suggestions and proof-reading!

Disclaimer:

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