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BTC is up 245% and Ethereum is up 730% in a one year period. Of course, both have now come down a lot over the past month. But the price alone tells us very little.
The efficient market hypothesis would lead us to believe that informational advantages, such as knowing what a blockchain is, or thinking that a network without transactions is worth less than a network with transactions, are absorbed by the markets through arbitration opportunities. If you have an informational advantage, whether fundamental or obvious or small, you act on that advantage and are rewarded with benefits over a period of time. Hence, incentives force rational actors to rationalize irrational markets.
Lex Sokolin, a CoinDesk columnist, is co-head of Global Fintech at ConsenSys, a blockchain software company based in Brooklyn, NY. The following is adapted from his Fintech Blueprint newsletter.
But let’s not forget that social media and memetics exist, in part, to make machines out of our lizard brains and network them in the internet’s limbic system of attention.
The price, then, is not just a cold calculation of the revealed truth. On the contrary, the price is a signal to be politicized, to be waged and to be worshiped. If you could move the sacred number more easily with your heart than with your mind, which one would you choose? No need to do math homework. Simply join the Banner Tribe of Bitcoin Maximalists, Link Marines, XRP Army, Doge Army, or another multi-agent Twitter centaur, and tear up anything that goes against your narrative.
The fact that people go crazy for the price and do nothing but talk about it like a flag is nothing new. But maybe the amount of purchases made on the basis of this flag alone is new with major cryptocurrencies. Financial rallying cries are now the norm to teach enemies their lesson in financial ruin.
Correlations are another data point here. Coin Metrics has a fantastic tool for plotting crypto asset correlations here. We can see correlations between projects starting to converge towards the 0.6-0.8 range. Assets with very different histories, such as bitcoin, ethereum, Uniswap, Aave, Binance, and Yearn reduce any difference in performance towards higher and higher correlation.
This perhaps indicates a lack of discrimination on the part of institutional actors when adopting an asset allocation approach. This would involve investing money in a sector rather than in a project. Thus, you would invest 10% of your hedge fund in crypto, rather than in particular assets. Then, when it is necessary to reduce the debt or to change position, you reduce part of your overall allocation and thus impact all the sub-components. But it’s a little hard to believe. Being pioneers among their peers, crypto funds playing in the space are extremely sensitive to risk and market structure.
Bitcoin’s status as a store of value requires retail players to sell performing but non-essential assets to store whatever is left in bitcoin. As the market as a whole has turned bearish, selling off the winners to pay off collateral calls or to deactivate risk starts to make sense. It seems more likely, and it sucks too.
Bitcoin fundamentals
If you want to be rigorous in your thinking about crypto networks, what are the metrics to really follow?
Bitcoin and ethereum come with very different histories, and therefore what to follow is quite different. Bitcoin is numerically rare and therefore can be viewed as solid and solid money. Hardness refers to the difficulty of creating additional units of currency. It is backed by its mathematical truth with a limited supply as preordered by code. While Chinese authorities may attempt to crush bitcoin mining like a weed, it doesn’t change much to the ability of networks to secure transactions and generate a wealth of wealth for people who wish to do so. away from their governments.
In this way, Bitcoin is a political tool for rulers, intended to strip their monopolies on wealth. To the extent that a country cannot collect taxes, control its economy through monetary policy, and otherwise govern its people economically, that country is not sovereign in the medieval sense. When a decentralized internet nation has its own decentralized internet currency and promises of freedom and happiness, the citizens of a country have an easily accessible alternative to hegemony. We may soon find a better social contract with a decentralized autonomous organization (DAO) than with a company or a nation. Thus the sovereign will use force to enforce the social contract that he finds existential.
Bitcoiners, however, believe market forces are inexorable, assuming endless demand. For example, the “Bitcoin Stock to Flow” pricing model takes the BTC issuance schedule with its halving events and overlaps it nicely on a logarithmic scale with the BTC price. So, the harder it is to generate the next bitcoin, the higher the price of bitcoin will be.
But maybe it is also two superimposed exponential graphs? For example, you take a number and divide it by two, then you take another number and multiply it by two, then you play with the vertical axis until your period matches.
Another part of the puzzle, when you know what supply looks like, is trying to project demand. There are various analyzes on the types of accounts that sell (for example, large or small), institutional entries and exits, and other leading indicators of the number of transactions. This is an attempt to quantify what people think of the future, and all kinds of chemistry exists in examining social sentiment.
In our opinion, some of the best charts for understanding bitcoin’s current valuation were developed by Willy Woo and can be found here. The NVT (value of the network to transactions) cap, which is based on historical cash flows relative to the value of the network, suggests that bitcoin is expected to be worth more than $ 1,000 billion. The value of all the coins at the price of their last transaction is $ 370 billion. The market is floating somewhere in the middle.
Note, however, that the main variables in all of these models are the relationship between bitcoin and its own value. It is valuable in that people have paid the store of value for it and at what rate they carry out such activity. And frankly, we can’t distinguish correlation and causation, because by design much of finance is recursive, reflexive, and self-similar.
Web 3.0
It’s a breath of fresh air to move from existential geopolitics and figuring out who becomes the god of money, a monarch, a president, or a computer program, to talking about creative calculus.
Once you build programmability into blockchains, you don’t have to talk about money anymore. Yes, silver is beautiful. But it’s also a simple derivative of real things that real people do. Money does not exist without work that has entered the tangible world and then abstracted into something else.
For us, it is this work that is important. While upgrading the transform function that saves abstractions to be more modern and free is a massive opportunity, can’t we have a native digital economy first instead of worshiping a calf? Golden ?
Paying for your sandwich in BTC or Apple stock is not a digitally native economy. Building software that runs on Ethereum, or some other bridged compute blockchain, certainly is.
Having shared, open source financial engines that deliver the world’s best financial functionality is a laudable goal. Fixing the original sin of the internet by reconnecting human creativity to attention-grabbing advertising monsters and economic exchange also seems like a very good goal. Designing, freezing, and governing an emerging metaverse to make the cyber-expanse feel grounded and worthy of being inhabited can be everyone’s biggest goal.
To that end, we find it much easier to root in the fundamentals of Ethereum as it accommodates non-canon expansions, whether it’s scalability networks like Polygon, Optimism, or Arbitrum, or be it the myriad of decentralized applications extending the financial uses of ETH through trading, lending, investing, insurance, structuring and asset management.
The more others build, and the easier it is for them to build and therefore generate trade and economic transactions, the better off everyone is. It’s like seeing the number of apps increase in Apple iOS or the number of merchants connected to Alibaba soar.
To believe in the future of the crypto-economy, it is not necessary to believe in the stories of rulers, digital or carnal. Rather, you have to believe the stories about the benefits of non-coercive peer-to-peer economic exchanges. To that end, instead of trading the old governments for the internet, the thesis is that you are trading the old economy for the internet. So this is our favorite chart, showing how Ethereums over 1 million daily transactions are now combined with 7 million additional daily transactions from Polygon.
(Nansen.ai)
Or maybe this one, showing 135 million call contracts in May, the song of software running code.
As crypto markets continue to display both (1) pronounced volatility and (2) increased correlation between different types of assets, it is important to articulate the main difference between Bitcoin’s motivating purpose and Ethereum. We don’t think crypto prices tell a useful or clear story, so it’s worth considering the fundamentals of what you’re betting on to become true.
Bitcoin and Ethereum / Web3 have quite different goals and will take very different paths to achieve them. Perhaps in the course of some beautiful singularity, they will converge. The Twitter universe will be yelling at you until you comply with its price story, so be vigilant and pay attention to the fundamentals. Much is at stake.
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