YWR: The Bear Case for Crypto (The New, New Pt. 2)
I have this paradox.
I expect blockchain usage grows 10x.
And I used to be bullish on crypto, but increasingly I see how Bitcoin and other crypto tokens fall another 50%.
How do we make money from that paradox?
This is Pt 2. of The New, New.
Let’s work through this paradox starting with Bitcoin and ending with my updated view on Coinbase.
Bitcoin Prophets
Value vs Value Capture
Crypto’s Original Sin
The Rise of Corpo Chains
Bring it back around with Clawdbots
The Coinbase Valley of Death.
Coinbase Earnings Model
Bitcoin Prophets
Imagine it was the year 2020 and you had just purchased BTC at $6,000. Your price target is that maybe BTC can trade back to the 2018 highs of $10,000.
Then a future version of you travels back in time one night and says she wants to help you with your trade so you can be richer in the future. She tells you a secret. BTC is going to $100,000. She tells you the whole world is going to change and go from making fun of BTC to loving it. The future President of the United States will pump it and say there should be a US BTC reserve. There will be a $170 billion Bitcoin ETF. The Bitcoin ETF will be even bigger than the gold ETF.”
“Stop it!” you say. “That’s crazy. Unimaginable.”
But you follow her advice and ride BTC to $100,000. You 15x your investment in 5 years. Everything she said came true!!!
So what do you do at $100,000?
Do you say maybe the trade is over? Do you step back and appreciate the significance of how BTC has gone from a fringe asset at $100 followed by cyber weirdos to a $2 trillion global reserve asset? Do you possibly appreciate what a once in a life time event that was and ring the cash register?
Not if you are a Bitcoin HODL’er.
If you are a HODL’er you just create a new 10x price target. Like 10x’ing again is something that happens every day in financial markets. You compete with the other Bitcoin prophets on Twitter and Youtube to come up with the new unimaginable target that will make you famous when it happens. How about Bitcoin $1 million, or $10 million or $50 million?
The ACID Capitalist selling his house to buy Bitcoin.
Michael Saylor squeezing Bitcoin to $50 million.
MMCrypto putting on a $100 million bitcoin trade
Natalie Brunell sees no reason Bitcoin can’t get to $1 million.
I have this view that society is slowly going insane, and so it makes sense in a Neal Stephenson sort of way that as trust collapses a cult would develop around a digital token. So rather than fade the $50 million price targets, maybe I should recognise BTC as the ultimate expression of Project Zimbabwe, the collapse of trust and our slide into AI driven insanity.
But the trader in me sees it differently. And the old Hugh Hendry, the London one, the one on less acid, would have seen it too. Assets do not 10x when everyone has the same view that they are going to 10x. Assets 10x out of fear, ridicule and ‘uninvestability’. Take Amazon as another example. It 10x’d lots of times, but it was ‘too expensive’ the whole way up.
For fun here is the write up from a lunch I hosted in 2023 in Knightsbridge when BTC was at $25,000. I brought in some crypto fund managers to try and convince the PM’s and Family offices to buy BTC. The lunch was a disaster. Nobody liked BTC and the discussion went totally went off the rails into all the usual pushbacks like ‘the $ is backed by aircraft carriers, BTC isn’t money etc’.
In hindsight this pushback was super bullish. This ridicule from the ‘smart money’ is why BTC 3x’d over the next 2 years.
All the competition now to out do each other with higher price targets, and $100 million trades makes me bearish. I miss the old days.
Contrast Bitcoin today with gold. Gold was derided at $2,000/oz as a ‘boomer coin’ which would never go up. Today at $5,000/oz not much has changed. The biggest price target anyone can imagine is $5,400/oz, or another 8%. There are no 10x; $50,000/oz price targets even though gold has the same Project Zimbabwe characteristics. Which is why gold will keep going higher.
A few other nitpicks on BTC. I can’t help but remember how in the early days of the narrative we were going to be use BTC to buy coffee, and we would save BTC in our cold storage wallets so the government couldn’t seize our assets. Now it looks like we will use stablecoins instead for payments, and will store our BTC in BlackRock ETF’s. Hmm…
Kind of looks like BTC has transformed itself from something special into another ETF’able risk asset. Maybe we trade it as such.
Then finally on the quantum risk… who knows right? But net, net it’s not comforting for your ‘digital risk free asset’ to have this overhang of ‘if/when’ it gets hacked by a quantum computer. And if/when it happens you will probably be the last one to figure out it has happened after all the insiders have sold out.
In summary, maybe BTC goes to $10 million and I’ll be here writing YWR while everyone else is on Palm Island. But for this trader, who has been to quite a few rodeos, there are a lot of concerning signs.
Value versus Value Capture
In CS183 Peter Thiel starts with a comparison of the airline industry and Google. Airlines create tremendous value for society. In contrast internet search engines also provide value, but if we could only have one or the other we would probably choose air travel. Yet, the market cap of Google is 10x that of the entire airline industry. Thiel is trying show that while search engines provide less value than airlines, Google does a better job of capturing the value. Value and Value Capture are not the same thing.
Crypto bulls will write pages about the value of blockchains and crypto to society, but very little on value capture, which is the part we care about.
Back in 2021 when ETH was $4,000 the story was you were buying the dominant Layer 1 which would run the future blockchain economy. You owned the tollroad the whole thing would run on. ETH was generating $200 mn of fees/week. You dreamed how much those fees would grow in the years ahead as everything tokenised. By 2026 would it be $1 billion/week? Or higher?
Nope.
The 2001 you would be shocked to learn over the next 5 years ETH fees would collapse 95% to just $10 million a week. ETH would also be in a life or death battle with Solana and TRON would overtake ETH has the primary blockchains for stablecoin payments.
In trad-fi world if you have the dominant market infrastructure it’s pretty hard for things to collapse that quickly.
What we are learning about blockchain world is that it is HIGHLY competitive and it’s hard to generate moats. In crypto world code is easily forked and trading bots can hop around between chains and dApps easily. Market fragmentation is not a problem and it’s hard to generate network effects. There is also none of the corporate world inertia and CYA bureaucracy which keeps customers locked into established products. In crypto world market shares change quickly and constantly.
Take Uniswap. Back in 2021 UNI traded at $40 and was the primary decentralised exchange where everyone went to swap tokens. Uniswap had 50-60% market share depending on the week. It was like owning the NYSE of crypto. Then 5 years later that market share had fallen into the 30-40% range. Uniswap was overtaken by Pancake Swap. Fees generated by the UNI exchange also fell from $30-40mn/week to the $15-20mn/week range. The UNI token price is -92% to $3.5.
Lots of crypto trading volume going on, but not much value capture for UNI holders.
The crypto push back to the collapse in fees on Ethereum is that the future value of ETH will become detached from the fees it generates. Usage of the Ethereum blockchain will be so unbiquitous that ETH will evolve into a new risk-free asset. It will be like gold or BTC, but better because it is programmable so you can do things with it. You will own ETH because you need it for everything. ETH will inherit a monetary premium divorced from its economics the same way the price of a fancy bottle of wine has nothing to do with its nutritional value.
Maybe, right?
I try to be open minded about these things. I’d hate to miss ETH $10,000 because I still need my Palm Island mansion. On the other hand ETH seems to be struggling to generate fees (something previously unimaginable), and struggling to find its role among the other Layer 1’s and Layer 2’s. It’s no longer clear ETH is the unbiquitous ‘chain to end all chains’ we imagined back in 2021. Taken all together it doesn’t seem like the set up for transmutation into a new monetary asset.
Instead it could be the set up for a drop to $1,000.
Crypto’s Original Sin
In crypto we are always buying ‘tokens’. Why is that? Why doesn’t Ethereum just charge you a fee for using the Ethereum blockchain like how it is for other infrastructure like AWS, the Golden Gate Bridge or the DTCC? Why do you buy a token instead?
