Talking Crypto, Part 2: The Tech Doesn't Matter (Much)
Last week we talked about macro and some technical factors for why Bitcoin is up. Picking up from there...
You left me hanging. There’s a bunch of reasons you cited for Bitcoin’s run. Anything else I should know?
Yes, there's one unique trend that tends to add to volatility in both directions:
One way trades. When crypto experiences a bull, transaction fees rise. For Bitcoin, fees can go as high as $60, and on Ethereum (which uses an auction mechanism) fees can go as high as $150 for a single transaction!
This creates a “one way dynamic” where sellers start to wait for fees to go down (so as to keep some profits) but buyers, blinded by FOMO, keep piling in at any cost.
DeFi (“decentralized finance”) apps are another contributor to the one way trade. To use many DeFi apps, you have to put up collateral, usually a deposit of Bitcoin or Ether. That crypto is now “locked” in a digital vault, further reducing the supply.
About 6-10% of all Ether is “locked” up as users have converted it to digital dollars, but without putting any selling pressure on Eth.
The one year chart of “locked value” shows how this has grown from $100M to nearly $30B in one year.
You cited like ten different possible catalysts. Which of all the factors you mention are real and which are just buzzwords?
Great question, but it’s a matter of opinion. Here’s my view on the reasons I cited above:
High beta asset: seems real. Correlations can always go away, but the link makes sense: when times are good, people are open to taking more risk on unproven investments.
Inflation hedge: this is where it gets tricky. Bitcoin as a “hedge against inflation” is mostly a self-fulfilling prophecy: if people believe it is a good inflation hedge, they will pile into it when inflation expectations are high,
But an important counterpoint is that expectations of inflation often don’t pan out. Experts have been saying the Fed’s monetary policy will cause inflation for over a decade.
To show the point, a number of studies show that gold prices - also considered an inflation hedge - do a bad job of actually predicting inflation.
And even if major inflation occurs, Bitcoin can’t do much to fix it. Many cite Zimbabwe and Venezuela as examples of hyperinflation, but those were driven by economic and political instability which currency policy could not fix. Inflation is a symptom, not a cause.
Dollar demand: definitely real. Many emerging markets in the world continue to face trade imbalances and that weaken their home currency.
This does, however, increase the importance of Tether (USDT) to the ecosystem. Tether is the most popular USD coin, and it has been dogged by fraud allegations for year. A popular article summarized the case against USDT and it does not look good.
DeFi (decentralized finance): depends on your definition of real. DeFi apps to borrow and lend money do work - I’ve used them. That’s pretty cool.
But it’s a lot of trouble to borrow and lend in crypto, and it’s so volatile taking a loan in BTC/ETh to do anything in the real world seems foolhardy. Would you borrow a bitcoin knowing you might owe double in USD terms next year?
There is one popular use case however - using these tools to borrow and buy crypto on margin. Even if that seems useless in real terms, it will still support the price trend.
Altcoin bull: lots of speculation. The surge in Dogecoin is the best proof of that.
So overall, some catalysts are real, some are temporary, and some are fake. But it’s impossible to know which is most important.
Can you explain more about the technology part? I’ve tried to understand Bitcoin a million times and I still don’t get it. I thought it was for payments?
Honestly, don’t bother. The above macro and tech cases are more important in my view.
The proof of that is that the core technology in Bitcoin (Proof of Work) has not improved in ten years, and likely never will. And that’s in spite of the huge waste of energy and resources related to Bitcoin use.
There’s some people who say Bitcoin uses green energy, but these are the people who shamelessly promoted crypto for years, so I would not trust what they say.
Satoshi Nakamoto is certainly not going to be fixing things anytime soon.
Overall, Bitcoin sucks for payments. It takes hours and costs $10 per transaction. The Lightning project is trying to fix that, but it is moving at a glacial pace with little progress.
I’m a little more favorable to Ethereum. Eth has improved its software, although very slowly. This is the primary bull case for Ethereum over Bitcoin. Eth2 launched its first phase in 2020. But that will take years to scale even in the most optimistic project plan.
Hmm, so I’m trying to figure out what to make of all that. It sounds a little crazy but it also sounds like this could keep going for a long time. Can it really keep going?
Yes.
The stock market keeps going up
The Fed will not stop printing dollars in the next two years
Price momentum is very strong
Most of the technology being built is having a positive impact on the price
Things that could stop it:
Loss of price momentum
Regulatory blocks
Tether getting shut down
Bad hacks - a particular risk for Ethereum/DeFi
When you take it all together, a lot of the bull case depends on things that are completely unpredictable. Like a mad prophet, the crypto narrative often describes truths we miss - like the arbitrary nature of currencies and fiat money - but also sees things that aren’t there, like fixing hyperinflation. The only certainty for the future is that we’re going to keep talking about it.