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Thursday mailbag

Q: Will bitcoin be a strategic reserve asset?

This is a deeply silly idea — and one that might just happen.

Senator Cynthia Lummis of Wyoming is reportedly working on legislation that would require the Fed to hold bitcoin as a "strategic reserve asset." 

I have no idea what might be strategic about bitcoin.

The US government keeps a reserve of oil just in case there’s a sudden shortage at the same time we want to fight a war or something. 

But in what scenario could a shortage of bitcoin ever cause problems for the US government?

The only thing you can buy with bitcoin is dollars, of which the US government has infinity.

The idea might still catch on — in addition to oil, the government owns gold and various foreign currencies, so people might think why not bitcoin, too?

But both of those holdings are historical relics.

The gold is a throwback to the pre-Bretton Woods days when people still thought currencies had to be backed by assets.

The foreign currency is a throwback to when the Fed would occasionally buy or sell foreign currencies to counter "disorderly market conditions."

It doesn’t do that anymore and even if it did, why would it care if the bitcoin market got disorderly?

A disorderly market in, say, Japanese yen might disrupt your ability to buy a new Zelda game, which would of course be a problem worthy of government intervention.

But a disorderly market in bitcoin would only disrupt your ability to buy bitcoin (which, let’s be honest, is not as important as Zelda). 

The reason we buy bitcoin is that it’s insurance against a US dollar collapse. 

So why should we encourage the government to inflate the cost of that insurance by buying bitcoin for itself?

(Here’s another way to accomplish the same goal: Print less money!)

Instead, we should be asking Senator Lummis to propose a bill banning the government from buying bitcoin. 

She’s about to do the opposite, though, and former President Trump will probably endorse the idea in Nashville this weekend — and because bitcoin is a crypto "currency" and it seems vaguely strategic, it might just happen.

It’s a silly idea, but money itself is just an idea, too — even the Fed says so.

Q: Is the election good for memecoins?

Keeping in mind that the Pepe meme might have been what pushed Trump over the top in 2016, I expected more from memecoins this time around.

There’s been plenty of material.

Trump’s fist-pumping response to the shooting was an incredibly meme-able moment and yet, the various Trump-themed memecoins have all traded flat or down since.

Vice President Harris has become the presumptive Democratic nominee in dramatic and unprecedented fashion, and yet the biggest Kamala coin, KAMA, is only worth $30 million.

Worse yet, the biggest JD Vance coin is only worth just $2 million.

Similarly, "blue chip" memecoins have held up pretty well, but don’t have nearly the mindshare they did as recently as a couple of months ago.

The election has unearthed some demand for memes, however.

After Biden’s poor debate performance, traders in China bought up shares of the software company Wisesoft Co because its Chinese name, "Chuan Da Zhi Sheng," happens to sound to Mandarin speakers like "Trump wins big." 

Takeaway?

Memecoins are losing some momentum — and if you’re launching one, you should consider launching it in Mandarin.

Q: Are prediction markets accurate?

I think they are. 

At Predictit, you can bet on Trump at a 57% probability and at Polymarket, it’s 62%. That’s a wide spread — presumably because the crypto-types betting with Polymarket are more bullish on Trump than the non-crypto types betting on Predictit.

Buying both Trump and Kamala will cost you only 92 cents on the dollar: 57 cents for Trump on Polymarket and 35 cents for Kamala on Predicit. 

But here’s the kind-of amazing thing: Your 8 cent-arbitrage is almost exactly what it will cost you to put the trade on.

Predictit takes a 5% fee and Polymarket takes a 2% fee (plus the Ethereum fees it costs to transfer USDC).

 Markets are efficient.  

Q: Will more crypto protocols pay revenue out to token holders?

If Trump wins, they might — one reason so few do currently is that it risks making tokens look like securities and that would be less of a concern with a Trump-aligned SEC in place.

That’s not the only thing holding them back, though. 

A lot of crypto people argue that protocols with revenue should be reinvesting that revenue for growth — the crypto industry as a whole is still in its VC stage and VC companies don’t pay dividends, so tokens shouldn’t either. 

But, for crypto, I prefer the DePIN model of using all (or nearly all) revenue to buy and burn tokens while simultaneously issuing tokens to pay expenses.

That would usually be nonsensical in equities — with a couple of exceptions (like REITs), since you wouldn’t expect a company to be both raising money and paying dividends. 

But tokens aren’t stocks and protocols are companies.

We were reminded of that this week when dYdX Trading Inc. announced that it’s in talks to sell its dYdX exchange software — the proceeds from which will not go to dYdX token holders, who have no claim on dYdX assets.

Token holders do generally have a de facto claim on both assets and earnings via governance — having the ability to vote yourself a dividend is not so different than having a legal right to earnings.

But do you really trust a DAO to act in the fiduciary interest of token holders? 

Recent evidence suggests you shouldn't — DAOs have been pretty terrible about allocating capital, so I think the industry would be better off if they just paid it out to token holders and let the token holders reallocate it instead.

Crypto needs a Gordon Gekko moment, like TradFi had in the 1990s when corporate raiders like KKR terrified management teams into recognizing their fiduciary duties to shareholders.

In the meantime, governments should let people decide what to do with bitcoin and DAOs should let token holders decide what to do with tokens.

— Byron Gilliam

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