“The value of money has been settled by general consent to express our wants…as letters were invented to express our ideas.”
— Edward Gibbon
Thursday Price-talk Mailbag
It’s been barely two weeks since the builder-centric, numba-goes-I-don’t-care-where Permissionless conference, and already I’m back to thinking mostly about prices. It’s not really my fault, though — I used to be a trader. Also, I love money (don’t tell anyone). For someone that thinks about money as much as I do, you’d expect I’d have made a lot more of it than I have. But trading is hard. Hope springs eternal, however. And even when numbers are going down, crypto is still pretty fun. So let’s try to figure some things out.
Q: What’s the most consensus idea in crypto?
Judging from the conversations I had at Permissionless, I’d say long ETH.
Maybe that’s just because it’s the most obvious answer to the “what do you like” question I asked everyone. But I heard enough people say it that I question whether we can all be right.
It’s an alluringly simple idea: Post-merge, the supply/demand dynamics are expected to flip from structural sellers to structural buyers. But, for one thing, the consensus is such that I wonder whether the pre-positioned longs will outweigh the favorable shift in supply/demand.
And for two thing, there are so many variables involved in the post-merge supply/demand, I question whether everyone has really thought it through.
How many ETH will be staked? How much MEV will validators extract? What will tips add up to?
After reading this Blockworks research piece, my best guess is that, post-merge, ETH will yield somewhere between 3% to 7% for validators, which, intuitively, feels about right: 3% seems too expensive for an asset with so many risk factors and 7% feels like a number that would get the attention of institutional investors.
That’s for validators and — with a haircut — stakers. If you’re just buying and not staking, you should be more interested in the emissions supply/demand outlook, and there I wonder if the consensus is too optimistic. With current bear-market levels of activity, it seems like flat emissions would be a good outcome, which may not be good enough given the consensus pre-positioning for the merge.
I am admittedly guessing, but, the truth is, I think everyone else is just guessing, too, there are too many moving parts to do otherwise.
Big picture, layer-1 blockchains sell blockspace, so to be bullish on ETH, you have to be bullish on the demand for blockspace. It feels to me like there is plenty of blockspace around at the moment and not enough use cases to fill it all up: The daily gas limit for ETH is 100 billion gwei and since April, daily gas used has been trending downward.
So I’m a little cautious on ETH, even after a 50% drawdown. But tell me where I’m wrong: [email protected]
Q: If L1s sell blockspace, what do L2s sell?
L2s, I think, are a kind of WeWork, but for blockspace instead of office space: They buy Ethereum blocks in bulk and then resell them in smaller increments.
That is certainly useful in that they scale L1s, but it’s not clear to me how they will accrue value or why they’d have a token. Maybe they can take a spread reselling L1 blockspace, but if it’s anything more than a razor-thin one, some other L2 will presumably offer the same service cheaper.
There may be a first-mover advantage with L2s and maybe a token can attract liquidity that can turn that advantage into a kind of moat — but it may also be that L2s turn out to be commodities (and not the scarce kind).
The Optimism token that started trading this week should offer some clues as to which way it will go.
Q: What’s the most consensus idea in equities?
That’s an easy one: long value, short growth.
That could easily be right for the immediate future: Even up 50% YTD, there are lots of smaller-cap energy companies that still look super cheap to me.
But I think people are being too quick to write off growth investing. And they’re almost certainly writing it off for the wrong reason: The Fed is not why growth outperformed for 18 of the last 20 years.
(Don’t quote me on that stat. But do quote me on this one: 72.1% of all stats are made-up.)
Growth has outperformed value, for however many years, because growth business models are better than value business models: Selling infinity copies of a piece of software at zero marginal cost is a better business than selling things you have to dig out of the ground at high marginal cost.
The problem now is simply that those better businesses got priced for perfection — to a level where investors became dependent on near-zero interest rates to make their DCF models work out.
But growth businesses are still better than value businesses, and it’s not interest rates that make them that way.
Q: What’s the dumbest idea you’ve seen this week that might actually work?
Evidently, @pacer_gg is going to pay people to sleep. I haven’t figured out how that is supposed to work yet, but I really, really want it to.
Of course, we’ve only just re-learned the lesson that there are limits to the magic of hocus-pocus crypto tokenomics, so I guess I shouldn’t get my hopes up.
But sleeping is my second favorite thing (after money), so I really want this to be real.
Sleep-to-earn is a Ponzi I can believe in.
Q: Sleep-to-earn? Really? That’s the best crypto can do?
OK, here’s something more substantial: I read recently that JPMorgan’s in-house blockchain, Onyx, has processed $300 billion of short-dated debt since its launch in December 2020.
The Onyx blockchain “allows banks to lend out US government bonds for a few hours as collateral, without the bonds leaving their balance sheets.”
That’s an amazing use case for crypto.
There is, of course, no Onyx token to buy, so it doesn’t get any attention. And private blockchains are not exactly what we’re here for. But I think it could be the biggest thing in crypto that no one is talking about — once institutions get accustomed to instantaneous settlement and intraday borrowing and lending, they are going to expect that kind of convenience and functionality in everything else they do, too.
I expect JPMorgan is creating a lot of institutional converts to the crypto cause. Eventually, they will get comfortable enough to venture away from private blockchains and join the rest of us in public ones.
Alright, I’m over my word limit now and, not to brag, but I have to guest star on a podcast in a few minutes. (OK, fine. There were cancellations, and I’m about the fourth alternate — like the emergency goalie they take out of the stands at an NHL hockey match — but, still, it’s a big podcast!)
See you tomorrow on Charts Friday for more price talk.
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