《Expression》
By Arthur Hayes
As the annual skiing season approaches, I have traveled from the mountainous subtropical region to the snowy peaks of northern Japan. Skiing in Hokkaido offers not only world-class snow but also delightful seafood, with one of my favorite crustaceans being the Hokkaido king crab. While frozen crabs are available worldwide at a reasonable price, the culinary expertise in this region elevates the taste of the crab to a whole new level.
In my skiing town, there is a stubborn Australian who has been producing the most delicious frozen crab legs for decades. When my friends and I first dined at his restaurant, the relationship between the assertive Hong Kong financial brothers and this master chef did not start off smoothly. Over the years, our rapport has improved to the point where, before COVID, I could walk into his restaurant on any given night without a reservation and still find a seat to enjoy crab legs. His boiled and chilled crab legs are the epitome of this creature’s flavor. Unfortunately, post-COVID, he only offers takeout. However, I can assure you that even eating in my own log cabin, the taste remains top-notch.
What do king crab legs have in common with the financial markets? Each ingredient or investment theme has its unique characteristics. When considering the ongoing devaluation of fiat currencies, what is the best way to profit from the demise of the dirty fiat currency financial system? What is the optimal form for such trades to take?
This is one of my favorite charts, clearly demonstrating that Bitcoin and the broader cryptocurrency space are the best representations of trades on fiat currency devaluation. Contrasting Bitcoin (white), gold (yellow), the S&P 500 index (green), and the Nasdaq 100 index (red) against the balance sheet of the Federal Reserve from January 1, 2020, each currency index was normalized to 100. Bitcoin has surged by 228%, outperforming all other risk assets.
If the asset indexation had begun when Bitcoin first started trading in 2010, the results would be even more favorable for Bitcoin.
Fundamentally, why does this situation occur? Cryptocurrencies represent a movement to separate money and finance from the state. Utilizing computers, the internet, and most importantly cryptographic proof, we the people have created the hardest money in history – Bitcoin; we have also created a new decentralized financial system (DeFi), supported by public blockchains like Ethereum…and others, but they are irrelevant, so I won’t mention them;) This new cryptographic financial system relies on mathematics and grassroots support from dissatisfied humans, rather than the violent coercion of states and their banking lackeys. Capital is a simple energy transfer seeking a safe haven free from devaluation, hence quietly entering the cryptocurrency space. However, when measured against fiat, the market value of cryptocurrencies is insignificant compared to the total value of all fiat financial assets. This is why a small amount of capital fleeing the collapse of the fiat financial system can generate such enormous profits in such a short period of time.
All tokens and investment themes in cryptocurrencies are not the same. As we approach the end of this year, I want to highlight some value traps in cryptocurrencies, some sold by well-meaning individuals and some by ignorant fools. As always, my goal is to present different perspectives and leave readers with questions. By answering these questions, I hope you can make better investment decisions.
Contents
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Jay Duck
Permissioned DeFi
Real World Assets (RWA)
Debt
Bitcoin ETF
Election Year
In my article “Bad Gurl,” I argue that Federal Reserve Chairman Jay-Powell is at best a lackey of U.S. Treasury Secretary Yellen. At the FOMC press conference in December, he displayed utmost compliance with Yellen and the big boss, U.S. President Slow Joe. I suspect that Jay’s knees were already worn out backstage in the green room before he delivered his speech.
The financial mouthpiece “The Wall Street Journal” clearly elucidated the significance of Powell’s pivot:
The Fed’s official statement suggests that policymakers have opened the door to raising rates again. Powell said, “It is too early to declare victory now, and of course there are risks.”
However, Powell’s commentary made this carefully crafted policy bulletin sound outdated less than an hour after its release, implying that officials have shifted their focus to rate cuts. “People generally expect that looking ahead, this will be an issue for us. That’s the reality of today’s meeting,” he said.
Powell’s remarks and the new projections show that Fed officials expect three rate cuts next year, marking a significant turnaround. For over a year, he has been warning that they will raise rates as needed to curb inflation, even if it triggers an economic downturn.
Powell’s comments on rate cuts were surprising, as just two weeks ago, during a speech at Spelman College in Atlanta, he said it was too early to speculate when it would be appropriate to cut rates.
The first and most significant pivot occurred in the first quarter of 2023, when the Fed and the Treasury deployed a $4 trillion rescue package to the U.S. banking system and the bond market through the Bank Regular Funding Program. Powell’s recent comments simply confirm loose U.S. monetary policy.
What changed in two weeks?… Politics.
What’s the worst thing for a politician? Not being reelected.
What’s the second worst thing for a U.S. Democratic Party member? Trump being reelected alongside a large number of Republican congressmen and senators.
Applying these guiding principles, the political factors behind the Fed’s actions from 2021 until now become quite clear.
Due to rampant inflation post-COVID, Slow Joe Powell sat down and instructed himself to control inflation. As seen on the chart, by March 2023, the U.S. 2-year Treasury yield skyrocketed from a base of 0% to 5%. This is the Fed’s fastest rate hike since Volcker’s tenure in the 1980s.
Unfortunately, a few months of Fed tightening were not enough to kill the beast before the crucial U.S. midterm elections in November 2022. Predictions suggest that the Democratic Party will fare worse than Sam Bankman-Fried’s son, as he gazes infatuatedly at Caroline Ellison’s photo. The Biden administration subsequently decided to deplete the U.S. strategic oil reserve, flooding the market with oil to lower gas prices before election day. This is a “strategic” deployment of scarce resources… to get party members reelected. This move worked; the red wave was dampened, and the real drama is yet to unfold.
It doesn’t really matter which clown rules America; the reasons for the empire’s decline were written in stone decades ago. In 2023, the Biden administration, joined by “Bad Gurl” Yellen, worked hard to significantly increase fiscal spending and shift borrowing toward the short end of the U.S. Treasury yield curve, attempting to put lipstick on a pig. I elaborate on this in detail in my article “Bad Gurl.” The result is a thriving U.S. economy, with a real GDP growth rate of 5.2% in the third quarter of 2023 and an expected 2.6% growth rate in the fourth quarter, impressive figures for the world’s largest economy. However, this is not enough to placate voters dissatisfied with Slow Joe and his Democratic Party bureaucrats’ numerous mistakes. Due to Biden’s poor performance, if elections were held today, the person Americans fear most – former U.S. President Donald Trump (aka “Orange Man”) – would defeat Biden. Oh, the horror, democracy is about to die, as most voters may decide to elect a candidate the establishment despises. How ironic;).
“Orange Man” must be stopped, and “Slow Joe” knows how to get the job done.
To further stimulate the economy and keep all financial asset holders happy, Powell must loosen financial conditions, even if it may lead to more inflation. It is hoped that the above-mentioned inflation will arrive after the November 2024 elections. This is why Powell’s desire to maintain such “tight” financial conditions at the Fed remains ambiguous. Don’t forget, according to various widely accepted economic theories such as the Taylor Rule, flexible average inflation targeting, and core CPI above the Fed’s 2% target, current financial conditions are not tight enough. Powell clearly stated on the podium that rate cuts in 2024 are actively being discussed. As “The Wall Street Journal” noted, just under two weeks ago, Powell sang a completely different tune regarding the possibility of rate cuts.
I imagine it like this:
Bad Gurl Yellen calls her “duck” into the office and tells him what’s what. Powell follows suit… rate cuts are on the table. Now, financial assets will rise until the U.S. enters a recession or inflation spikes significantly. With the federal government determined to spend as much money as possible to maintain high GDP growth, I expect no economic recession in the election year of 2024. Whether protests and instability from food and fuel inflation will occur before November 2024 is yet to be seen. But let’s not dwell too much on the future. Currently, the Fed, the U.S. Treasury, and the leaders of the American Daoist Association are all shouting buy, buy, buy. Don’t be silly, reverse and engage in the best form of participation in this trade – cryptocurrencies.
Other major countries or economic blocs such as China, Japan, and the EU will cooperate, allowing the U.S. dollar to soften against the yuan, yen, and euro. With the dollar weakening, everyone is a winner except those without enough financial assets to withstand the inflationary impact of a weak currency.
After firmly grasping the macro reasons to be bullish on cryptocurrencies, let me help you avoid some potential value traps.
This is one of the most absurd cryptocurrency themes currently. If we carefully consider the implications of these words, any thinking individual should understand that these projects are doomed to fail.
Permissioned – the implication here is that some central entity decides who can trade and who cannot trade.
Decentralized – the implication here is that there is a network of participants operating a financial network in a trustless manner. This is a permissionless activity not commanded by a central entity.
Given the implications of these words, how do we create a decentralized financial network? Or a permissioned permissionless financial network? This makes no sense… unless you’re trying to create a value trap to exploit retail investors for TradFi crocodiles.
These projects are built for institutional investors, who have various rules that, in many cases, prohibit them from trading in genuine DeFi projects. This is unfortunate because in a true DeFi free market, there is a large volume of retail traders engaging in trading, while institutional investors cannot participate. A market filled with retail traders is the best market type because it provides an opportunity for “smart” institutional funds to profit from “foolish” retail investors, as they have faster computers to execute trades without human emotions. At least that’s how TradFi markets operate, as exchanges offer special order types and latency rules, providing significant advantages to large high-frequency trading firms. Michael Lewis has a good book on this issue called “Flash Boys.”
In reality, there won’t be enough retail traders using these permissioned DeFi primitives, as they have no need to transact on genuine DeFi projects. Retail traders in a market full of them is the best type of market, as they provide an opportunity for “smart” institutional funds to profit from “foolish” retail investors, as they have faster computers to execute trades without human emotions. At least that’s how TradFi markets operate, as exchanges offer special order types and latency rules, providing significant advantages to large high-frequency trading firms. Michael Lewis has a good book on this issue called “Flash Boys.”
End of translation.DeFi, or decentralized finance, attracts global retail cryptocurrency traders because of its market structure, which is different from traditional finance (TradFi) stock and derivatives markets. Once the hype fades, these licensed DeFi markets will simply become a loop for high-frequency traders, waiting on bid and ask prices, hoping someone crosses the spread and they can make a profit. When retail traders fail to show up in large numbers and cannot prove that the funds invested in these protocols are reasonable, institutional investors will leave. The result will be a ghost town with zero activity or interest from both retail and institutional traders.
Venture capital firms are essentially well-paid puppets, and they are jumping into this theme. Therefore, they will continue to burn capital, just like they did when they invested in the “blockchain, not Bitcoin” theme from 2014-2017. Most of them have missed out on groundbreaking projects like Uniswap, dYdX, Compound, Aave, and others. They have not analyzed the reasons for missing out on these innovative projects but have decided to try something that looks similar on the surface and sounds super sexy. Which investor wouldn’t want a trading platform that combines institutional investors with DeFi and has a massive capital base?
As usual, some people will start selling snake oil to these desperate venture capitalists who want to invest in cryptocurrencies but are skeptical of the current cryptocurrency ecosystem due to the weird and unpopular people residing in it. I don’t hate the founders selling these ridiculous ideas; they can get money from accredited investors with questionable intelligence, which is good for them. But for you, dear reader, when these nonsense projects launch governance tokens, do not become their exit liquidity. If you are willing, you can use these projects, but please think critically to avoid getting yourself into a situation where the token becomes worthless over time.
RWA is the evolution of the security token theme that emerged in the last bull market cycle. Simply put, the aim of RWA projects is to create a special purpose vehicle (SPV) to tokenize assets such as real estate, securities, stocks, etc., and provide partial ownership to ordinary people who cannot afford to buy an entire house or enter a specific asset market.
I firmly believe that any cryptocurrency token relying on national laws cannot achieve large-scale success. Decentralized public blockchains are expensive because they do not need the presence of a nation. With centralized options being very cheap and having good liquidity, why pay a premium for decentralization? The lack of standardization in properties hinders true market liquidity. For example, after buying tokens representing 1/10 of a house, how do you find a buyer at a reasonable price when you want to sell? The buyer needs to understand the location, local real estate regulations, taxes, and actually want that specific property. This can never be compared to the liquidity of owning small portions of standardized stocks or bonds. As usual, entering these investments is easy, exiting is hard… if you can exit.
In conclusion, leave the “real” world governed by national laws to TradFi intermediaries. They can offer more coherent and cheaper investment products to express the same themes. True DeFi projects should only rely on well-written code, not on laws that require interpretation and judgment by fallible humans.
If the ETFs managed by TradFi asset management companies become too successful, they will completely crush Bitcoin. This prediction is based on a subtle and profound distinction between Bitcoin and other monetary assets used by humans throughout history.
All other monetary assets used by human civilization are based on naturally existing physical laws. Gold is gold because of the arrangement of atoms, not because we say it is gold. These atomic interactions are governed by universal laws. Money printed on paper is just gibberish, but it is still a physical substance. Whether you believe a piece of paper has monetary value, it is still a piece of paper. If you dig a hole and bury gold and a stack of paper in it, come back 100 years later, the gold and paper will still exist. Bitcoin is completely different.
Bitcoin is the first monetary asset in human history that can only exist when it moves. After the Bitcoin block rewards approach zero around 2140, miners will only receive rewards for verifying transactions through transaction fees. In other words, miners can only earn Bitcoin income when the network is being used. Essentially, if Bitcoin moves, it has value. But if there are no more Bitcoin transactions between two entities, miners will not be able to afford the energy needed for network security. As a result, they will shut down their machines. Without miners, the network dies, and Bitcoin disappears.
The largest TradFi asset management company, Blackrock, is playing an asset accumulation game. They absorb assets, store them in a metaphorical vault, issue tradable securities, and charge management fees for their “hard” work. They do not represent clients using the assets they hold, which presents a problem for Bitcoin when looking at a possible future from an extreme perspective.
Imagine a future where the largest asset management companies in the West and China hold all circulating Bitcoins. This scenario could happen when people confuse financial assets with stores of value. Due to their confusion and laziness, people buy Bitcoin ETF derivatives instead of buying Bitcoin and storing it in their own wallets. Now, a few companies hold all the Bitcoins, there is no practical use for the Bitcoin blockchain, and Bitcoin will no longer move. The ultimate result is miners shutting down their machines because they can’t afford the energy needed to run them. Goodbye, Bitcoin!
Carefully consider that this is wonderful. If Bitcoin becomes another financial asset controlled by nations, it will disappear due to lack of use. Bitcoin’s demise creates space for the development of another cryptocurrency network. This network could be a reboot of Bitcoin or an improvement on the original Bitcoin. Either way, people will once again have a currency asset and financial system that is not controlled by nations. Hopefully, the second time around, we will learn not to hand over our private keys to baldies.
Therefore, when considering how to survive ongoing fiat devaluation, you must choose a side. Either trade financial assets to earn more fiat, or use an uncontrolled financial system to safeguard your wealth in energy. If it’s the former, go ahead and trade ETFs. That’s why they exist. In the latter case, you must buy Bitcoin and withdraw it to your own self-custody wallet from a central exchange.
Since the idea of “nation-states” infected our collective consciousness hundreds of years ago, 2024 will be the year with the most national elections worldwide. Any politician seeking re-election needs to do good for the people. For wealthy asset holders, this means encouraging central banks to print money and provide loose financial conditions for them. For the poor, it means handouts to pay for rising food and energy costs, a direct result of policies favorable to the asset-rich. For the middle class, it means giving them “democracy,” telling them to pay taxes, bow down, and be grateful for having a vote. Given this, it is futile for politicians seeking re-election to resist the party of fiat devaluation. The votes of those benefiting from fiat devaluation and inflation-linked handouts will outweigh those of the suffering. Therefore, the printing press in every “democratic country” will be in overdrive in 2024.
If you think today is a special moment in history, take a look at the above chart showing the change in the gold value of various reserve fiat currencies over time. Fiat currencies always tend toward zero. No political system can resist the temptation to print money.
The best time to buy Bitcoin and start your cryptocurrency journey was yesterday, and the next best time is now. Clearly, the investment community recognizes the potential of cryptocurrencies to combat fiat devaluation. Otherwise, charlatans like Nouriel Roubini wouldn’t be publishing articles in the Financial Times of London introducing his latest scam, “flatcoins.” Therefore, choosing the best way to express cryptocurrency is crucial. The state and its cronies will offer sweet candy to your children’s brains. But as your parents taught you, do not accept food from strangers.
Original Article Link: BlockBeats
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