September 22, 2022
You can listen to MTC 35 right here.
Not a paid subscriber? Sign up here
Today’s note is 1800 words (9-minute read)
Market update
Remember The Merge? That feels like ages ago. ETH continues to chop out a multi-year top against BTC as the story for now is:
- No new catalysts for ETH on the horizon post-Merge
- Institutional interest in digital yield is existent but not game changing
- Regulatory risk remains pernicious unless your coin is called “bitcoin”
One might could argue that ETHBTC staying way up here in the depths of a bear market is kind of encouraging given ETH is the high beta.
ETH vs. BTC Flippening percentage (2017 to now)
blockchaincenter.net
But I would read it the other way: With The Merge over, ETH facing hundreds of competing PoS tokens, BTC facing zero PoW competition, and higher regulatory risk for ETH than BTC… ETHBTC is way too high.
ETHBTC, 2017 to now
Reversion to the mean around 0.047 makes sense to me. If you run multi-month swing trades, the risk/reward is great with a stop loss above 0.085. Risking 1.5 to make 2.5 kinda thing. Either way, I would much rather be long BTC than ETH for now.
Crypto Volumes
I have seen some headlines saying NFT volumes down 99% and similar types of things and given the hysterical nature of clickbait headline writing, I wanted to check for myself. This got me wondering about the overall state of crypto trading volumes and so I decided to do a bit of a deep dive.
Here come the charts!
First, daily exchange volume from The Block. That is a great resource for crypto data. If you squint, you can see volumes have gone from a peak of about $88B to an average around $20B these days. Down 75% approximately from the highs, but still 4X volumes pre COVID.
Overall crypto volumes 2019 to now
To cross-check that data, here’s Coinbase volume:
Next, I took a look at exchange volumes. I would say bitcoin futures, BITO and MSTR are the three best listed proxies for now. Here are US dollar volumes of those three, back to 2017.
Exchange-listed bitcoin proxies, USD volume (2017 to now)
Since the scaling on that chart is a bit wooly, here are the volumes, as a % of the all-time high, for each.
Exchange-listed bitcoin proxies, volume as a % of high (2020 to now)
This does not look very good!
In fact, given the torrent of VC money that poured in, there is a huge risk that this is an overbuild different from, but reminiscent of dotcom 2000. While the saying is that “bear markets are for building,” bear markets are also for reassessing malinvestment and cutting your losses on hopeless moonshots and projects with high burn and too-little runway.
Much as a forest fire clears out the undergrowth, allows the pyrophytic plants to seed, and restores balance for the next growth cycle… Bear markets wipe out many existing structures while making room for new ones.
Here’s how NASDAQ trading volumes behaved around the 2000 dotcom bubble:
NASDAQ 10-day average daily volume, 1997 to 2004
Somewhat similar, as you might expect. Two big peaks and then an epic winter. NASDAQ volumes have never recovered to 2000 levels, even with the ape-fueled 2021 call option shenanigans.
I don’t want to overdo the 2000s comparisons. 2017 was a bubble in crypto too and things got wild again three short years later. That said, humans learn from their mistakes (generally) and frothing up a third bubble when many of the needed participants have already lived through two… Is gonna be Herculean. Also, the financial market and monetary/political regime shift triggered by COVID was a once in 100 years event. Future MMT episodes are unlikely to be as dramatic as the one we just survived.
Here’s how DeFi volumes are looking:
ETH, total value locked (2019 to now)
From DeFi Llama
And NFT volumes:
USD value of NFTs trading on OpenSea
Data from DappRadar
Woof. That’s one heck of a chart.
The metric for number of users isn’t as bad. One could argue this next chart offers a glimmer of hope. The much larger user base provides a cohort of people ready to get involved in the next bull run.
OpenSea Users
Data from DappRadar
The CryptoPunks chart tells a similar story:
Bored Apes were less moribund over 2022, but flatlining now…
Soggy Vibes
I am feeling pessimistic on crypto right now. I know most MTC readers are naturally bullish crypto (price and tech), so it doesn’t feel very good to write all this. But I am trying to be honest. I don’t necessarily feel that prices need to go much lower in the short-term… It’s more that I’m feeling blue about crypto as a technology and asset class. These types of thoughts:
- Crypto is not close to crossing the chasm. Momentum towards crossing is compromised by the crypto winter. As discussed in MTC 33.
- There are too many VC dollars chasing too few good projects.
- In my two sons’ cohorts (ages 14 to 20), nobody is interested in crypto or crypto gaming. And plenty of them are interested in the stock market and video games. Meanwhile over-40s were drawn by FOMO and guaranteed riches and MMT terror in 2021… But now they are losing interest too. That leaves 23-39 year olds as the flag bearers for now, and it’s not obvious that allows for any growth.
- It all feels so much like 2001/2002. They could barely give away the Google IPO in 2004… That was three years after the NASDAQ bottomed and despair still reigned.
- The list of financial use cases for crypto has been severely trimmed post-COVID as it’s become a high-beta risky asset like all the others. But it’s a high-beta risky asset that’s harder to onboard and has random, hard-to-measure regulatory and operational risks.
- Midjourney and stable diffusion (AI) have come out of nowhere and the use cases are so compelling they are completely blowing my mind. That tech kind of puts crypto to shame when it comes to usability, UI/UX, use cases and all that. Stable diffusion is only a month old! This obviously says nothing specific or directly about crypto, but it provides a stark contrast.
Description:
https://en.wikipedia.org/wiki/Stable_Diffusion
Use cases:
https://twitter.com/daniel_eckler/status/1572210382944538624?s=46&t=WlboskcynIgTNPBvkoplKg
#brentisbeingdepressingheregeez
This is the nature of bear markets. They are depressing. And to point #4 about the Google IPO … There is a location in a bear market where aggressive buyers get rich. The thing is, you need max patience, and deep conviction to survive the endless, grinding series of new lows. And you need to consider the opportunity cost of locking down dead money for a few years.
As long as you’re earning a fair yield, perhaps the wait will be worth it. How much worse can it get, right? Right? …
Halving
I don’t know what my deal is, but I keep getting the date of the next BTC halving wrong. Most estimates are for March or April 2024. Given my analysis last week, that lines up pretty well with an estimated crypto bottom in late 2023 or early 2024. If you’re sophisticated and bullish, you could sell some still-juicy 1-year calls against your ETH and BTC holdings.
Gamers don’t like crypto
The article linked below is a bit over the top, but it also offers a good window into the psychology of the gamer view on crypto. So far, they have been 96% correct as real-world crypto gaming funtimes remain elusive.
Poors as NPCs: NGMI. Key excerpt:
Luckily, people are coming up with fresh ideas for how citizens of the Third World can be put to productive use by wealthy Westerners. Mikhai Kossar of blockchain gaming consultant Wolves DAO, for instance, suggested that they could be added to the background of videogames for the amusement of other, presumably wealthier players.
“With the cheap labor of a developing country, you could use people in the Philippines as NPCs, real-life NPCs in your game,” Kossar said, apparently seriously. They would “just populate the world, maybe do a random job or just walk back and forth, fishing, telling stories, a shopkeeper, anything is really possible.”
It’s an odious idea, perfectly in-character for the NFT field, and literally the dictionary definition of exploitation: “Selfish utilization … especially for profit.”
Tell us how you really feel.
That’s it for this week! Thanks for reading …Sorry for being such a Debbie Downer.
Don’t follow the crowd. Don’t fight the crowd. Think for yourself.
bd