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Sunday Rundown - February 7, 2021
Bitcoin dominance just dropped below 62% and everybody’s gearing up for a new wave of money entering the market. Things could get interesting :-)
Near the beginning of last week, I posted a video regarding a rumor that altseason will end in February. Hard to see how it could end before it starts!
This week, I published my third book, From Bust to Boom: Ten Months Through the Eyes of a Bitcoiner. Premium subscribers, make sure you got your free version.
Everybody else, if you do read the book, will you please leave a review? It’s essentially a trimmed down, slightly-edited compilation of the monthly issues of Crypto is Easy from March to December 2020, all in one book.
Read below for a few interesting bits I found around the innerwebs.
Bottom line: on October 25, 2017, an FX trader said 2017 was bitcoin’s IPO and a deluge of institutional money was looking to enter the market.
My take: sounds familiar? It took institutional money two more years to get into bitcoin. They’ve mostly chilled now, waiting for a better opportunity. As was the case in October 2017, it’s retail’s turn now. (BTW October 2017 was the first time I heard about bitcoin, I bought my first in November.)
Why we care: if October 2017 is analogous to the present situation, you can expect lots of chest-beating hype and the same kinds of articles. Just remember, they ain’t buying until they’re buying. Most who wanted to buy have already bought. No worries—retail buyers can push markets very, very high without the help of institutional investors.
Watch the short video, Adaptor: The Rise of Social Money. Think about social money like Web3.0 meets DeFi meets DAOs, where creators and businesses create branded tokens with specific rules fixed by smart contracts. They can release, leverage, or exchange them for products, services, and access to people or perks.
It’s quite a mind shift and possibly the next evolution of cryptocurrency. If this bull run is led by DeFi, DEXs, and DAOs, perhaps the next bull run will be led by Web 3.0? Can you imagine asking a potential employer to stake your token as a condition of employment?
Last, read this post from the Unqualified Opinions newsletter. Some food-for-thought about DeFi. I couldn’t link, so here it is:
DeFi asset prices are soaring. The average DeFi asset is up 3x this past month, and we now have six DeFi unicorns: Uniswap and Sushiswap (decentralized exchange), Aave, Compound, and MakerDAO (lending), and Synthetix (synthetic assets). The current DeFi king, Uniswap, is worth $5.5 billion today, and nearly $20 billion on a fully-diluted basis, having processed $30 billion of trading volume in January.
There’s real value flowing through these markets, and we’ve argued before that many DeFi asset valuations are supported by fundamentals (i.e. network earnings power) despite their sky-high sticker prices. This is especially true when considering long-term growth potential. Still, just how high are the ceilings for DeFi assets? Can they one day rival today’s largest global financial institutions, or are their ceilings structurally lower?
That depends on three variables:
Global Reach - DeFi protocols should scale more efficiently across jurisdictions than legacy financial institutions. Like the internet protocols we take for granted today (TCP/IP, HTTP), DeFi protocols are open standards for transferring value worldwide. They are not beholden to any specific jurisdiction; they are available everywhere (easy to access), yet have no physical “home” (hard to kill). That’s a deadly combination for a disruptive technology.
Market Structure - Will DeFi be a “winner-take-all” market? This is the trillion dollar question, and maybe the hardest to answer. It’s unclear how many winning protocols there will be per vertical, or whether “everything protocols” emerge that completely absorb their rivals. There are already some early signs that the latter is one potential outcome.
Value Capture - Even if we assume DeFi scales globally and exhibits winner-take-most dynamics, it won’t matter for investors if protocols lack viable long-term value capture mechanisms. Open source development leads to low switching costs, so it's likely protocols will extract only minimal value from the services they provide, as competition will prove fierce. There’s a delicate balance in managing stakeholder incentives in DeFi, and it's unclear how much extractable value there will be (or should be) for token holders today or in the future.
My [Ryan’s] take?
I’m bullish that in 15-20 years, DeFi protocols will be far larger than our current financial institutions. Their ignorance of borders and democratized economics will help them scale globally much more quickly than incumbents would like. We’ll see at least some value capture from each new financial utility as protocol maintainers reap rewards for their contributions. And it won’t matter whether verticals become "winner-take-most" or “everything protocols”: investors could simply invest in vertical winners early on, and ride them as they eat the competition.
The “everything stores” of finance will be much larger than JPMorgan.
Relax and enjoy the ride!