Welcome to Money Reimagined.
This was the week the internet finally defeated Wall Street – at least for a few days. The wild rally in GameStop’s stock, fueled by an army of Reddit retail day traders, imposed devastating losses on hedge funds and showed how free trading tools and social media (memes) can now be harnessed by networks of individuals to achieve economic outcomes previously controlled by elites. The gobsmacking story of GameStop, Melvin Capital and r/WallStreetbets was tailor-made for the disruptive, anti-establishment vibe of the crypto community. This “WSB effect” theme runs throughout this week’s newsletter.
On the other side of the masses vs. establishment divide, this was also the week of the “Davos Agenda” virtual event, held in lieu of the World Economic Forum’s annual meeting. It included the likes of German Chancellor Angela Merkel, Chinese President Xi Zinping, a host of Fortune 500 CEOs and so forth.
My podcast co-host Sheila Warren, who happens to be the WEF’s blockchain lead, invited long-time WEF Managing Director Adrian Monck to this week’s “Money Reimagined” show. We talked directly about how the old guard deals with the changes that radical outsiders, such as crypto developers and tribes of activist retail investors, present. Have a listen at the link below after reading this week’s newsletter.
BTC and ETH: Made for each other
As of 11:00 a.m. ET Friday, the year-to-date returns for bitcoin and ether show an easily discernible reversal of the BTC dominance seen in late 2020. Bitcoin is up 27% year-to-date and ether, 92%.
- What’s going on here? Well, before we try to answer that, a caveat: If the past week’s WallStreetBets-vs-hedge funds spectacle has taught us anything, it’s that in today’s meme-consuming, radically democratizing markets, confidently defining fundamental reasons for price movements is difficult. What matters is which narrative is winning.
- Narrative? So prices are just make-believe? Well, yes, but stories have always been about how people – and thus markets – reach consensus. It used to be Wall Street controlled the narrative. It’s unclear whether that’s still the case.
- So, what narrative best explains ETH outperforming BTC? Well, let’s first challenge the “Tulip Bubble” angle that mainstream crypto critics might instinctively apply here: The idea this is a rerun of the 2017 bitcoin rally, which pushed speculators into comparatively cheaper tokens only to foster the mother of all bubbles. The loss suffered this week by short-selling hedge funds at the expense of hordes of retail investors from the r/WallStreetBets subreddit shows it’s dangerous to conclude that large groups of determined bulls are inherently wrong.
This is not to say ETH’s price won’t correct as bitcoin’s has this month. It just means we owe it to ourselves to explore other narratives.
- Such as? Here’s one: There’s a BTC-to-ETH price rotation going on that suggests thoughtful investors are starting to see Ethereum, and more specifically the decentralized finance (DeFi) applications built on it, as a constructive complement to Bitcoin. As sophisticated investors increasingly recognize bitcoin’s potential as a “digital gold” store of wealth, the thesis goes, they will soon see DeFi as a means to creatively unlock that value – for payments, for loans, for insurance, and so forth.
This take sees Bitcoin as the base layer protocol for a software stack that handles the internet’s value storage and exchange. Bitcoin the currency is a simple yet hard-to-change, highly secure store of value. Much like gold, it doesn’t do much; you just lock it away and use it as security to back up your other investments and financial activity. But because it’s built on a permissionless protocol, developers can still do many more creative things with it than, say, a gold custodian can do with bullion.
That’s where Ethereum and DeFi come in. With smart contracts, oracles, decentralized exchanges and multi-sig systems for securing digital assets, the degens of DeFi are now incorporating bitcoin into their freewheeling, “composable” world of decentralized financial products. Hence the summer explosion of wrapped bitcoin tokens such as WBTC.
To go back to the software stack analogy, Ethereum is middleware and DeFi occupies the application layer.
- Analogies are also being made to the traditional finance “stack.” RealVision CEO Raoul Pal says bitcoin is “pristine collateral” that could even take on the $123 trillion market for U.S. Treasury bonds as the base-level security for all credit. It’s appeal is not only that it’s a provably scarce asset, but also that it can be locked up in escrow through a decentralized smart contract that leaves neither lenders nor borrowers vulnerable to the failures of a middleman. You build DeFi’s lending, borrowing and insuring products on top of that feature and you now have the makings of a financial system.
- Now a mega-name celebrity investor is also warming to the thesis. Asked by CoinDesk contributor Jeff Wilser if he would ever see bitcoin as something more than a speculative investment, Dallas Mavericks owner and CNBC “Shark Tank” personality Mark Cuban responded, “Sure. If DeFi and BTC can evolve together in a manner that allows BTC to effectively be a bank account without the bank. That creates utility for BTC.” What does he think of Ethereum? “I like ETH. Obviously it’s a primary foundation for DeFi, and we will see what happens with ETH 2.”
- Ah, Eth 2. The Elephant in the Room. If Ethereum 2.0 succeeds, over the next couple of years the blockchain will transition from a proof-of-work consensus model to proof-of-stake and will allow massively more transaction-processing capability. That scalability is needed if Ethereum is to play a meaningful role in the global financial system. But the transition is incredibly difficult to pull off within a large, decentralized community of users where billions of dollars are at stake.
Still, there seems to be early optimism around Eth 2.0. The amount of ether locked and staked on the transitional Beacon Chain has steadily risen to more than 2.8 million ETH as of Wednesday (an amount currently worth about $3.89 billion). Indeed, ether’s steady January gain to an all-time high of $1,476.12 on Sunday was itself an expression of confidence in that project.
- There are other ticks in the plus column for Ethereum. There’s a boom in non-fungible tokens, also captured in the Cuban interview. And there’s support, including from suddenly in-the-news social media platform Reddit, for using so-called layer 2 scaling solutions such as Plasma to expand Ethereum’s use cases. Meanwhile, EY blockchain lead Paul Brody is predicting financial institutions will bring DeFi to the masses.
All of this points to an expanding and diversifying Ethereum ecosystem. For a blockchain, that’s the best story you can tell: a growing network.
Did Trump help bitcoin’s late-2020 surge?
Since we’re talking about narratives, let’s look at how we might visually represent a market-justifying story. I’ve chosen a take by CoinDesk Global News Editor Kevin Reynolds on the role played by fears of electoral chaos on bitcoin’s price rise during the late fall and early winter. I can buy this story: If bitcoin is digital gold, it should work as a backstop against dystopia. But what I also found interesting was how easy it was to illustrate this idea on a chart. I just grabbed a few election-related statements by former President Donald Trump and his supporters, got CoinDesk data visualizer Shuai Hao to mark them on a four-month chart, and the yellow line did the rest.
(NOTE: This chart was produced late Thursday New York time, before bitcoin’s huge leap to a new post-Jan. 8 high of $38,000 early Friday morning. The story may need a new chapter. Arrival of the WSB effect?)
Kevin argues that electoral fear added an extra $10,000 to the all-time high that was hit right after the climactic Jan. 6 raid on Congress. The rest of the gains came from the standard stuff everyone was talking about: mainly that institutional investors were now adding bitcoin to their long-term portfolios. So, when things simmered down and new President Joseph Biden was sworn in, bitcoin’s price eased to what would be fair value in normal times – you know, amid a normal global pandemic and economic depression.
The Conversation: ants vs. elephants
In 2014, when the idea of decentralized autonomous organizations was first being kicked around, crypto pioneer and DAO enthusiast Joel Dietz founded a decentralized fundraising platform called “Swarm.” (It has since evolved into Swarm Capital, which provides tools for companies to issue security tokens.) The name always struck me as an evocative one for an entity comprising many individuals without centralized control.
Now, after digesting this heady week on Wall Street, the term seems especially apt. I’m talking, of course, about how retail investors in a Subreddit that quickly swelled to 4.4 million people collectively forced big hedge funds into a “short squeeze” on supposedly has-been “meme stocks” such as GameStop, AMC Entertainment and BlackBerry. The WSB group maneuver imposed billions of dollars of losses on those institutions. Melvin Capital needed an injection of $2.75 billion from Citadel and Point72. One thinks of a swarm of ants attacking elephants.
That the name stems from a crypto venture is also fitting since the WSB saga prompted an outpouring of interest from the crypto community. It had all the elements of a crypto drama, even though the battle never occurred on a blockchain.
For one, there was a much-discussed CNBC interview with Social Capital CEO Chamath Palihapitiya, who had spent time trawling through the r/WallStreetBets posts and, following the group’s lead, made a $500,000 profit. Declaring that what he “learned over the last couple of days is important for everybody that’s watching CNBC,” Chamath said the insurgent investor movement was “a pushback against the establishment in a very important way,” one that harked back to the 2008 financial crisis. It captured the rebellious, anti-Wall Street vibe that’s long been part of the crypto community.
As the drama unfolded, Crypto Twitter lit up with people drawing parallels with and lessons about the crypto scene.
In a tweet thread about people demanding change to a system rigged for the big guys, Galaxy CEO Mike Novogratz said the movement was “a giant endorsement of DeFi.”
Then, on Thursday, when the Redditors’ favored trading app, Robinhood, shut down access to the the stocks in question – creating a vitriolic backlash in what one observer called the trading app’s own “Streisand Effect” – the crypto community leapt to remind the world that this could never happen on a decentralized exchange. It was the perfect opportunity for Erik Voorhees, CEO of Shapeshift, to weigh in about his company’s new decentralized offering.
Then, inevitably, the WSB phenomenon spread into the crypto world’s very own “meme token,” Dogecoin, which soared more than 800% to a new record high.
CoinDesk’s own Will Foxley couldn’t resist:
Relevant Reads: Dabbling, not diving
Going into the year-end was an exciting period for bitcoiners. Many large-name investors emerged to declare their appreciation of bitcoin’s potential and the price responded accordingly.
As the price dropped back in the latter part of January, the “institutions are coming” rallying cry tempered. Big-name investors still showed interest in bitcoin, but some of their messages emphasized their caution and focused on the challenges they still see bitcoin facing before it attains a widely recognized place in institutional portfolios. CoinDesk’s coverage this past week captured that. (We’ll have to see how next week’s stories look if bitcoin holds the gains it enjoyed Friday morning and as these institutions take stock of the powerful reckoning they’ve been confronted via a retail investor insurrection.)
- Guggenheim Partners Chief Investment Officer Scott Minerd, who made waves last year when he assigned a long-term target of $400,000 to bitcoin, didn’t exactly retract that prediction but added an implicit “not any time soon” caveat. In a Bloomberg interview he said, “Right now, the reality of the institutional demand that would support a $35,000 price or even a $30,000 price is just not there.” After Friday’s jump, that comment is looking a little off.
- Journalists are always looking for comments from Dallas Mavericks owner and CNBC “Shark Tank” personality Marc Cuban. Crypto journalists are no exception. So, we were thrilled that CoinDesk contributor Jeff Wilser had a rich exchange with Cuban this week. As discussed above, Cuban sees real potential in bitcoin, especially if it can team up with DeFi. But as a standalone investment for now, his current view is, let’s say, “meh.”
- We’ve also long been trying to get legendary Bridgewater Associates founder Ray Dalio’s thoughts on bitcoin. He has remained mostly skeptical, even if his tone has become moderately more upbeat over time and his view has emerged only via small snippets of commentary. Finally, in his widely read Daily Observations newsletter, Dalio and his team have delivered a detailed, deep-dive analysis of bitcoin’s opportunities and challenges. I’d say Dalio still has a small amount of learning to do – for example, on why bitcoin can’t easily be replaced by a “better” cryptocurrency – but otherwise this is a brilliant analysis. His team’s assessment of bitcoin’s infamous volatility and why that makes it hard for portfolio managers to adopt it as loss-mitigating uncorrelated asset is masterful. (Oh, and I’m super excited to tell you that Dalio will be a headline keynote at CoinDesk’s Consensus event in May. Stay tuned for more exciting speaker announcements as we update the events page.)
- Perhaps the most important news of the week on the institutional investor side was Ian Allison’s scoop that the trustees who run the endowments of Harvard, Yale, Brown and other universities have been investing in bitcoin for over a year. What we need to know is why. The colleges are, for now, keeping the justification for their entry into this market close to their chest. Without that, it’s hard to know whether they’ll keep it up.