Paper Weight
Layer-1s Bounce Back while $BTC and $ETH Lie Dormant
I haven’t had too much time to write lately, as I am in the middle of grading my students’ final papers, but I wanted to drop a quick line to everyone to share with you all some illuminating thoughts from Caitlin Long, Founder and CEO of Avanti Bank (She’s a champion.) I recommend reading through the thread below on your own time, but I will provide the TL;DR below.
Long story short, bitcoin’s price is being suppressed because Wall St. folk are trading “paper” bitcoin via a futures ETF as opposed to trading the real asset. When you buy a futures contract, you speculate on the price of an asset in the future, and you use leverage to do so. But before I continue, though, let’s discuss what “paper” bitcoin is.
Another way to think of this is that paper bitcoin is like an IOU for bitcoin (and the accounting around these IOUs currently seems shady at best). It’s similar to the phenomenon that occurs when you buy bitcoin or other digital assets on Robinhood. You don’t actually buy or own the asset; you own an IOU for the asset. (In this piece, I touched on why you should always buy the digital assets themselves and not digital asset financial products or IOUs.) When you buy paper bitcoin or paper versions of other digital assets, the price of the asset is not directly impacted, because the asset itself isn’t being swapped; only the IOU is. This has happened with gold in the past, as well. Long cites Hayek, who discusses how this happened with gold after WWI, in her thread above.
In short, Wall St. is doing what it does best: paper trading with poor/shady accounting. Ironically enough, Bitcoin was created to remedy this issue, and yet here we are. It’s almost like Wall St. - wait for it - ruins everything it touches.
To further complicate matters, as I mentioned, with this paper trading comes leverage. I’ll let Long explain below before I comment further.
Essentially, when people bet with leverage via the Bitcoin futures ETF, they are betting with potentially more bitcoin than even exist. Without going too much further into detail on this, the main effect that this has is that it amplifies price drops. Instead of simply causing a moderate sell-off (which is like 20% in $BTC world), it causes an exaggerated sell-off, a 30-40% sell off. After such sell offs, the market gets traumatized and we trade sideways, like we currently are.
Summary: The Bitcoin futures ETF that launched in October of this year is a trash asset that was approved by a trash (I take it back; I’m trying to be less antagonistic) less than favorable head of the SEC, Goldman Gary Gensler (for more on how just how much of a fraud Goldman Gary is, I recommend flipping to page 62 of the Crypto Thesis for 2022 from Messari to the section entitled “10. Dear Gary Gensler: Are you a Partial Fraud or a Total Fraud?” Really important reading.)
It’s important to understand that while Gensler actually taught a class on Bitcoin and blockchains at MIT, you’re better off thinking of him as a former Goldman Sachs employee that is now a regulator for the U.S. government. In other words, he’s a good ol’ boy, a Boomer careerist who has no problem coming and going through the revolving door between Goldman and the U.S. government (He’s held other positions at the federal government level in the past, as well.) And he’s the one who approved the Bitcoin futures ETF instead of a Bitcoin spot ETF. For more on the difference between these two types of products, please read this article. I’ll quickly give an overview of what a spot ETF is below.
A spot ETF is a fund that is backed by the actual asset it represents, and when people trade a spot ETF, the actual asset, not just the IOUs for the asset, needs to be bought and sold. Greyscale Bitcoin Trust would have been the perfect entity to convert into a spot ETF - and they have an application on file with the SEC requesting to do so - but my guess is that Captain Gary G. knew that a Bitcoin futures ETF would likely suppress the price of Bitcoin.
Not to fear, though.
Continue reading the thread above for more of a breakdown on why Bitcoin’s price will likely break through this current suppression sooner than later. If you want my two cents on why “a day of reckoning is coming” for the price of Bitcoin, it’s because the people who hold it (myself included) are a bunch of degenerate fucking maniacs, and we’ll hold it until it not only tears through the paper that’s currently holding it down, but until the skies open up and the heavens rain holy Hell on Wall St. [End outraged millennial fantasy here.]
So, what happens now?
Well, given that the financialization of Bitcoin (and Ethereum) seems to be weighing down the prices of both assets, my suggestion would be to 1.) Just continue to hold your $BTC (and $ETH) and 2.) Look to Layer-1s (and maybe gaming coins and NFTs, though, I don’t really dabble in those areas, so I can’t really speak to that) if you are looking for potentially greater alpha.
Avalanche ($AVAX) and Terra Luna ($LUNA) just went on a little tear. You may see the likes of Solana ($SOL) and Fantom ($FTM) do the same.
As always, though, this isn’t financial advice; it’s simply the rantings of a mad man who just went off on a tangent about holding Bitcoin through the “holy Hell” that will inevitably rain down on Wall St. - Totally healthy.
Layer-1s have been performing like $BTC and $ETH did in the 2017 bull market. That doesn’t mean that they will continue to do so. It just means that they have been recently. Translation: Don’t take these previous three sentences as your signal to ape into Layer-1s.
So, what did we learn today?
Wall St. is trash.
(Most) Bitcoin financial products are trash. ($GBTC is okay.)
Gary Gensler is... (Oh, I want to say it so badly… Errrr...) not acting in good faith. [Forceful exhale] (Really, he’s just doing his job… Not the job of actually protecting investors when it comes to Bitcoin (lol), but the job of attempting to protect the hegemony of the U.S. Dollar, which I can’t wrong him for. But more on how stablecoins like USDC can actually play a role in doing that better than Gensler’s current tactics in a future edition of the newsletter.)
Layer-1s (and Layer-2s like Polygon: $MATIC) are probably something you should learn more about.
And now, I’ve got to go back to assessing the little Hemingways and Austens that I taught this semester.
Tomorrow’s my last day as a university lecturer! Wish me luck!
Best,
Frank
Twitter: @frankcorva
