BM Pro Daily - Bitcoin And “Crypto”
Bitcoin And “Crypto”
In today’s issue we will analyze the broader “crypto” market, with a focus on Ethereum and reaffirm why we remain a bitcoin-only focus in our analysis.
In short, our primary thesis is that bitcoin is the best monetary asset the world has ever seen, given its monetary assurances, immaculate conception, decentralization, and immutability. While there is certainly a lot of activity in the broader cryptocurrency market, including everything from stablecoins to NFTs (non-fungible tokens), to lending protocols, our belief is that all of these projects/experiments are dwarfed by global money from the perspective of long-term TAM (total addressable market).
In particular, bitcoin often is compared to ether as cryptocurrency’s #1 and #2 assets by market capitalization. While understandable solely due to the fact that they are both recognized as the world’s biggest “crypto-assets,” in our view, that is where the comparisons end.
In our November 29 issue titled, “Bitcoin: The Most Efficient Value Settlement Network,” we compared Bitcoin and Ethereum as monetary settlement networks, where we used blockchain data to support our thesis that bitcoin was the far superior monetary settlement network and monetary asset. This is compared to ether and the Ethereum network operating in a gray area of being a quasi decentralized smart contracts protocol, that wasn’t purpose-built for value settlement and storage.
On a similar note, Ethereum is in an ongoing process to switch from PoW (proof-of-work) to PoS (proof-of-stake). In short, the hypothetical switch would change the protocol from rewarding miners for their hashing (which requires electricity and computational power) to rewarding those who stake their ETH with additional ETH.
While in theory, it sounds like quite the lucrative system for the holders of the asset, in practice, there are many more worries, such as the slow creep towards further centralization and the staggering weight of exponentially-increasing tech debt that has to be dealt with by protocol developers.
Ethereum Protocol Risk
“Complexity is an often overlooked aspect of a system because usually someone else is paying the price for it, not the person creating it.
“But don't be mistaken, someone *is* paying the price - whether money, time or mental capacity. They might not be willing/able to do forever.
“As with scalability, complexity also keeps trickling unseen up to the breaking point. At that time, it's already past the point of no return.
“Complexity also has the nasty effect of causing cascading failures. Overload people too much, lose capacity, leading to even larger load.
“In #Ethereum's history, complexity never decreased. Every EIP is piling on top. Every major change (1559, merge, sharding, verkle, stateless, L2, etc) is one more nail.
“I'm extremely frustrated when a research proposal says ‘everything's figured out, it's just engineering now.’
“As good as it feels that we're approaching The Merge, I must emphasize that #Ethereum is not going in a clean direction. Tangentially it's achieving results, but it's also piling complexity like there's no tomorrow.
“If the protocol doesn't get slimmer, it's not going to make it.
“I feel the root cause is the disconnect between the research and the dev teams. The former has to ‘only’ dream up elegant - standalone - ideas.
“The latter needs to juggle every single idea that was ever introduced, whilst surgically expanding the dimensionality of the space.
“There have been engineering attempts to reduce the complexity (module split in Erigon, responsibility split in The Merge). Yet there was never an attempt to reduce the protocol complexity.
“We are already past the point of anyone having a full picture of the system. This is bad.
I can't say what the solution is, but my 2c is to stop adding features and start culling, even at the expense of breaking things.
“There are less and less people knowing and willing to piece together a broken network. And each change pushes more away.”
Szilágyi ended the thread with a picture summing up his thoughts on the state of the protocol:
Harsh critics of Ethereum have long said it was a solution looking for a problem, with its long history of changing its narrative/value proposition, going from a platform to launch ICOs (initial coin offerings) and dApps (decentralized applications) to playing a key role in the explosion of DeFi (“decentralized” finance) and the recent NFT boom.
Supporters say that Ethereum and in turn ether (ETH), the network's native asset, are the foundation of a new internet economy, where innovation is endless and interoperability is king.
The reality is more likely somewhere in the middle, as it is true that Ethereum can do many things that the Bitcoin network cannot (i.e., all of the things listed above). But what supporters/investors must ask themselves is, does Ethereum have a true sustainable moat, or is it subject to a seemingly endless amount of knockoffs that make trade-offs on the “decentralization” front to allow for cheaper and faster transactions? These features appeal to a newer user base who doesn't have a vested interest in using “the platform.” Evidence of this phenomenon comes in the form of Binance Smart Chain, Solana, Avalanche, NEAR, etc., who all have implemented a similar set of features as Ethereum as “smart contract protocols.”
The reality is the larger that these platforms and their native assets grow, the more “money-like” they become and the less “utility” can be derived from it, other than the monetary value and its subsequent applications itself. The more popular a blockchain becomes, the larger transaction fees (read: settlement costs) become, and lower use cases get priced out. Compared to Bitcoin, which is purpose-built to store and transfer value immutably, it is inferior.
Now include the inferior supply-issuance schedules and fully-diluted market caps of these projects, which are often far larger than the market cap today, and the tokens will in all likelihood fade as the trading pair in bitcoin terms trends to zero with a few dead cat bounces throughout.
Currently, ETH is 58.82% its all-time high in BTC terms, and has made a series of higher lows since its 2017 peak.
More broadly speaking, since the collapse of Terra/UST a short while ago, many altcoins and L1s (Layer 1 protocols) that performed incredibly well during 2021 have collapsed in market value, as investor confidence in the long-term staying power and true value of these protocols has been severely shaken. As the liquidity tide continues to wash away, we’re likely to see further declines in speculative altcoins as they trade as higher beta to bitcoin – which trades as higher beta to the broader equity market.
While this issue touched on quite a few different issues and fronts on the broader “crypto” ecosystem, if it wasn’t already it should be quite clear,
There is bitcoin, the absolutely scarce monetary asset that has been monetized from scratch in a decentralized manner over the last decade, and then everything else. As an investor, it would be a grave mistake to conflate the highest likelihood bet humanity has for stateless digital money with a venture-capitalist-backed experimental startup (that may or may not be a security).