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“Economic efficiency is when all goods and factors of production in an economy are distributed or allocated to their most valuable uses.”

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Crypto Goes in Search of Purpose

Is crypto building a new financial system? Or a new casino?

Or both?

The purpose of a financial system is to allocate scarce investment resources to their most productive use, and the purpose of a casino is entertainment.

Crypto is entertaining, for sure, so I’d say we have the casino box ticked. 

But crypto has gotten so entertaining as of late that even some of its biggest proponents are wondering how productive it can possibly be.

Travis Kling, CIO of Ikigai Asset Management, has captured the current zeitgeist with his crypto investment thesis for the next 12 to 24 months — nearly all of which is explained right in the title: "A Lack of Pretense That Any of This Shit Does Anything or Will Ever Do Anything."

Kling expects ETH and BTC to hit new all-time highs and altcoins to do even better, but only because “people want to gamble on vaporware and next year looks like a good year to be in the casino.”

He’s not the first crypto native to question what we’re doing here. 

In a blog post proposing a new token standard for Bitcoin (Runes), the OG Bitcoin developer Casey Rodarmor confessed a moment of doubt: “Should such a thing exist? I don't know…the world of fungible tokens is a near totally irredeemable pit of deceit and avarice, so it might be a wash.”

The collective hivemind of the market decided it should, of course, exist.

Development of “Rsic” inscriptions that entitle holders to mine as-yet-non-existent coins on the as-yet-non-existent Runes token standard began within days of Rodarmor’s blog post — they now trade at a floor price of $5,500.

I’m guessing that buyers see Rsics as a casino-like bet, but the high price they are paying is also 1) a message to the world that the Rune token standard would be a good thing to have, 2) an incentive to developers to get working on it and 3) a signal to investors that they should be funding more such projects.

Message received.

The most bewildering price action of the last week has been the manic buying of Pandora NFTs.

The floor price for the first collection of “bi-directional” NFTs, built on a new Ethereum token standard (ERC 404), has shot to $17,000, up 40-fold over just the last few days.

This is the invisible hand of crypto pushing us towards things like Runes and an Ethereum equivalent, even as the inventor of Runes questions whether that’s the direction we should be going in.

For better or worse, crypto prices are directing the allocation of investment resources.

Gotta catch ‘em all?

Runes is probably not the least productive behavior that crypto prices have been directing.

Consider, for example, the market that’s recently developed for “rare sats.”

In Bitcoin, new sats (the smallest unit of a bitcoin) are assigned a number based on the order in which they’re created. 

This was originally part of Satoshi’s design to prevent bitcoins from being double spent, but the assigned numbers have unintentionally turned individual sats into collectors’ items.

On the Magic Eden marketplace, a sat with an assigned number that happens to be a palindrome is worth at least 5x its nominal value — and a sat that happened to be used in the famous pizza transaction in 2010 might go for twice that.

Sats mined by Satoshi or Hal Finney are offered at far, far higher multiples.

These market prices have incentivized people to go “sat hunting” by scanning the bitcoin market for sellers inadvertently offering a rare sat at normal sat prices  — in other words, it’s created an incredibly boring version of Pokémon Go. 

Similarly, the recent resurgence in airdrops has incentivized countless people to spend countless hours doing menial tasks on Discords in an attempt to qualify for the next chance at free money.

It’s hard to imagine that encouraging people to spend all day in bitcoin markets or Discord chats is a net positive for society.

Then there are memecoins. 

The memecoin phenomenon is easy to dismiss as retail insanity, but even professional investors are now responding to these price signals — as evidenced by this morning’s report of a $1 million investment in DEGEN, a memecoin that has filled the speculative void created by the inexplicable lack of a Farcaster token.

Farcaster, a decentralized version of Twitter, does not require a token to function. 

But crypto’s “investors” feel they need some way to bet on Farcaster — so, for better or worse, the crypto financial system has efficiently provided them one.

Show me the incentive and I’ll show you the outcome

The invisible hand of the market works in mysterious ways, so this may all be for the best; it’s hard to say.

The $1 million invested in DEGEN, for example, may go towards creating public goods for the Farcaster ecosystem, which might help turn Farcaster into a viable alternative to Twitter.

And the new token standards that the market has incentivized developers to build may make NFTs on both Bitcoin and Ethereum far easier to trade. 

But this nascent bull market has already created so many inexplicable prices that many of crypto’s biggest proponents, like Kling and Rodarmor, question how efficient the crypto economy can ever be.

That’s not to say they’re bearish: Most seem to agree with Kling that this market cycle will produce 1) all-time high prices for crypto and 2) nothing useful for the world.

If so, that will be more entertaining than a Las Vegas casino.

But far less productive than a functional financial system.

― Byron Gilliam

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We're Watching

This week, Travis Kling, CIO of Ikigai Asset Management, joins the show for a discussion on his bullish thesis for 2024. With Stock markets at all-time highs, a rate cutting cycle expected in 2024 & the approval of Bitcoin ETFs, Travis makes the case that he expects potential tailwinds into the coming year for both crypto & markets broadly. To hear all this & more, you'll have to tune in!

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Wondering how to navigate the ever-changing and oftentimes ambiguous crypto regulatory environment? Join us to hear from the experts on best practices when approaching compliance and how to stay ahead of the complicated legal requirements. We will also discuss how recent and ongoing court cases, enforcement actions and legislation can change the landscape in the US going forward.

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