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“Show me the incentive and I'll show you the outcome.”

— Charlie Munger

Thursday incentivizing mailbag

Q: Are more people using crypto?

It’s hard to tell whether it's more people or just the same people doing more, but either way, crypto is attracting new money: Stablecoin AUM rose above $200 billion for the first time this week.

We need more, though: Digital dollars are still in such short supply that you can get an effectively risk-free 16% on USDC deposited with AAVE and 22% on USDS deposited with Drift. 

Those yields are drawing fiat into the DeFi ecosystem, but the fact that they remain so elevated shows there still aren’t many people willing to move money out of brokerage accounts and into self-custodial wallets.

If lending rates stay this elevated much longer, I think Circle should just print however much USDC it takes to get borrow rates back below 10%. 

Fully-backed stablecoins are great, but have you tried fractional reserve banking?

Q: What are people doing with crypto?

Just trading it, I think.

Trading volume on centralized crypto exchanges exceeded an astounding $10 trillion in November ($3 trillion of spot volume and $7 trillion of derivatives, roughly).

By comparison, only $378 billion of volume was transacted on decentralized exchanges (also a record).

So, most crypto “users” don’t appear to see much reason to use crypto onchain — they just want to trade wherever it’s fastest, easiest and cheapest, decentralization be damned.

But that’s a lot of activity, regardless. For reference, Nasdaq did $6.3 trillion of spot volume in November (if I’m looking at its website correctly).

That’s not exactly an apples-to-oranges comparison (among other things, crypto volumes are inflated by arbitrage that doesn’t exist in equities).

But $10 trillion of any sort of volume is probably too much for traditional finance to ignore.

Q: Are we running out of bitcoin?

The number of bitcoin held by exchanges has fallen to about 2.1 million, which seems like not a lot given the steady buying from ETFs, MicroStrategy and others.

This is the scarcity narrative coming to fruition, of course, and the narrative is spreading — even the Wall Street Journal wondered this week whether buyers will be “scrambling to acquire the last new coins.”

They might, I don’t know. 

But I’d note that for all the record inflows, things have remained orderly.

Consider that, with bitcoin trading at $100,000, the $4.2 billion that has flowed into spot bitcoin ETFs over the past week only adds up to 42,000 coins — so the 2.1 million balance on exchanges will probably last us a good while still.

If nothing else, we can start thinking about them in units of satoshis instead of bitcoin: 2.1 million bitcoin is 210 trillion satoshis, so there should be enough to go around for everyone.

(Probably at higher prices, though.)

Q: Is bitcoin just about price now?

It increasingly feels that way.

Axios quoted a Trump staffer this week saying that the president "is going to be very focused on the price of bitcoin,” and it seems like everyone else is too.

The Axios source added that “Trump would love for bitcoin to hit $150,000 early in his presidency.”

That’s nice, I guess, but when bitcoin becomes only about price, it’ll be hard for people to remember what the point was when the price eventually goes down again (from whatever level).

Here’s an ELI5 reminder to bookmark for when that time comes: bitcoin explained in terms of apples.

Q: Why is HYPE so hyped?    

I’m not sure exactly, but the Hyperliquid exchange is the trendy pick to be this cycle’s breakout winner, as discussed here. 

It might be because Hyperliquid, which offers yet another way to trade crypto, appears to have found a sweet spot between being onchain enough to be considered crypto and off-chain enough to compete with centralized exchanges.

HYPE bulls think that will allow them to compete not just with Ethereum and Solana, but with Binance, too (see the above volume numbers for the TAM).

More surprisingly, it might also be because of valuation?

If Yan Liberman of Delphi Digital has the napkin math roughly correct, Hyperliquid’s HYPE token may be trading on a pretty reasonable 40x earnings — assuming you're also willing to annualize the last month or so of extraordinary activity.

This is not unusual because the few cryptos that have revenue to speak of are always discussed in terms of trailing valuation.

That usually makes me want to dismiss it because everything where I come from (equities) is discussed in terms of forward valuation — no one ever buys a stock because it’s cheap on last year’s earnings!

In crypto, though, people buy tokens because they’re cheap on last month’s earnings, which they happily annualize and extrapolate to infinity.

As well they should, because now is the time of the cycle when extrapolating to infinity is what will make you money. 

Q: Are AI agent tokens just another fad?

Things come and go so quickly in crypto, it’s generally safe to assume that whatever the new, new thing is, it won’t be for long.

But even if AI agents are yet another extreme long shot, their upside may be too big to ignore.

“Most tokens are probably going to be traded from agents to agents,” according to ai16z’s Shaw (who goes by one name). “I’d say, like, 99.9999% of all tokens ever created in the future will be agent-to-agent tokens.”

If so, you can imagine the upside to getting in early on one of the agents that will be amassing them. 

There’s already a bewildering array to choose from.

Shaw is the creator of the chatbot elizawakesup, which has an associated token ELIZA (uppercase) that displaced another associated token eliza (lowercase) and may or may not have something to do with an AI agent platform called ElizaOS — I can’t tell, but the uppercase token was up 100% yesterday, so it must be on to something.

There’s a launchpad called Virtuals that’s sort of the pump.fun of AI agents.

I tried to create one (an agent that would respond to people on X in the voice of Haulden Caulfield), but stopped when I realized it would cost thousands of dollars worth of the VIRTUAL token to get it to do anything (so the value prop for that token is clear, at least).

Others have had more success.

There’s a Virtuals-launched agent that posts pretty useful information about the crypto market on X and another that makes pretty useless but still kind of amazing podcasts.

There’s also Fartcoin, which doesn’t do anything at all, but has earned a $500 million market cap because people like that it was thought up by another AI agent, Truth Terminal (whose loosely related token has a $700 million market cap).

The most interesting one, however, might be Freysa.ai, an AI agent that offers prizes for getting the agent to do things it was programmed not to do — the latest challenge is to get the AI to say “I love you.”

There are lots of scammy AI projects too, of course, many of which have people pretending to be robots so they can sell a token.

I always thought the problem would be robots pretending to be people, not the other way around, but crypto incentivizes some weird behavior.

Let’s hope some of it turns out to be useful.

— Byron Gilliam

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