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“Prices are signals that convey underlying realities.”

— Thomas Sowell

Thursday Mailbag

Q: Is crypto still in a bull market? 

In equities, bull markets are unofficially declared when the major indexes rise 20% from a bear-market low. 

This doesn’t map to crypto because 1) 20% isn’t much in crypto and 2) Bitcoin is more than half of crypto by market cap, so the “index” is basically just bitcoin.

But even in equities, a bull market is not really defined by prices — instead, it’s defined by activity: Is lots of new money coming in? Are IPOs booming? Are VCs funding everything? Are the riskiest stocks rising?

This does map to crypto and, on that basis, I think we unfortunately have to concede that this is no longer a bull market.

Fund flows are modest: Stablecoins are a useful proxy for the amount of fiat coming into crypto and stablecoin flows are positive, but not bull-market positive. At $167 billion, the total market capitalization of stables is unchanged from the end of 2021.

New tokens are not booming: What was the last token launch that people got excited about? ZKSync and Blast have been down-only since launch, despite launching at much lower valuations than something like Starknet, which caught the top of this cycle by launching in February. 

Crypto VC is not booming either: Fund raises for crypto projects peaked in February and have been trending down ever since. July was the worst month for raising capital in crypto in a year — not what you’d expect of a real bull market.

Riskier tokens are underperforming: Bitcoin dominance (bitcoin’s percentage of the total crypto market cap) has been rising all year and even the second least-risky crypto token (ETH) remains 40% below its 2021 high. 

Beyond Bitcoin, all of the price signals suggest that the underlying reality is that this is not a bull market. 

Q: Is crypto bipartisan yet?

Last night’s Crypto4Harris Town Hall was a hopeful sign, particularly because the second most powerful Democrat (Senator Chuck Schumer) came out reasonably in favor of crypto. 

But until the candidate herself speaks on the subject, the Crypto4Harris contingent will continue to hear the “chickens for KFC” taunts.

Those have gotten louder following news reports on who is likely to be appointed to key economic posts in a Kamala Harris administration — for some, these appear to “spell doom” for crypto.

I wouldn’t read that much into it, though. Whatever their track records, if a President Harris told her economic deputies to go easy on crypto, they would surely fall in line.

Would she, though?

I’m guessing crypto won’t get a mention when Harris sketches out her economic plan for the first time in Raleigh, NC tomorrow, but we might get some better clues as to where she stands philosophically. 

If so, I’m not particularly hopeful because the vice president reportedly intends to propose a federal ban on “price gouging” in the food and grocery business.

I take that as a bad sign for crypto because if you don’t trust staid grocery stores to set the price of groceries, you’re probably not going to trust chaotic crypto markets to set the price of money, assets, and banking, either. 

Crypto may just be too much of a stretch for someone who doesn’t believe in the signaling value of prices.

Q: What’s Nate Silver think of crypto?

If you're a regular reader of this newsletter, Nate Silver’s On the Edge, won't tell you anything about crypto you don't already know — but he frames some crypto things in useful ways you probably haven't thought of.

He describes memecoins, for example, as attempts to use social media to solve the coordination problem at the core of the “prisoner's dilemma” — prisoners can’t coordinate in their collective interest because they’re locked in separate rooms. But memecoin holders can coordinate on X and Redditt.

(Although that didn’t work out so well with OHM, which was the most explicit attempt to do just that.)

Probably only about a tenth of Silver’s book is directly about crypto, but much of the rest of it is applicable, too — as when he quotes someone who lost their life savings trading equities options: "It was easier to rationalize trading options because it has that guise of investing."

That could equally describe a lot of the “investing” that happens in crypto, I think.

We consider crypto an asset class whose rightful place is alongside equities, fixed income, and real estate, but, in On the Edge, Silver casts us into “The River” alongside poker, casino games, sports betting, and speculative stock trading. 

I think he’s right — crypto is definitely a tradeable asset class, but, at this early stage of its development, whether it’s an investable one remains TBD.

I find that a helpful way to look at it, because, whether it’s investing, trading, or just betting, it's important to know what game it is you're playing.

Q: Should stablecoin holders be KYC’d?

I don’t think so, no — I think stablecoins should be treated like that last line of defense for financial privacy, physical cash.

But Switzerland’s financial regulator disagrees — they now say that stablecoin issuers will have to know who holds every one of the tokens they issue.

I fear that many governments will eventually come to the same conclusion.

In the US, stablecoins operate in a sort of legal limbo that might get favorably resolved after the upcoming election.

But there’s a risk that, even with a crypto-friendly administration, law enforcement may eventually decide that the current KYC/AML practice of stablecoin issuers blacklisting addresses upon request is insufficient. 

For one thing, the efficacy of blacklisting addresses is limited by bandwidth (bad actors can move funds from one place to another faster than issuers can trace them back to a blacklisted address).

And for two thing, even physical cash has only limited privacy — in the US, cash transactions of $10,000 and above are required to be reported to the IRS.

Notably, that $10,000 threshold was set in 1945 and has never been changed. 

If the US government really cared about your right to financial privacy, they’d have been increasing that threshold by the rate of inflation, in which case today’s limit would be $174,000.

It’s clear the government does not want you moving $174,000 of cash without their knowledge, so how long do you think they’ll let you do that with stablecoins?

The financial privacy afforded by physical cash is mostly a relic of physical money that I suspect the US government will eventually decide is not applicable to digital money. 

I hope I’m wrong, because I think stablecoins are crypto’s best use case to date — but whenever the next bull market starts, there’s a risk we’ll have to use something other than stablecoins to get involved.

— Byron Gilliam

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