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Thursday Mailbag

Q: Why are my coins down?

I see why you’re asking because the news has been good — one candidate for President is all-in on crypto and the other may be coming around; the spot ETH ETF is approved and trading; crypto is winning in the courts; Fed funds rate cuts are incoming.

But prices have been bad — relative to that news flow, the price action has been disappointing.

The ETH ETF has created more sellers than buyers.

A highly memeable election has failed to get memecoins going.

Even the previously unthinkable prospect of the US government buying couldn’t push bitcoin back to its highs.

These kinds of narratives don’t seem to work anymore and that is making this bull market (if that’s still what it is) feel distinctly lackluster.

But it might also be for the best.

The ETFs that started the bull run aren’t really crypto; memecoin trading is a legitimate use case but with a low ceiling; the US government is probably not going to buy your coins; the Fed will cut rates, but they won’t be printing money again anytime soon.

The disappointing price action might be the market’s way of telling us that it will take more than narratives to push significantly higher from here.

Hopefully that will compel crypto investors to allocate their money to projects that go beyond narratives.

Q: How do we go beyond narratives?

Cash flows!

Both Compound and Aave have live proposals to start returning revenue to token holders, which I find hopeful.

If we’ve exhausted the ability of narrative to push the market higher, protocols will have to start doing the hard work of providing services that people are willing to pay for and not just tokens that people are willing to buy.

Q: What about ORE?

Fair point — the current buzz around the ORE token, an unholy mix of Proof of Work running on top of Proof of Stake, is evidence that narrative crypto is far from dead.

ORE is essentially Bitcoin (21 million cap included) but on Solana.

If you’re wondering why ORE on Solana should be worth the $800 per token it’s currently trading at, let me know if you figure it out, because I am too.

I’m guessing it’s mostly just because “Bitcoin on Solana” has potential as a meme.

But the bigger question, to me, is whether wondering about why ORE has value should make us wonder why bitcoin has value, too. 

If so, this could be a Wizard-of-Oz moment for crypto — Bitcoin has been so valuable for so long now that people within crypto no longer question why it’s valuable.

In Bitcoin Nashville this past weekend, the unquestioned explanation was simply “scarcity” — but ORE has the same 21 million cap as bitcoin and is issued in the same way: decentralized, fair launch, proof-of-work.

So, yes, you might rightly ask why ORE should be worth anything more than zero — but you might equally ask why it should be worth anything less than Bitcoin.

Either way, I think there are two interesting things here: 1) ORE is an experiment that should conclusively test the theory that scarcity creates value (spoiler alert: it doesn't) and 2) ORE might allow us to do a sum-of-the-parts valuation on bitcoin. 

If the price of ORE reflects the value of proof-of-work mining and a 21-million issuance cap, the additional market value of Bitcoin might be attributed to its value as a meme.

Much as the “term premium” metric measures the part of a bond’s valuation that is otherwise unexplainable, ORE may offer a way to measure the “meme premium” of Bitcoin — the portion of Bitcoin’s valuation that is not explainable by proof of work or the 21 million cap.

If so, Bitcoin’s price is currently 98.7% attributable to its value as a meme.

Sounds about right!

Q: Is Bitcoin 98.7% overvalued then?

Not at all, no — the value of memes is real (see: gold).

But thinking about it in those terms might helpfully lower your expectations for the velocity of bitcoin’s future returns. 

When, as with bitcoin, the value (not just price) of something is strictly a function of supply and demand, the more it goes up, the more demand is required to make it go up further.

That’s obvious, of course, but it may be something to remember when you’re wondering why bitcoin isn’t $100,000 yet.

Counterpoint: There are other ways to think about the price of Bitcoin, like Matt Hougan’s formulation that it reflects the value of the service it provides (storing wealth).

I prefer the meme theory, but that’s what makes crypto interesting — it’s a blank-slate asset class.

Q: Is non-memecoin crypto-only infrastructure?

I’ve been asking myself that question since I heard David Hoffman float the idea that crypto isn’t for applications on the Expansion podcast.

Hoffman notes that Polymarket, which is widely touted as a successful crypto application, is really just a Web2 application that uses crypto infrastructure (because you bet with USDC).

I’ve been struggling to come up with counterexamples.  

On the one hand, that’s disappointing — after all these years waiting for a killer app to take crypto mainstream, could it be that there is not only no killer app coming, but no apps whatsoever?

On the other hand, it’s kind of liberating — if crypto is just infrastructure, we can stop worrying about the lack of apps!

Instead, we can just build infrastructure and let someone else worry about what to do with it.

Banks, for example, may someday run entirely on crypto rails in the same way that Big Tech runs on internet rails — that wouldn’t turn banks into crypto applications, but it would make good use of crypto infrastructure. 

For crypto investors, I think this is a similarly mixed bag.

On the one hand, it suggests the industry has been focused on the right thing: Upgrading financial rails in the same way that dotcom-era investors upgraded information rails in the 1990s.

On the other hand, it limits the upside: The telcos and cable companies that built our current internet infrastructure have gotten a pretty modest return on their investment.

Crypto aspires to be more than just the next cable industry, of course.

Still, if infrastructure is all that crypto is, that will still be very useful to the world.

The important thing is to do something with it while we have the chance.

— Byron Gilliam

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Avi and Jonah dive deep into the current state of the crypto market, analyzing the impact of political events like Trump's potential re-election vs. a Kamala victory. Tune in for insights about trading strategies, the future of DeFi and what could be potentially the end of four-year market cycles. 

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