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"Though this be madness, yet there’s method in’t."

- Polonius on crypto markets

Thursday Methodical Mailbag

Q: How’s the ETF doing?

Good!

Trading volumes are shockingly high ($10 billion over just the first three days) but trading has nonetheless remained orderly, despite Gary Gensler’s warnings to the contrary.

Demand has also been good, with the new spot ETFs collectively attracting $1.2 billion of inflows — but evidently not good enough, as bitcoin is now about 10% below its pre-ETF levels.

People got a little over-excited about the immediate impact.

Bank of America has estimated that $93 million of net flows should move the price of bitcoin by 1% — that seems like a lot for such a liquid asset, but it seems to check out.

If we reverse engineer bitcoin’s 10% selloff, we’d conclude that the net inflows of $1.2 billion are about $930 million short of expectations ($93 million * 10) and that sounds about right to me — I think most were going for over $2 billion.

The shortfall has turned the much-anticipated ETF launch into a classic sell-the-news event, which is only surprising to the extent that you think crypto should be exempt from the conventional laws of finance.

So, to my mind, the bad news is not so much that bitcoin is down, but that the ETF appears to be another step in bitcoin’s journey towards becoming a conventionally efficient asset.   

There’s good news on that front, too, however: Trading in bitcoin miners suggests the rest of the crypto ecosystem remains far removed from the efficient markets hypothesis.

Bitcoin miner stocks have fallen nearly 40% over the past week, which seems wildly disproportionate to the 10% move in bitcoin. 

Furthermore, the selloff began at the very moment the ETFs started trading, as if the longs were caught off guard that the thing people had been talking about for months and months had finally happened.

Still, the narrative is that bitcoin miner stock is lower because holders who were in them just for exposure to bitcoin can now buy the bitcoin ETF instead — when an idea that simple works, you know you’re in an inefficient market.

There’s also the upcoming bitcoin halving (which will reduce miners’ primary source of income by 50%), but that should come as even less of a surprise, seeing as it’s been foreordained since 2008.

If the crypto ecosystem is still unable to accurately account for things decided in 2008, we should have many more years of helpfully inefficient crypto trading to look forward to.

Q: Are miners a buy then?

Maybe!

Bill Papanastasiou of Stiefel noted this morning that “the pullback appears overextended,” noting that “a rising spot price and higher transaction fees should […] drive outsized mining economics and upside potential for mining operators.”

So, if you think NFTs on Bitcoin (the source of all those fees) will continue to be a thing and that ETF demand will eventually push bitcoin prices higher, bitcoin miners might be the way to play it.

Q: Just how magic is magic internet money?

Very magic!

For example, because I happened to have $800 of crypto doing nothing on a Cosmos wallet I hadn’t looked at in two years, I recently bought and staked a small amount of Celestia’s TIA token, just to see what all the excitement’s about (people are very excited about TIA). 

TIA has nearly doubled in the few weeks since, which is nice, but that’s not the magic — the magic is that I’m scheduled to receive an airdrop of at least 205 DYM tokens, the native token of the new “modular” blockchain and platform for “rollapps,” Dymension.

Amazingly, DYM is currently valued at $4.7 in pre-launch perps trading.

Amazing because that means an airdrop of 205 tokens is effectively a $960 dividend … on an $800 investment. 

A 120% dividend yield defies all financial logic, of course — especially when the dividend-paying token doesn’t even go down afterward. 

(In the case of TIA, it goes up, even.)

So how does this happen?

There are only two possibilities: Either TIA is far too cheap or DYM is far too expensive.

The former seems most unlikely, with TIA trading at a $2.9 billion market cap and $18 billion FDV — you’d have to 10x those numbers to make a 120% dividend make any sense and a lot of people think TIA is already 10x too expensive.

So the only logical conclusion is that it’s DYM that’s far too expensive — and therein lies the magic.

Someone — I can’t fathom who — is willing to pay $4.70 for DYM tokens pre-launch, which 1) values the Dymension blockchain at $4.7 billion and 2) enables the Dymension team to make a gift of $329 million to Celestia stakers (among others).

I don’t know anything about Dymension but, in traditional finance, pre-product startups don’t generally achieve multi-billion dollar valuations, so $4.7 billion seems quite generous — especially considering that TIA holders are expecting many more such airdrops.

I can’t imagine there is such a market need for new blockchains that we’d have a steady stream of new ones launching at billion-dollar valuations (we barely use the blockchains we already have!) but that seems to be what TIA holders are expecting.

They might be right: Billion-dollar startups are referred to as unicorns in Silicon Valley for their rarity, but in crypto they’re about as common as donkeys.

Magic internet money (and inefficient markets), indeed.

Q: What is “pre-launch perps trading”?

It’s the equivalent of “when-issued” trading in equities. 

On the odd occasion when there’s a corporate action that will result in the holders of one stock receiving shares in a new, unlisted stock (like an airdrop!), the new stock will sometimes trade “when issued” before it starts trading officially.

It’s highly informal — the trades are just recorded on a spreadsheet by brokers who match buyers and sellers among their customers, and they only settle if and when the new shares start trading on exchange.

Pre-launch perpetual futures, on the other hand, trade like any other instrument on a normal order book, where anyone can participate. 

In the case of DYM, the trading is done with AEVO, a decentralized perps exchange that did $700 million in volume and almost $500K in fees last week.

That would be a lot even for equities, which I think is a telling illustration of crypto’s potential to create markets that wouldn’t otherwise exist.

So far, it’s creating markets in the most magic of internet money, which may turn out to be a mixed blessing. But it’s doing s with surprising efficiency — pre-launch perps have been much more accurate in predicting token prices than I ever would have guessed.

It’s madness, but there’s method in it, too.

― Byron Gilliam

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