🟪 Thursday Rookie Numbers Mailbag

Thursday Rookie Numbers Mailbag

Q: Is this really a bull market?

I’d call it a proto-bull market. Things are going up and it already feels frothy, but the froth is mostly being caused by recycled, crypto-native money churning around — the real money isn’t here yet.

As evidence, I’d cite the collective market cap of stablecoins, which has ticked up to $130 billion, but remains a whopping $50 billion below the 2022 peak.

That’s despite rocketing token prices and months of excitement around a spot Bitcoin ETF.

For all the talk of institutional adoption, inflows into crypto-related investment products totalled just $2.2 billion in 2023, 87% of which went to bitcoin-related vehicles.

Those are rookie numbers — for a true bull market, we’d have to pump those up quite a bit.

Without new, non-native money coming in, we can only rotate from one thing to another — out of ETH into SOL, out of BONK into WIF — a non-stop game of musical chairs.

Some new money has come in, of course — enough at least to mark everything higher and make us feel marked-to-market richer. 

But those are mostly paper gains. There’s no way, for example, that more than a small portion of BONK’s $800 million market cap could be realized by sellers.

For the paper gains to turn into real gains, we’ll need incremental, non-native buyers willing to swap their fiat for our crypto.

I don’t think we’re there yet — more likely, we’re only just threatening to enter the optimism phase.

There’s no guarantee we’ll get to the euphoria stage, but a spot ETF would probably give a shove in that direction.

Q: What if there’s no ETF?

Despite some consternation caused earlier this week by a prediction that the SEC will summarily reject all ETF applications, approval is still looking overwhelmingly likely, perhaps as soon as tomorrow (Friday).

Some crypto people, however, concerned about the institutionalization of Bitcoin, would find an ETF rejection not at all consternating. 

To understand why, imagine a world where $100 billion of the bitcoin backing ETFs was held by a single custodian (as now looks likely to be the case), which then decided that, given its vested interests, it should start mining bitcoin as well — that would be a lot of bitcoin and a lot of hash power controlled by an entity that answers to the SEC.

Not exactly what Satoshi had in mind, I don’t think.

That’s an extreme scenario, but it’s also reasonable to think that crypto would be better off without a large base of institutional investors — funded by only crypto-native money, the space would develop more slowly, but perhaps in more permissionless, censorship-resistant directions.

There’s also an argument to be made that more inflows will push the industry into unproductive directions.

In Zero to One, Peter Thiel argues that startups should deliberately be starved for cash because easy money breeds complacency, inefficiency, and a lack of focus.

There’s already a lot of easy money in crypto and, arguably, a lot of complacency and inefficiency, too — without naming names, I think it’s uncontroversial to say that DAOs have generally not made the best use of the resources we’ve gifted them by bidding up their token prices so aggressively.

In traditional finance, the best companies are often products of bear markets, when funding is tight and only the startups with the best prospects get funded.

I’d expect the same in crypto. My guess is that the cohort of protocols funded in the bear market of 2022 will do far better than the cohort funded in the bull market of 2024.

The problem with the just-ended bear market might turn out to be that it was too short — the best things get built when money is tight, and crypto money wasn’t tight for very long.

If an ETF pushes BTC to new highs, money will get even easier, but it might not be super productive.

Q: What makes you think money is too easy?

I could list all the memecoins trading on infinity valuations, but it’s perhaps more instructive to look at protocols that have some sort of earnings. 

So I’ll cite this chart from Blockworks Research on Celestia, the data availability protocol that is currently having a bit of a moment:

Note that there is no multiplier on the Y-axis of this chart: Celestia is currently earning about five TIA tokens per day.

That’s $75 a day of revenue (not thousands or millions, just $75) to support a $2.4 billion market cap and a $16 billion FDV.

Celestia has only just launched, so it might be unfair to judge it by its earnings at this stage, but I can’t imagine it would get a similar valuation if it were raising TradFi money in a Series B funding round.

It’s not the only one. Here’s another where a TradFi refugee like myself might be disoriented by the lack of a Y-axis multiplier:

As of December, Akash, a decentralized computing marketplace, was averaging about $1,000 a day of revenue — in crypto, that’s good enough for $640 million of market cap and $1.1 billion of FDV.

On a larger scale, there’s also this:

For as hot as Solana has been lately, the transaction fees it collects (the green bit at the top) are tiny relative to the ever-growing number of tokens it issues (the big red part).

I take that as a reminder that crypto still requires inflows just to keep the lights on — all that issuance ultimately has to be bought with new fiat entering the ecosystem. 

With a large assist from the SEC’s approval of spot ETFs, inflows should be forthcoming.

Should those inflows be buying Celestia at $16 billion FDV? Akash at $1.1 billion? Solana at $45 billion?

Maybe!

But these are not rookie numbers — so we probably don’t need ETF-euphoria pumping them up any further.

― Byron Gilliam

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