Post by @zoronoa • Hey
Friends:
The carnage of the past twelve months in crypto has been brutal for all of us. We’ve grinded through bankruptcies, lawsuits, layoffs, turnover, a
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- The big money managers agree, too. Binance had some excellent research recently that showed “bitcoin” sentiment crushing “crypto” sentiment among asset allocators over the
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summer (though perhaps that sentiment is shifting with ETHBTC’s underperformance). With momentum like this, my bet is that bitcoin dominance retakes 60% in an ETF-driven rally (leading the way up) OR severe macro stress (consolidating the way down).
Even if I’m wrong, and we’ve already seen this cycle’s high-water mark for bitcoin dominance, I find it extremely unlikely that bitcoin prices decline nominally AND relatively. The highest EV play in the early stages of a crypto bull run has always been to bet on the king, and this cycle has been (and will continue to be) no different.
I will reiterate what I said last year: I find Ethereum’s “ultrasound money” thesis to be wholly unconvincing. If such a meme had legs, then the liquidity scoreboard wouldn’t look like this, even after an ETH futures ETF was approved:
We probably won’t see another 100x for bitcoin, but the asset could easily outperform other established asset classes once again in 2024. Eventual parity with gold would yield a price per BTC of over $ 600,000. And remember: gold has many of the same macro tailwinds, so that price isn’t necessarily a ceiling.
If monetary crises get bad enough, no price will be too high: 1 BTC will be worth 1 BTC.
*[Required Reading: BTC Q3 Quarterly Report]*
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**1.2 ETH & The World Computer(s)**
Ethereum’s successful “Merge” (Sep. 2022) and its completion of the “Shapella” upgrade (Apr. 2023) were some of the most technically impressive software upgrades of all time. The Merge also ushered in a new era for ETH as a net deflationary digital asset.
I love Ethereum and everything it has spawned. Messari itself doesn’t exist without the cryptoasset ecosystem that Lord Vitalik built. But the long-term *investment* case for ETH looks more like Visa or JPMorgan than Google or Microsoft, or a commodity like gold or oil.
ETH is straddled. BTC outperforms ETH as digital money thanks to institutional allocators’ interest in the digital gold “pure play” while broad availability of Ethereum substitutes (L0s, L1s, L2s) will likely lead to those substitutes’ outperformance as they sop up
onchain volumes relative to the Ethereum main chain. I don’t see a scenario where ETH outperforms bitcoin AND its up-and-coming, higher-beta peers.
That said, I would not bet against ETH, *nominally* speaking.
It’s survived multiple technical challenges and market cycles. It’s (arguably) got better supply dynamics than bitcoin does today. I agree that any ETH bridged to other rollups is likely gone forever and “not coming back to hit the bid.”
If anything, being bearish on ETH relative to the field is not an indictment of *Ethereum*, but rather a clear-eyed realization that ETH as an asset has been *incredibly dominant* so far, and has set the bar impossibly high to maintain over a 60% market share in its network token peer group. When I think of Ethereum vs. Solana, I think of Visa vs. Mastercard, not Google vs. Bing in terms of relative strength.
Even if I give ETH maxis a fair shake, I must again point to the scoreboard and note that ETH is less of a bargain than BTC.
*(Source: Coin Metrics)*
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I’ll be talking more about the tech later on, but I know you aren’t sitting around the fireplace salivating for my take on proto-danksharding. You want the 70 IQ bull/bear recommendation, and betting on ETH is right in the middle of the bell curve. I’ll argue about this with the *Bankless* guys sometime soon, I’m sure.
*(Note: While I hate hedging, this strong opinion has weakened since I first drafted this section. With BTC now up ~150% and SOL up more than 6x year-to-date, we’re overdue for some mean reversion for ETH, which has been a stablecoin for too many months and lagged considerably.)*
*[Required Reading: ETH Q3 Quarterly Report]* **1.3 The (Liquid) Field**
BTC, ETH, and U.S. dollar-backed stablecoins represent 75% of the $ 1.6 trillion in total crypto market cap today. That won’t always be the case.
I founded a company on the thesis that the other 25% of the crypto pie would grow 100x over the next decade and that investors would need sophisticated diligence tools to parse thousands of crypto assets, not just two. A 100x for “the field” from today’s market size would put the liquid crypto capital markets just north of the private capital markets ($ 20-25 trillion) and about 30% and 35% of the size of the global debt and equity capital markets, respectively.
What’s more: if you believe (as I do) that blockchains are accounting innovations at their cores, then all assets will eventually be “crypto” assets that trade on public blockchains versus legacy clearing and settlement systems, whether they are “utility tokens” or “security tokens.” Over time, the Venn diagram of crypto versus TradFi looks more like a circle.
There are pros to just sticking with a market cap weighted index of BTC and ETH, though.
For one thing, it’s been a winning hand historically, and you (definitionally) captured
75% of the market’s upside over the past ten years if you simply went to the 2014
North American Bitcoin conference in Miami and bought whatever Vitalik was selling
(the Ethereum ICO and bitcoin). Those blue-chip assets are now crypto’s best “hard” investments, in that you don’t run the risk of getting crushed by supply dilution over the course of time either. Many other top projects have gargantuan treasuries that get sold off by insiders over time. Their “market caps” could go up while their token prices stay flat or decline.
*(This is one reason we launched our token unlocks dashboard this quarter. We want people to understand where sell-side pressure could come from, as I find it unlikely that we’ll return to the “bullish unlocks” madness of 2021.)*
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*(Source: Messari)*
Obviously not investment advice, but as a student of history, I know that:
A. BTC and ETH may be today’s market leaders, but they are not permanently unassailable; and
B. Of the 26,000 stocks traded since 1926, just 86 stocks were responsible for half of the appreciation in the U.S. markets.
Very few stock market leaders from the ‘20s are still around today, and crypto will be no different. So what is a passive index enjoyoooor like me supposed to do?
Not much to be honest. The current alternatives for crypto index products are not very
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compelling, and I doubt that will change in 2024.
A low-fee, auto-rebalancing index that factored in token supply overhang and market liquidity would be a *killer* investment vehicle. But to get index exposure today, your options are to either pay too much on the AUM (200-250 bps like Grayscale’s products), transaction fees (actively managed crypto funds), or the methodology (complex to get right, with significant regulatory and technical risk to execute onchain).
The only “cheap” path for investing in crypto-assets #3 through #1,000 is to bet on yourself and your own investing prowess. I’ll give you one example.
A back-of-napkin index play to run at home might be to monitor this liquidity list from Kaiko and rebalance it quarterly. If you buy the assets in green (liquidity rank > market cap rank), and sell the assets in red (market cap rank > liquidity rank), you would mostly mirror my personal long/short list so far this year out of the large-cap assets (again not investment advice, people).
*(Source: Kaiko)*
It would be nice to build an index fund around this methodology without running the
risk of being sent to Gary’s gulags in the U.S. But for now, you can run these strategies manually by using tools like our asset screener to help select the critical filters and data transformations that help with portfolio balancing. (We’ll see if the “Kaiko trade” still looks attractive next quarter, and maybe we’ll do a follow-up report with Kaiko backtesting this strategy for our Pro subscribers.)
*[Required Reading: Messari Unlocks Report, Crypto Portfolio Management]*
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**1.4 The Resurgence of Private Crypto Markets?**
I pissed off a bunch of crypto fund managers a few years ago when I wrote that their business models amounted to “losing alpha” on behalf of customers. I was right.
*(I’m not gloating, so much as reassuring myself that I made the right decision in passing up the most lucrative business model in the world when I could have been on that 2-and- 20 grind since 2017 without having to clear a BTC/ETH hurdle rate. GLORIOUS.)*
Many crypto investors are not only underperforming the market, but dead. Some liquid investors got caught up with bad levered positions (3AC), bad counterparties (Ikigai), or both (we cover DCG in Chapter 6). You already know all that. I don’t need to rehash last year’s crises.
What’s on deck for 2024? The liquid crypto markets remain a jungle of technical and counterparty risks, high transaction fees, and ruthless competition. Next to that jungle is a veritable valley of death that is the private crypto venture markets.
VC markets in general have been decimated by the Fed’s whiplash-inducing monetary policy of the past several years. Crypto infrastructure has been hit even harder by fraud and widespread regulatory crackdowns. New users and customers are sidelined from touching “long-tail” crypto until they get some much-needed legal clarity, while old users and customers cut spending and ride out the winter as best they can. That’s led to vicious demand destruction: service revenues go down, burn rates go up, budgets go down even more, and so on.
To add insult to injury, AI is the hot new Chad of tech. We’re the Virgins. Again. (As I explain in Chapter 1.8, I think that’s a silly meme and false choice. AI and crypto pair well together.)
Despite all this, I’m still pretty bullish for *new* crypto venture investors. The funds with a 2023 vintage will likely outperform the S&P in the medium- to long-term, and many may even have a fighting shot at outperforming the BTC/ETH benchmarks by virtue of this year’s anomalously low entry prices. The liquid markets have roared back to life, and there are some signs of a venture turnaround as well.
Private VC funding (seed through Series D+) hit its highest levels since May with more than $ 500 million of announced deals (track them all in our fundraising screener):
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Here’s a partial list of crypto funds I’m keeping an eye on this year:
**Multicoin:** I had a three-part series written about their legendary 2021 performance. (It’s actually pretty good. One, Two, Three.) Though it’s unclear how their LPs managed the absolutely vicious 96% SOL drawdown in 2022. Even if Multicoin’s AUM rallies hard again this year, I’m not sure there have been many bigger rollercoasters for fund LPs.
**1confirmation:** Nick Tomaino is one of the most intellectually honest crypto investors I’ve met. He wrote candidly about the benchmarking issues I addressed above, the need for better accountability in crypto investing, and was one of the few contrarians to call out the Sams. First SBF, then Altman. He’s walked the walk too, even sharing his fund’s DPI, a rarity in venture capital markets.
There were a few “bullish at the bottom” investors whose tweets have aged well in hindsight. **Framework** (Vance), and **Placeholder** (Burniske) come to mind as two who posted specific calls AND are not simply up-only permabulls. (Even those bullish at the picotop will likely prove prescient long-term, though.)
**a16z** and **Paradigm** might be offsides in terms of the marks on their private portfolios, depending on how much capital they deployed into the top of the market in 2021, but I don’t want to bet against Chris Dixon, Matt Huang, and their teams. I’m actually somewhat relieved they (may) be flat or temporarily underwater on certain vintages. That makes them excellent fighters for the industry in D.C., and their policy teams are A+.
**Syncracy Capital** has beaten the crypto market since inception by quite a bit. Three former Messari analysts are on the team there, including co-founder Ryan Watkins. In full disclosure, I’m an LP and will shamelessly shill anyone who helped build Messari and continues to make me money after they leave. They are one of
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the few new liquid funds I know of that is above the BTC/ETH benchmarks since inception.
For day-to-day monitoring, I use Messari’s asset and fundraising screeners. Nearly every day, I join the thousands of crypto investors looking to keep tabs on what the “smart money” is up to. We’ve got alerts, custom views, and AI-powered reports that help spot signs of life as we emerge from hibernation. Our full-year state of crypto venture report will be out in January, but you can use the tools now to start keeping track. (We released them this quarter, ICYMI).
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