(Any opinion expressed below is the author's personal opinion and does not constitute investment advice)
Human beings always want to be easier in life and work. In the context of financial markets, everyone wants to find that expert, tip, or secret trading program that will allow them to earn excess returns without risk. In essence, we all know that the above situation is just a microcosm, and that one's pursuit of profit is to take risks--however, people keep asking me"what coin should i buy"，"Is now a good time to buy"，"Is technical analysis useful?",etc. Even to my closest friends, I do not give such opinions lest they think I am a charlatan.
Recently, I was involved as a sponsor of Tampines Rovers Football Club in the Singapore Premier League. A few football players were interested in encryption, so over lunch one afternoon they asked me if I could give them some advice.
All three players have dabbled in cryptocurrency trading, with varying degrees of success. They asked me all the standard questions I mentioned above, expecting me to provide the secrets to getting rich in crypto over a two-hour lunch. Unfortunately, I let them down by asking them a lot of questions about why they were investing/trading, how much time they had to devote to their endeavours, and what their risk tolerance was. As an inspiration for this post, I asked them if anyone had read the Bitcoin white paper. None of them answered in the affirmative.
This white paper is important not because I am the biggest beneficiary of Bitcoin, but because almost every other blockchain and crypto project borrows the concepts presented in this paper and uses the ideas presented in this paper as a benchmark. Some projects may not directly borrow from the Bitcoin white paper, but from another project that has borrowed from the Bitcoin white paper (and so on). As a rule of thumb, almost every blockchain or crypto project borrows a set of successful, proven concepts from previous projects and either emulates them or tries to build on them.
The hoax imitates poorly, and on a superficial level. Scamcoins usually have buzzwords and a ridiculous looking website - but if you actually take the time to read even a few sentences from their white paper or proposal report, you should recognize it immediately as spam (often Because it's either a shameless plagiarism or totally incomprehensible).
After a project succeeds, it will imitate and improve with many projects on this basis. Ethereum mimics Bitcoin in many ways, but offers substantial improvements by creating a virtual decentralized computer that greatly expands the potential use cases of Bitcoin's underlying technology. Don't you wish you bought some ETH in the presale? But in the early days of the project I called it shitcoin.
At the end of the day, any new project needs to answer these fundamental questions in order to maximize its chances of success.
Why should we buy this cryptocurrency right now?
What do we hope to achieve?
What are we trying to improve or replace the current financial system?
if you are right"Why"and potential"How to do it"Without a firm understanding, you cannot discern fact from fiction. As the number of cryptocurrencies continues to expand, without a firm understanding of what the project is aiming for, you will be swayed by any coin recommendation that a search algorithm may come up with.
With the exception of my last post, ALL ABOARD!, my 2021 messages are more of a philosophical nature and rarely delve into actionable ideas. This is because, without first understanding"Why"Digital assets will deal a fatal blow to our current simulated financial system. You will never have the belief that assets will fall by 90% in a bear market, and they will still hold firm after a 10-fold increase in a bull market. If you bought Bitcoin at the 2017 high of $20,000, by the end of 2018, you would have fallen by nearly 90%. But if you stick to today, the investment has gone up 3x, which is still more than the percentage growth of the Fed's balance sheet. I will always remind everyone that the metric to beat is monetary base expansion. If you lag behind this indicator, you lose.
A peer-to-peer system that transfers information from one point to another, without a centralized, trusted third party, is the goal of decentralized finance as a whole. Successfully transfer trust from third parties to a decentralized network itself. I often focus on the financial ramifications of this, as this is my area of interest and experience. The point of this post is to examine at a very high level the price we pay for blind trust in every aspect of our financial existence. If we imagine that some decentralized digital currency, Token or cryptocurrency can replace part of the demand for centralized trust in the future, how much room is there for the current market to rise?
value"value"secondary title
banking system
Let's start with some charts that show the market's dislike for the traditional banking model.
Here's a chart of the KBW Bank Index, which represents major U.S. commercial banks. As you can see, after peaking in 2007, it has only recently surpassed that ATH. Fed to rescue"too big to fail"The banks are doing whatever it takes, and it still took them 14 years to recapture the 2007 high.
Here is a biographical chart of the EuroStoxx Bank Index representing major European banks. It is still down 80% from the high point.
This is the trend chart of the CSI 300 Bank Index. China's major banks are still down 20% from their 2008 highs. In China, these industries will receive strong support from the state. Yet even with the help of the authorities, the banks are still not above their highs.
In Japan, the country of the rising sun next door to China, the situation is not much better. The Topps Bank Index is down more than 90% from its 1989 ATH.
Here is a chart of the Nifty Bank Index in India. I never would have guessed that Indian banks would do so well. No matter how hard you try, it's hard to bring down your banking system when demographics are on your side. Hope this price performance can continue.
Conversely, even after the blip of the 2000 bubble, technological progress today is still exponential. Given that integrated circuits and semiconductors are the bedrock of the technological utopia we inhabit, the chart of Taiwan Semiconductor (TSMC or 2330 TT) represents the march of innovation. Let's compare this to the performance of the different bank indices shown above.
Banks with privatized profits and socialized losses have not yet enriched shareholders. It's sad. If they had fully adopted any of the technology improvements we've seen over the past decade, they'd be better positioned to see exponential growth similar to TSMC and other technology benchmarks.
The stock market is shouting that the traditional banking business model has been broken. The question is what will replace it in the not too distant future. Every product and service offered by banks can be replicated and improved through blockchain-powered decentralized services. I believe this replication can happen at a lower cost on a macro scale, but this is debatable - I expect to see some empirical evidence in the near future.
Traditional banks are destined to be companies that provide services to relatively wealthy children around the world, and they cannot think about digital finance. My mother would rather go to a physical bank branch and risk contracting COVID than learn how to use online banking. She's not alone -- that's your inertia. The business still generates billions in fee revenue, but it's definitely not a growing part of the market.
Below is a comparison of common services offered by banks and their decentralized networks.
Savings account - An account that the bank used to pay you interest on.
Decentralized system--Fiat currency stable currency deposited on the DeFi lending platform. For example, if you hold USDT (Tether), which is said to be backed 1:1 by USD held by traditional banks, you can stake them on Compound and earn a positive return. As a reward, the act of lending USDT allows you to obtain equity in the Compound network in the form of COMP.
Checking account - An account that a bank allows you to withdraw funds from your balance to pay expenses on demand.
Decentralized system solutions - any coin, token or cryptocurrency held in a digital wallet. You can use the currency you hold 24 hours a day without asking permission from anyone. Banks can also deny you access to your hard-earned money for various reasons. But as long as you are connected to the internet, you can use the decentralized system.
Loans - Banks charge interest and lend you money to buy various things. The problem here is that banks often price credit differently based on non-monetary factors such as race, and to this day this gives the impression that certain groups are redlined and have to pay more than others The cost of credit -- if they don't even get a loan at all. Plus, in this era of global corporate socialism, large entities borrow largely for free, while SMEs are in many cases shut out of commercial credit markets. This created anger at the banks that were supposed to be the conduits for credit to production companies.
Decentralized System Solutions - Right now, most loans are negatively leveraged and over-collateralized. Negative leverage means you put up more collateral than you borrow. In addition, the real credit demand is only for speculators and miners. Please read my article "A Farmer's Dream" for a thorough tour of the crypto fixed income market. There are currently no scaled DeFi mortgage, credit card, and personal loan platforms. This is definitely an area where the traditional banking system, even with its flaws, does a better job than DeFi.
Trust Services - Banks perform a very important function of authenticating something about you as a person or business. They can prove that you have a certain net worth based on your bank deposit records, they can prove that you are paid employment and the amount of your salary, they can also provide proof of your account statement mailing address. Many of these services come with a price that you have to pay to prove your profile to others.
Decentralized system solution - most of the assets held on the public chain can be verified independently for free. If your income is in the form of digital assets, it will be easy for you to prove how much you are paid. As for proof of address and other PII, a number of projects are working to create a shared secure database of opt-in PII that can be called upon by other services to verify your identity.
secondary title
replace audit
Why do companies need audits? Anyone who deals with a company, from banks, securities regulators, and even employees, wants to know that the books are in order. Therefore, the auditing company will charge a certain fee to verify the authenticity of the accounting statements made by the client.
In an ideal future, all capital flows will occur on the public chain. Imagine you are a durian grower in Malaysia and you are selling your durians online. The only payment method you accept is USDT, and all your agricultural material suppliers can also accept USDT payment. USDT rides on various protocols, but let's just assume you use the ERC-20 version. This means you can verify what you paid for and what you earned for each fruit sold.
Your accountant will prepare a standard set of income, balance sheet, and cash flow statements. But beyond that, the accountant's ledger can objectively verify that payments and receipts match the amounts reflected on the statement by querying the Ethereum blockchain. In this case, you don't need an independent third party to charge you a fee to verify that you are telling the truth. Ethereum does this for you for free.
Triple bookkeeping, as I've heard some people say, makes all professional accounting and auditing firms obsolete. These companies have no reason to charge this anymore"trust tax"。
I took a look at the fees earned by the four major firms, Ernst & Young, PwC, KPMG, and Deloitte, from auditing and accounting services.
secondary title
ratio
Ethereum is the most developed, decentralized smart contract network. Although gas costs are astronomical right now, this is a good question. No other blockchain backed by public smart contracts operates at the scale of Ethereum. When they do, I'll update this analysis.
Nothing in life comes for free, and even more so in the crypto capital market. Every action on the Ethereum network incurs a fee. We can think of this as income for those who keep the network running, or as taxes paid by us as consumers using products and services enabled by ERC-20 Dapps.
I am using transaction data collected on Glassnode. I plotted the revenue multiple of the Ethereum network going back four years. The reason I look at this metric is that it's what we pay to use these networks. Any Dapp piggybacked on these protocols must also pay fees to utilize the network. Fees charged by any Dapp on top of fees for utilizing the base layer protocol do not count here, and we will only be able to observe that in the near future. That's why I don't look at individual fees charged by highly successful Dapps that alienate sectors of traditional centralized finance.
A portion of all fees spent using trust rent-seeking gates in the traditional financial economy may vest in these networks in the future. Obviously, the goal of DeFi is to improve services at a lower cost, so we cannot assume that all the money spent in the CeFi world will directly translate into benefits for the underlying protocols and the Dapps they enable. So we're just taking a high-level look at why this is such an amazing opportunity.
The above is a time series of Ethereum price versus revenue for the last 12 months, where revenue refers to transaction fees excluding miner block rewards. This chart covers the past 4 years, with the initial pump occurring at the same time as the 2017 ICO boom.
The Y axes of both graphs are logarithmic scales, so we can truly appreciate the exponential nature of time series data. The most interesting thing is currently with ETH making new highs, its price/revenue is at the low end of its historical range.
If you are a follower of mean reversion, here are a few things to consider.
Price/income on April 10, 2021: 98
Average Price/Revenue: 1,528
Median price/income: 430
Standard Deviation: 3,939
April 10 2021 ETH/USD price: $2,071
Price if median reverses: 9,054
Price if moving averages reverse: 32,143
These are very optimistic advanced tutorial posts using basic statistics. That doesn't mean it's going to happen, but it shows that it's not impossible to reach these levels if the data behaves like the data in large sample sets.
Ethereum is a decentralized computer, and computing power requires money. The more useful DeFi applications built on Ethereum, the more users will pay to escape the greedy CeFi platforms. Currently, the price/earnings ratio is close to 100, which is at the low end of its range.
This ratio is a backward indicator. From April 2020 to the present, the following are the price/earning statistics of ETH.
Minimum value: 86
Maximum value: 608
Median: 169
Average: 255
Standard Deviation: 168
Let's run with the median as a forward-looking approximation to value the Ethereum network. We assume that Ethereum can capture a certain percentage of the 5-year average earnings of banks and the Big Four audit firms. In addition to the usage fees accumulated by Ethereum's underlying protocol, Dapps located above will also charge some fees for using their services. Therefore, we must mistakenly believe that the actual accrued amount of Ethereum and Dapp is smaller.
Below is a table describing a hypothetical scenario where a certain percentage of revenue is shifted from centralized to decentralized services over the next 12 months.
These numbers are quite remarkable, but since this is a very rough, high-level context, it is unlikely to be completely accurate for a very uncertain future. In the 0.50% case, the price of ETH, assuming that amount of activity is transferred into its ecosystem, would imply a 10x price appreciation from current levels; in the 0.10% case, a doubling of the ETH price. I'm pretty sure DeFi can take at least 0.50% off CeFi. Could DeFi show higher levels of success? sure. If I'm happy with 0.50%, imagine if we could get 10x or 5%.
Long whatever the fuck you value when you take a high-level approximation that you'll make money even assuming the worst.
The problem is simple: the current financial architecture is not adopting technology as quickly as it should. The market is clearly showing a hardening of the financial services system, as evidenced by the equity valuations of its major players. The solution may be DeFi. DeFi is driven by the public chain, which is characterized by smart contracts. While Ethereum is the best out there, there are others trying to exploit its weaknesses and become top dog - including Polkadot, Solana, Cosmos, Cardano (when Godot arrives and smart contracts are finally available), etc.
Calculated at 0.50% of the revenue earned by the surveyed CeFi companies, this is still $14 billion in revenue, on which multiples will be calculated. As can be seen from ETH, the market attaches a very high multiple to the transaction fees generated by an immature ecosystem. So even a spray-and-pray attitude towards smart contract base layer chains that have the opportunity to loot some CeFi loot, at the portfolio level, can yield high returns.
The danger is that if you're lazy, you'll invest in anything that makes sense on its face. Take a word cloud of the most read Medium post about DeFi, shove it into a ridiculous looking website, and I bet you'll attract big money into yours from gamblers looking for the next Ethereum wallet. That's why I implore the football players I have lunch with to read the Bitcoin white paper and study what they don't understand. Only when you witness and appreciate beauty can you protect your capital from ugliness.
