"I must not be afraid. Fear is the killer of the mind. Fear is the cause of utter destruction. I will face my fear. I will allow it to pass through me. When it passes, I will turn my gaze inside, Look at the path it has traveled. Where the fear disappears there will be nothing. Only I will remain."
– Paul Atreides science fiction novel Dune
I love science fiction. At any given time, I read at least one science fiction novel. Dune by Frank Herbert is some of the best science fiction ever written. The full six-book series is pretty good, but the quality of the series gradually declines after the first book. The best science fiction book series is Liu Cixin's "Three-Body" trilogy. It's amazingly written. I wish my Mandarin was better so I could read the original in Chinese instead of the English translation. If you like science fiction, this is the truth. I'm also very excited for the upcoming TV series Foundation, Foundation. Asimov was a mafia.
American businessmen and investors are simple creatures driven by fear and greed. Greedy people make humans do many incredible things, and the fear of loss is overwhelming. Daniel Kahneman has written extensively describing how human decision-making is not as rational as classical economists believed. In particular, monetary losses are more damaging to our psyches than monetary gains. As we delve deeper into this epic crypto bull run, assessments of panic are critical, as one or more of these narratives may supersede punters’ desire to keep BTFD (buy the dip).
reverse
A few weeks ago, I got a message from Suzhu from Three Arrows Capital. He asked me what I think is the probability that the ethereum market cap will surpass bitcoin during this bull run. I answered 0% and asked his opinion. He responds to me with a 50% possible advantage in ETH. Shortly thereafter, the May 2021 issue of Raoul Pal's Global Macro Investor was released. The always surprising report includes a lengthy report summary by Nikhil Shamapant on why Ether could reach $150,000 by January 2023. After reading the report, I sent Su another message, raising the probability of a reversal to 30%.
There is a branch of the Bitcoin community who stay up all night rooted in the fear that Ethereum will surpass their beloved Bitcoin one day, including the apostles of God V and Lubin. I don't know about tribalism, but check out Crypto Twitter for some epic Bitcoin vs. Ethereum rants. Bitcoin supremacists believe that Bitcoin is a true currency god in the crypto market. All other cryptocurrencies are, at best, aids of the gods, or pure evil.
On the other hand, the head of mETH believes that Ethereum can be both the most difficult form of cryptocurrency and the best decentralized computer in the world. For them, after ETH 2.0 launches and completes the switch from proof-of-work to proof-of-stake consensus algorithm (currently scheduled for later this year), the market capitalization of ether will quickly surpass that of bitcoin.
I do my best to undo my dogmatic thinking lest I marry a thinking that has become outdated over time. As all people, I will fail, but hopefully I remind myself that I can only predict probabilistic outcomes and act accordingly to minimize future losses. The dogma surrounding Bitcoin and Ethereum must be reduced to the actual basic idea of each cryptocurrency. We can then return to the current situation and assess whether the narrative makes sense at all.
What are Bitcoin and Ethereum?
The best form of money has no industrial precedent. Fiat currencies are great for business because they are essentially worthless. The need to use a particular command depends entirely on the availability of its network. In this case, the network is the number of counterparties that accept a particular fiat currency in exchange for goods or labor domestically or internationally.
The reason commodity currencies don't work well for everyday use is that they have value associated with some real-world use cases. A barrel of oil is terrible money. Oil will have two sources of demand that affect its price, not labor and commodities. The first is the demand function of energy consumers. The second is the demand function as a medium of exchange. How do I price my labor in terms of a barrel of oil? I have to estimate the value of oil based on its usefulness for my daily energy needs, and I think others see the value of oil as the value of the good or service I'm trading. As the number of economic actors increases, it becomes quite complex, and the supply of oil and the velocity of money contain interdependent vectors.
Ethereum's primary mission is to power the world's largest distributed computer. Ethereum is valuable because the Ethereum network is the most commonly used smart contract protocol. It has the most developers, the most Dapps, and the largest Total Value Locked (TVL). Ether is a commodity used to pay for gas fees, so you can use Ethereum decentralized computers.
The use case for ether is not purely money. The best example is hack DAO. For those who haven’t lived through 2016 or so, here’s a very short series of events that led to the Ethereum network deciding to hard fork the network in order to save the DAO’s investors:
A project called The DAO was launched in an attempt to become the first truly distributed autonomous organization running an Ethereum protocol VC fund.
Users stake ETH into the DAO smart contract, and in return they get to vote on how the pooled funds are invested in promising projects.
The DAO attracted roughly $150 million worth of ETH at the time, making it one of the largest crowdfunding campaigns in human history.
A programming error in a smart contract allowed an entity to siphon funds from The DAO. I object to calling it a hack; smart contracts execute according to a plan, like code. The problem is that the creators of the DAO don't fully understand how their smart contracts will behave in the open world.
Loosely under the leadership of V God, the Ethereum community had to make a very clear choice:
Allowing DAO funds to be withdrawn, but not rolling back transactions, insisting on the immutability of the blockchain. This would have made Ether more of a hard currency tool, but given the nascent stage of the Dapp ecosystem in 2016, it would dampen investor enthusiasm for future DeFi projects due to the losses it suffered.
Pushing miners to accept a hard fork that would revert the Ethereum blockchain back to before the DAO was exploited and allow investors to recover their ETH. This makes Ether a poor monetary tool as the history of the blockchain can be rewritten under duress, but it will give investors the confidence to keep experimenting with DeFi applications.
True to its mission, the community chose to promote Ethereum as a decentralized computer rather than a true monetary instrument.
This decision also made many community members take immutability very seriously, so, after the hard fork, they continued to mine the original chain, but changed its name to Ethereum Classic (ETC). It has the same community commitment as Bitcoin, behaves like hard money, and the smart contract logic of Ethereum.
The market is my religion, and in these 5 years, it announced that ETH should be worth 30 times or more than ETC. The market's emphasis on Ethereum is to be the best smart contract protocol, and at the same time, it hopes to be one of the cryptocurrencies A good hard collateral. Serving two masters is not possible.
If in doubt sometime in the future, the Ethereum community will always place the need for a decentralized computer over the need to turn it into a real hard money tool. Looking at the future of ETH 2.0, there is a nascent narrative that Ethereum may be the hardest form of cryptocurrency and the best distributed computer. #REF!
Ethereum Inflation Timeline
If approved, EIP-1559 would significantly alter ethereum's inflation schedule. Essentially, ether is not transferred from users to miners in the form of network gas usage fees, but a base fee is burned, and a tip is provided to miners. It is estimated that up to 70% of the gas in transactions can be burned. In my article "Yes... I read the white paper", I talked about the potential massive increase in Ethereum gas fees if DeFi could replace even a small part of CeFi.
If the amount of GAS multiplies with usage and these fees are burned, then the inflation schedule will happen very quickly. As the platform becomes more useful, the supply of Ether will decrease. If we underestimate the impact of DeFi on human economic interaction, then in the future, Ethereum will not be able to provide enough Ethereum for the system to use.
The counter to this is that the high price of Ethereum solves this supply problem. But that's not the case, and if the marginal mining margins expand enough, there's no magic ETH on the ground to exploit. The network will not generate enough ETH through block rewards to satisfy its use in Ethereum tasks.
At this point, network economics fails. Prices are high and hoarders are suddenly trumped, but if DeFi applications that need fuel can’t get it at any cost, Ethereum is one step away from the ghetto. Considering how the community responds to existential threats to accomplish its mission (see: DAO hack), do you expect them to sit by and watch the network self-mutilate due to a flawed inflation scheme? If there is a hard fork, it can be hard forked again. Deflationary issuance and gas fee burning schemes will be sacrificed so Dapps can be used at the capacity required to drive distributed computers.
So those who are betting that the current EIP-1559 inflation schedule will never change, need to look at the protocol's history. The main driver of the bull market reversal is the exponential growth in on-chain transactions required by DeFi, which causes more fees to be spent and then burned, reducing supply and boosting prices.
If the ethereum price really hits $150,000 and the Defi network is eliminating the parasitic CeFi mechanics, then the mere suggestion that the protocol has to change its issuance schedule to continue crushing CeFi's skulls will send the ethereum price towards maria The bottom of the Na Trench. Failure to understand what a deflationary release schedule means for a currency powered by the underlying technology whose utility underpins prices can be fatal. Ether could never be the most difficult form of cryptocurrency to fulfill its true mission of powering globally distributed computers.
However, this does not mean that the market cap of Ether cannot exceed that of Bitcoin. It just means that it will be more difficult to achieve that goal, because ether cannot get cake and food.
Money is not as valuable as technology
The global reserve currency is the most valuable because it has the largest network of participants who will accept it in exchange for goods and labor. Currently, this is USD. The approximate value of money is M0 or the amount of base money in circulation. Currently, USD M0 stands at $5.8 trillion.
The combined value of FAANG (Facebook, Apple, Amazon, Netflix, and Google) is $6.36 trillion. The U.S. dollar is just pure money that relies on the network of the U.S. financial system. It is no more valuable than a company that provides actual goods and services in dollars.
People who hold dollars don't cry like babies on social media because companies that sell products denominated in dollars are worth more than dollars. So why are bitcoin fanatics so threatened by inevitability that they think other cryptocurrencies with industrial use cases will be worth more than bitcoin? The feeling doesn’t seem to be mutual — many of the most successful altcoins raised their initial funding in Bitcoin.
If Bitcoin’s market cap dominance is significantly lower than current levels, then it has no inherent utility as the hardest form of crypto collateral. Bitcoin holders must trust that there is Bitcoin collateral in any cryptocurrency-enabled economy. They should strive to support this mission, as doing so would further cement Bitcoin's role as the foundation of a cryptographic pyramid.
The Ghost of Sir Thomas Gresham
Fiat currencies and gold require human breath to exchange them for other forms of money, goods or services. These traditional forms of money rely on human networks. As long as there are people, the network can function normally.
Even though Bitcoin is the hardest money ever, it takes, in addition to humans, an army of selfish miners to expend real-world energy to maintain the network. Miners are only rewarded in bitcoins. If the bitcoin-to-energy exchange rate fluctuates for various reasons, miners will not mine bitcoins and the network will disappear. This means that both Bitcoin and Proof of Work are about to disappear.
The higher the rate of Bitcoin transactions, the more on-chain fees are generated. These fees, in addition to large rewards, allow miners to purchase energy to maintain the network. We all know that block rewards will drop approximately every 4 years until they are all terminated in 2140. Fortunately, the number of transactions on the chain is rising, and it is from the right side. However, as the culture of buying paper bitcoin derivatives grows and older generations of bitcoin legends continue to HODLing, Gresham's Law (bad money drives out good money) will become increasingly relevant in the near future.
Some money wasted, such as dollars and other fiat currencies; good currencies were hoarded, such as Bitcoin. This is now Gresham's Law. But while hoarding gold doesn't reduce its value, extreme hoarding of bitcoin in the future without using it in any way will destroy the network economics that give bitcoin value - because after the block reward ends , miners will only pay fees in transactions, if there are no transactions, there will be no fees and no incentive for miners to maintain the network.
Not your private keys, not your bitcoins
Most newcomers into our circle want an easy way to acquire Bitcoin to hedge against fiat currency. That is, they believe that the price of Bitcoin will rise, but have no interest in becoming their own bank. They want to call a customer service number when they forget their password and have someone to complain when things don't go as planned. Service providers are happy to sell paper bitcoin derivatives that provide exposure to the asset, while charging for handling all the pesky blockchain stuff.
Judging from the asset collection success of Grayscale's GBTC, Coinshare's XBT Provider and other paper derivatives, ordinary investors only need price risk. My close friends who are actively trading also use these products because they are easy and they fully understand that when you don't take custody of your coins the truly revolutionary aspect of the bitcoin blockchain is completely lost . But that's irrelevant because they're more eager to hedge against inflation than the new financial ecosystem.
In the long run, piles of bitcoins sitting in escrow accounts not being used for business, or as collateral for the new digital financial economy, could be a potential drag on miners' profitability. Another headwind is those who are all in the "be your own bank" ethos, but would rather spend money on their own necessities than precious bitcoins. If both ends of the belief system are firm, the growth of on-chain transaction volume will slow down or decline entirely.
Chip shortage
With bitcoin and energy prices so high, the high profit margins of bitcoin mining will continue to exist due to an ongoing shortage of the semiconductor chips needed to make new mining machines. Even if you had the money to buy a machine, there are not enough chip opportunities to significantly increase the network hashrate.
As a reminder, the real exchange rate that matters is the price of Bitcoin to energy. Fiat currencies come and go, but miners must somehow buy electricity with the bitcoin they earn to keep their operations going. The remaining bitcoins after purchasing such products are their profits. $1 can buy 1 kWh or 1,000 kWh; however, 1 kWh is always 1 kWh.
The current output of large mining farms does not require a significant increase in network transaction volume to sustain ongoing capital expenditures. They also use second-generation mining machines and print so much money that it doesn't matter if bitcoin is used in actual commerce.
From mine to fork
When primary, intermediate and final goods are all priced in Bitcoin, credit expressed in Bitcoin terms can be extended to all steps of the value chain. A true bitcoin economy allows unsecured loans on bitcoin terms. If this future comes, on-chain transaction volume will explode.
Bitcoin usage from mine to fork is the salve to ease the constant itch of Gresham's Law. We have time to correct the rational but destructive urge to buy paper bitcoin derivatives and hoard physical bitcoin.
currency of dogs
The most powerful force in the universe is the power of the collective human imagination. Every unnatural physical object we interact with begins in the imagination of one or more individuals. It all starts with belief and then transitions to physical reality.
The value system that upholds our collective delusion is heavily guarded. We need only record the millions of people who have lost their lives over the millennia of human civilization due to differences of opinion about political systems and religions. It’s no surprise that people take their beliefs very seriously when it comes to the realm of the monetary system. They should, because the monetary system you believe in can be the difference between a life of leisure and boring labor.
Humans inherently know that money is pure fiction. So when you challenge their belief system with other stories, they may become hostile. The best way to respond is with humor.
The most talented comedians take our most cherished beliefs as a social phenomenon and demonstrate the fallacies of logic through humorous upward arcs. If you can't joke, you might want to meditate for a while to understand why your beliefs are so insecure. Maybe it's because deep down you know they're total bullshit.
Dogecoin has angered both the traditional financial establishment and the crypto cowboys. This is incredible internet money without any pretense of lack of technological innovation. It is a cute dog displayed on a computer screen. Dogecoin founder Jackson Palmer quit Doge a few years ago in a rage, underscoring the absurdity that he thinks such blunt cryptocurrency jokes still have value.
It's only fitting that one of the greatest salesmen in human history, Elon Musk, uses Dogecoin to illustrate the absurdity of our current monetary system. Elon's company, Tesla, is worth more than most car companies, while producing only one-sixtieth the number of cars in the world. Definitely pure hype. Elon has created more stock value with its Twitter broadcaster than it has with delivering electric vehicles that are safe, fast, and environmentally sustainable.
Love him or hate him, he is the poster child for price hype! The Dogecoin joke has created a lot of millionaires from basements. In an era when central banks around the world have expanded their balance sheets at a CAGR of 15% since the global financial crisis in 2008, for traditional finance investing in value and growth on TV while barely earning single-digit percentage returns To the Guardians, it was quite a shock. This is a real irony.
Dogecoin also mocks the utopian gamers of distributed technology. Their dogma is also threatened by Dogecoin. How did such a technically deficient protocol break into the top 10? How does this affect the value system of your peers? They bemoaned that Dogecoin "makes us look like a joke" and "makes cryptocurrencies look unprofessional." If professionals wear suits, ties, and black pencil skirts while earning substandard pay then give me some dogecoins. You, too, are trading the incredible internet currency and pushing electrons across computer screens while advancing philosophy. Maybe you just want Count Elon touting your pump tokens on "Saturday Night Live."
Doge is fearless about cryptocurrencies. Instead, it should have been used as a thin layer of paper to show that the emperor was unclothed. Money is a mental abstraction. The sooner a generation realizes that all things are fictional, the sooner they can transition from tangible government-issued paper money to a purely digital distributed currency. All the same fakes. Which novel to choose to preserve your purchasing power amid rising energy, food and housing costs? Which novel is inclusive rather than exclusive? Which novel could you work on?
Dogecoin is a blessing. Long live cute dogs!
i will face my fear
It's simple - I'm afraid global central banks will slow the growth of their balance sheets. Absent this, any cryptocurrency should not be a multiple of today's value. When currency prices are no longer distorted, traditional cash flow analysis will once again make sense.
The various fears I've talked about in this article are unique to specific cryptocurrencies. Just like stocks, real estate, and commodities, all asset classes will continue to rise in price as the money supply increases. Know your fears and choose the right ecosystem to keep your fortune safe from inflation. As Chuck Prince, former head of Citigroup, once said:
"When the music stops, things get complicated in terms of fluidity, but as long as the music is playing, you have to get up and dance."
Risk warning: the above views are only personal opinions, not as investment advice
Risk warning: the above views are only personal opinions, not as investment advice
Original Author: Arthur Hayes Bitmex
X-mining compilation
