Original author: Arthur Hayes

Original compilation: GaryMa, Wu Shuo Blockchain

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Every investment thesis has a way it is best expressed (a way it is presented or expressed in a specific way). When we think about the ongoing fiat debasement, what is the best way to profit from the collapse of the dirty fiat financial system? Whats the best way to express this transaction?

This is one of my favorite charts that clearly shows that Bitcoin, or cryptocurrencies in general, is the best representation of fiat currency debasement trading. I deflation-adjusted the values ​​of Bitcoin (white), gold (yellow), the SP 500 (green), and the Nasdaq 100 (red), benchmarking them against the Federal Reserve balance sheet, in 2020 Performance from January 1st is indexed (starting point is 100). Bitcoin is up 228%, far outpacing all other high-risk assets.

If you place the starting point of the index for these assets in 2010, when Bitcoin started trading on exchanges, the results are even more favorable for Bitcoin.

Fundamentally, why is this happening? Cryptocurrencies represent a movement to separate money and finance from the state. By using computers, the internet, and most importantly cryptographic proofs, We the People created the most solid currency ever created—Bitcoin; we created an entirely new decentralized finance powered by public blockchain networks like Ethereum System (DeFi). This new crypto-financial system relies on mathematics and fundamental support from dissatisfied humans, rather than the violent coercion of states and their bank henchmen. Capital as a transformation of energy is looking for a safe home away from devaluation, and it is seeping into the crypto space. But the market capitalization of crypto is minuscule compared to the total value of all fiat financial assets. This is why a small amount of capital escaping the collapse of the fiat financial system can create such huge gains in such a short period of time.

All cryptocurrencies, tokens, and investment themes are not created equal in the crypto space. As the year ends, I want to discuss some of the crypto traps being peddled by enthusiasts and fools alike. As always, my goal is to present a different perspective and make you, the reader, think. By answering these questions, you can hopefully make more informed investment decisions.

Fed turns

2-Year U.S. Treasury Bond Yield

In the first and biggest turn of events in the first quarter of 2023, the Fed and Treasury teamed up to rapidly promote a bailout of the roughly $4 trillion U.S. banking system and Treasury markets through the use of the Bank Term Financing Program (BTFP). Powells recent comments are merely confirmation of loose U.S. monetary policy.

What changed in two weeks? ……politics.

Whats the worst thing for a politician? Not re-elected.

What’s the second-worst thing for a politician to do as a member of the Democratic Party in the United States? Trump was re-elected, along with a wave of Republican congressmen and senators.

Using these two guiding principles, the political motivations behind the Feds actions from 2021 to now become crystal clear.

With inflation raging in the wake of the pandemic, Biden sat Powell down and instructed him to get it under control. As you can see from the chart above, by March 2023, the 2-year Treasury note surged from essentially 0% to 5%. This was driven by the fastest Fed rate hike since Paul Volkers tenure in the 1980s.

Huge amounts of money printed to appease the populace have led to the greatest inflation in more than 40 years, and a few months of Fed tightening are not enough to smother this monster before the crucial November 2022 US midterm elections. The Biden administration then decided to drain the U.S. Strategic Petroleum Reserve to flood the oil market with oil, keeping gasoline prices lower on Election Day. It was a very strategic use of a scarce resource...to get members of the party re-elected, and it worked.

Regardless of which clown is in charge of the United States, the causes of the empires decline have been forged by policies enacted decades ago. In 2023, the Biden administration, working with Yellen, is working to significantly increase fiscal spending and shift borrowing toward the short end of the Treasury yield curve. The result is a booming U.S. economy, with real GDP growth of 5.2% in the third quarter of 2023 and forecast real GDP growth of 2.6% in the fourth quarter, which is very impressive for the worlds largest economy. number. But even that can’t quell voter dissatisfaction with the mistakes of Biden and his merry Democratic bureaucrats. Because of Bidens poor performance, the most feared man in America, former US President Trump, would defeat Biden if the election were held today.

Trump must be stopped, and Biden knows how to get the job done.

In order to further stimulate the economy and keep all financial asset holders happy, even if this may lead to more inflation in the future, Powell has to cooperate by easing financial conditions. Hopefully, the aforementioned inflation will come after the November 2024 elections. Thats why Powell was vague on the Feds desire to maintain this tight fiscal position. Never mind that current fiscal conditions are not tight enough according to a variety of accepted economic theories such as the Taylor rule, flexible average inflation targeting, and core CPI exceeding the Feds 2% target. As the Wall Street Journal noted, less than two weeks ago, Powell had a completely different view on the possibility of a rate cut.

This goes something like this:

Yellen called Powell into her office and told him what was going on. Powell did as he was told...to communicate the possibility of a rate cut. Now financial assets will rise until the U.S. falls into recession or inflation returns sharply. I dont foresee a recession in the 2024 election year, given the federal governments determination to spend as much money as possible to keep GDP growing. Its unclear whether inflation in food and fuel prices will materialize in a meaningful way before November 2024, sparking protests and instability. But let’s not worry too much about the future. Right now, the Federal Reserve, the U.S. Treasury, and Americas leaders are all screaming at you to buy, buy, buy. Don’t do anything stupid; get ready and participate in the best of this trade, namely cryptocurrencies.

Any other major country or economic bloc, such as Japan and the European Union, would cooperate and allow the dollar to weaken against the yen and euro. As the dollar weakens, everyone benefits except those who do not have sufficient financial assets to offset the effects of inflation.

Now that you have the macro reasons to be bullish on cryptocurrencies, let me help you avoid some potential value pitfalls.

Permissioned DeFi

This is one of the most pointless cryptocurrency topics out there. If we only consider the meaning of these words, it should be clear to anyone thinking that these projects are destined to fail.

These projects are designed for institutional investors, who have various regulations that in many cases prohibit them from trading on real DeFi projects. This is bad because there are a large number of retail transactions in the true DeFi free market, and institutional investors cannot participate. A market filled with retail trading is the best market because it provides an opportunity for smart institutional money to make profits from dumb retail investors because they have faster computers and can trade without humans. Execute trades under emotional circumstances. At least thats how it works in traditional financial markets, as exchanges institute special order types and delay rules that give large high-frequency trading firms a substantial advantage. Michael Lewis has an excellent book on this subject called Flash Boys.

The fact is that there won’t be a sufficient number of retail traders using these permissioned DeFis because they don’t need to trade with institutional investors. Exactly what institutional traders need versus retail trading. The entire reason why DeFi is attractive to retail cryptocurrency traders around the world is that it has a different market structure than traditional financial stock and derivatives markets. When the hype subsides, these permissioned DeFi markets will simply become a circle of high-frequency traders waiting on the buy and sell orders for each other to cross the spread and be affected. When enough directional retail fails to emerge to justify deploying capital on these protocols, institutional investors will pack up and leave. The result will be an empty ghost town with zero activity or interest, with neither retail nor institutional traders.

Venture capital firms, essentially high-paid puppets, are jumping on the theme train. Therefore, they will continue to burn capital, just as they did when investing in the Blockchain, not Bitcoin theme from 2014 to 2017. Most of them missed out or abandoned investments in Uniswap, dYdX, Compound, Aave, etc. Instead of analyzing what made them miss out on these seminal primitives, they decided to dive into something that superficially looked similar and sounded downright sexy. As an investor, who wouldn’t want to own a trading platform that brings together institutional investors with their massive capital base and DeFi, which is considered a completely new way of organizing financial markets?

As always, there will be those who move quickly to sell snake oil to these desperate VCs eager to invest in cryptocurrencies but unwilling to get involved in the current crypto ecosystem. I have no ill will toward the founders pushing this nonsense; I applaud them for getting their money from accredited investors whose IQs have yet to be challenged. But for you, dear reader, please don’t be the exit liquidity for these garbage projects when they launch governance tokens. You can use the project if you want, but please do some critical thinking and avoid falling victim to the regular money-making that governance tokens will become over time.

RWA

RWA (Real World Assets) is an evolution of the security token theme that emerged during the last bull market cycle. In short, the goal of the RWA project is to incorporate assets such as real estate, tradable debt securities, stocks, etc. into special purpose vehicles (SPVs) and then tokenize them to ordinary people who do not have the ability to buy an entire house or enter the market for a specific asset. People provide fragmented ownership.

I fully believe that any cryptocurrency token that relies on national laws for its existence will not succeed at scale. Decentralized public blockchains are expensive because they do not require a state presence. Why pay a premium for decentralization when it already exists and is so cheap and liquid? The most direct example is the fragmentation of real estate.

The current problem is that due to asset inflation – which is a direct result and target of central bank policies – many Millennials and Generation Zoomers cannot afford to buy their own homes. If they could own part of a one-bedroom apartment and get their foot in the door on the real estate market, that would be a lofty goal, but there are some problems.

First of all, young people trying to leave home or start their own family do not want a house or apartment that is partly in the void. They wanted a real building with four walls and a roof that could actually be lived in. Purchasing a token that represents non-attributable financial performance of real estate does nothing to solve this problem.

Second, every property is unique. This lack of standardization inhibits the development of truly liquid markets. For example, after you buy a token that represents 1/10 of a house, how do you find someone willing to buy it at a reasonable price when you wish to sell it? The buyer needs to understand the location, local real estate regulations, taxes, and ultimately must really want that particular property. This will never come close to the liquidity of owning a fraction of a standardized stock or bond. As with this type of investment, its easy to get in and hard to get out...if you can get out.

Finally, and most importantly, you can already own fractional shares of real estate by purchasing very large and liquid real estate investment trusts (REITs). These securities are offered on many traditional financial stock markets around the world. They are managed by large and reputable companies that have been doing this for a long time and whose experience outlasts most of the target market. I see no reason why you need to do all this blockchain magic and issue tokens.

Purchase these low-liquidity RWA tokens at your own discretion. But even worse is investing in RWA issuing the governance tokens of the platform itself.

Debt ownership tokens

Another very popular expression of RWA is the creation of tokens that represent ownership of the proceeds debt. The most popular projects offer their token holders yields on U.S. Treasury bills (T-bills). The idea is that Tether is great because it allows people who might not have access to affordable U.S. dollar banking channels to send U.S. dollar-pegged tokens 24/7 via public blockchains like Ethereum and Tron. But Tether doesnt pay out returns; Tether owners are able to capture all returns on the dollars they hold in reserves invested in T-bills. What if there was a USD stablecoin that also provided this kind of T-bill income?

This is a great development and I fully support competition to distribute more of the net interest margin (NIM) of these USD-pegged stablecoins to holders. Using and holding these tokens is not a bad thing in itself, but investing in a project’s governance token is foolish. Because this is just a bet on the path of U.S. interest rates.

If USD interest rates remain significantly above zero, the project should make profits and pass those profits on to governance token holders. If U.S. interest rates drop close to zero again, the project will lose money because it has to pay developer, legal, and compliance fees but wont have enough interest income to take a piece of the action. So, as an investor, why would you pay a multiple of the project’s net interest margin to hold a governance token?

Instead, you should short a liquid exchange-traded fund (ETF) that holds T-bills. You can express the same bet on interest rates, profiting when rates rise, without having to pay an additional multiplier to a bunch of crypto guys. If you want truly high leverage trading, then apply high leverage.

In short, the real world governed by national laws is left to traditional financial intermediaries. They are able to offer a more consistent and cheaper investment product that expresses the same theme. Real DeFi projects should only rely on well-written code, not laws that must be adjudicated and interpreted by humans who can make mistakes.

Bitcoin ETF

Fundamentally, if ETFs managed by traditional financial institutions are too successful, they will completely destroy Bitcoin.

Every other monetary asset ever used in the history of human civilization exists by the laws of nature. Gold as a substance is gold not because we say it is, but because of the arrangement of the atoms. The interactions between these atoms are governed by universal laws. Fiat currency is gibberish printed on a piece of paper, but its still a substance. A piece of paper is still paper, whether you believe it has monetary value or not. If you dug a hole, put gold and a bunch of paper in it, and then came back 100 years later, the gold and paper would still be there. Bitcoin is completely different.

Bitcoin is the first monetary asset in human history that can only exist if it remains dynamic. After Bitcoin block rewards hit zero around 2140, miners will be rewarded solely for validating transactions through transaction fees. This means that miners only receive Bitcoin income when the network is used. Essentially, if Bitcoin is moving, it has value. However, if there is never another Bitcoin transaction between the two entities, miners will not be able to pay for the energy needed to secure the network. Therefore, they will shut down their machines. Without miners, the network dies and Bitcoin disappears.

Blackrock, the worlds largest traditional financial asset manager, is in the asset accumulation game. They absorb assets, store them in metaphorical vaults, issue tradable securities, and collect management fees for their hard work. They dont use what they hold on behalf of their clients, which poses a problem for Bitcoin if we take an extreme view of the possible future.

Imagine a future where the largest Western and Chinese asset managers hold all Bitcoin. This happened organically because people confused financial assets with stores of value. Due to confusion and laziness, people buy Bitcoin ETF derivatives instead of buying and HODLing Bitcoin in self-hosted wallets. Now, only a handful of companies hold all the Bitcoins, and with no real use for the Bitcoin blockchain, these coins never move again. The end result is that miners shut down their machines because they cannot afford the energy required to run them. Goodbye, Bitcoin!

When you think about surviving the ongoing fiat currency debasement, you have to pick a side. Either you are trading financial assets to earn more fiat currency, or you are trying to preserve value in energy terms while using a financial system that is beyond the control of the state. In the former case, trade ETFs to your hearts content. Thats why they exist. In the latter case, you have to buy Bitcoin and withdraw it from a centralized exchange to your own self-hosted wallet.

American election year

2024 will see the most national elections since the “nation-state” ideological virus infected our collective consciousness hundreds of years ago. Any politician who wants to be re-elected needs to deliver benefits to the people. For wealthy asset holders, provide easy financial conditions by encouraging central banks to print money. For the poor, giving them subsidies to cover rising food and energy costs is a direct result of policies that support asset affluence. For the middle class, give them democracy and tell them to pay their taxes, bend over backwards, and happily vote. With this in mind, it makes no sense for a politician seeking re-election to stop the fiat devaluation party. The votes of voters who benefit from fiat currency devaluation and inflation subsidies will outweigh those who suffer. Therefore, every democratic country in the world will print more money in 2024.

If you think todays moment in history is special, take a look at the chart above, which shows the value of gold over time for various global reserve fiat currencies. Fiat currencies always tend towards zero. No political system can resist the temptation to print money.

The best time to buy Bitcoin and start your crypto journey was yesterday, followed by now.