18 December 2019 19:41 #1
From our Crypto Theses for 2020 – download the full report here.1 My Top 20 coin hot takes (UPDATED):This is a refresh of my list from last year.Many of these haven’t changed, but I’ve bolded the ones have.Rankings based on OnChainFX.com.
If you’re not full-time in crypto, don’t worry if you don’t get the jokes, and skip to #2.BTC: Digital Gold ETH: DeFi Reserve (vs.
ICO Reserve) XRP: Too-Big-To-Jail Coin USDT: Surprise! They’re more reserved than most Tier 1 banks.
(vs.
Surprise! They’re solvent.) BCH: Bitmain casino chips LTC: BTC betanet 4- (vs.Now useless) EOS: Actually no, it is in fact broken and run by a cartel.(vs.Wait, it’s legit?) BSV: Faketoshi Coin XLM: Burn the coins cuz no one wants them (vs.Cool.
Enigmatic.) BNB: exciting unregistered security LINK: XRPArmy welcome ADA: YOU STILL DON’T KNOW WHAT IT IS? XTZ: Wow! Staking games will never backfire! ALGO: Top 20 if no one redeems, amirite? TRON: fake-it-til-you-make-it coin XMR: Fluffy Pony Watch Fund LEO: Quasi-security backing a quasi-Liberty Reserve ATOM: Most interesting ETH “complement” NEO: “Chinese ETH” HT: Quasi-security that might have CCP blessing Other quick notes: XRP has tremendous and surprising staying power.I didn’t understand it when I realized it isn’t required to use Ripple’s software.
I really don’t understand it in a future that includes institutional stablecoins and central bank digital currencies…The bitcoin forks are write-offs at this point, even if the IRS ends up walloping people during audit open season these next five years…A lot of the dogshit washed away this year , or is on its way to predictable obsolescence, but Dogecoin will continue to rock because legends never die….Means of exchange tokens (why not use a more liquid crypto or stablecoin) and governance tokens (what valuable resource are you actually governing) are garbage and now trade as such.2 Bitcoin will lead, or alts will bleed An interesting thing about crypto is that bitcoin has not actually led a supercycle rally since 2013.
There’s evidence to suggest that, back then, family office and accredited investor interest in the Bitcoin Investment Trust led the rally.In 2017, it was ETH and ICOs that led the rally.I remember being at the Enterprise Ethereum Alliance’s inaugural event, and it was a who’s who of “blockchain, not bitcoin” folks from the major corporates.I thought, “oh fuck, maybe I should buy some ETH just in case,” then all hell broke loose with people raising $30 million in 30 seconds with ETH.You made money in ETH / ICOs, then you “sold” into Bitcoin on Poloniex.That was the formula.It wasn’t until later in the year that bitcoin became its own thing again following the resolution of the SegWit2x stalemate.Why does this history matter? Because bitcoin itself hasn’t sparked a proper rally in six years, and the much hyped “halving” narrative is bullshit because the magnitude of the decline in new issuance as a percentage of market cap is tiny.
Instead, the 2013 and 2017 rallies were driven by new types of buyers.It just so happens bitcoin is the most likely asset to attract the next major new type of buyer again today: institutions.There won’t necessarily be a sudden surge higher.Instead, it will be more like a snowball: one off announcements of adoption begin to increase in frequency before the price begins to tick slowly higher.I think bitcoin hits a new high before we go macro “risk off” again.3 The “dumpening” will continue.
I said in my original 95 theses post that we’d see most tokens grind down 99%+ from their all time highs, mostly due to the incredible amount of selling pressure that would hit most token markets once teams and inside investors began liquidating positions.By this metric, XRP has a could-be-market-dumped liquid treasury of $2-3 billion, XLM’s is $800 million, and Chainlink’s is $600 million.Those are some of the publicly traded assets.For token projects that raised gobs of money at nosebleed valuations in 2017, things could get very ugly, very quickly once they start trading.It’s not even guaranteed Telegram, Filecoin, Dfinity, or Polkadot come to market in the new year, but if they do, I’d be surprised if they traded at anything close to their last priced rounds.
4 Yes, crypto is about the post-USD world.
More than 95% of the value in crypto – outside of exchange tokens (which I’d argue are quasi-securities) is due to the monetary premiums of the top crypto-currencies._ We’ve reached the point where the macro global currency narrative will make or break bitcoin in the next cycle.If huge piles of negative yielding debt continue to build; if central banks continue to flood their markets with cheap capital; if mistrust in most global governments continues to rise, then crypto will be a relatively strong asset to hold.If trade wars accelerate; if governments crack down on the regulated edges of the crypto economy; or if a major recession hits, it’s going to be “risk off” and we’ll be in for a long winter.Modern Monetary Theory is the most damaging economic voodoo bullshit that has gone mainstream recently.
“Rising debt isn’t a big deal because the dollar is a reserve” only makes sense if you ignore the reality that China is expanding its RMB reserve influence throughout Asia at an accelerating clip, and that the central banks stockpiling gold at record rates are also the same ones that happen to hate the U.S.: Russia, Turkey, and China.I’m surprised we didn’t see a top 50 central bank announce they were purchasing crypto as a speculative complement to their gold purchases.
I’d be even more surprised if this weren’t happening in secret by now.5 The gold-digital gold basket.If you’re a gold bug, I don’t know why you wouldn’t take 2% of your gold portfolio and buy bitcoin with it.
Unless you were legally restricted from doing so for some reason.If you view these assets as perfect “store of value” complements, and you look at the demographics of who’s buying bitcoin (young people), you’d be a fool to not market cap weight your gold-digital gold basket.When I was in college, I told my grandfather that between freshman year and senior year, I watched the Mac user base go from 3% to 6% to 10% to 15% of my classmates over four years.Folks, this man doesn’t code on the weekends, but he did buy Apple stock between rounds of golf, then a new BMW a couple of years later when he sold some of the stock.That’s because sometimes the easiest investments decisions are the simplest ones, and I don’t know why any asset manager would stand in front of the freight train that is the generational rotation from boomer gold bugs to millennial digital gold bugs.
6 Refresher on the crypto asset barbell.There’s nothing new under the sun.
If bitcoin has converged on becoming a new form of digital gold, that still leaves plenty of other interesting and valuable monetary and non-monetary assets within crypto.The biggest bucket by far will be crypto-currencies (including stablecoins), followed by smart securities (which will take longer to develop), then a narrow band of digital tokens that span use cases like governance rights, digital resource allocation, work / affinity rewards, etc.BTC, ETH, ZEC, and XMR (the ‘ole “ consensus contrarian ” portfolio) are still the main cryptocurrencies, while exchange tokens are proving to be the first quasi-security tokens with Binance, Bitfinex, and Huobi tokens catapulting to the top 20 in the past year.(We should have known that the industry would dogfood its own companies as the first tokenized securities!) I cover this in pretty epic detail with Placeholder’s Chris Burniske in one of my favorite interviews of the year on the Messari podcast.
7 The insanity of inflationary staking rewards.Non-money and non-security tokens need some type of artificial velocity sink, otherwise their theoretical value should be capped at some discounted value of the future maximum network utility, divided by velocity.(I know that’s a mouthful, bear with me.) Low velocity comes from the need to hold an asset in reserve or earn fees generated in the network (i.e.gas to run applications within the Ethereum virtual machine).
Another way to create a velocity sink, though, is via inflationary staking rewards.Essentially taking money from one pocket and putting it in the other.Brilliant! I don’t want to mince words here: inflationary staking rewards are without qualification the dumbest thing this industry has deluded itself into believing since white paper investing caught fire in mid-2017.
The logical end game is that custodial staking services centralize holdings, inflation rewards get split pro rata to 99% of the network that stakes, then those lucky recipients pay their staking services a fee AND get a cash tax liability for what is really more like a stock dividend.Then the custodial staking services report it all to the tax authorities.Madness.
8 I’m actually a medium-term bull on staking.Oh the irony! Solid governance infrastructure really needs to exist if proof-of-stake is going to work.I’d argue staking probably must be run (unfortunately) by a fluid oligopoly of providers for a while much like proof-of-work mining is run today.Counterintuitively, this means staking services probably should get bootstrapped around the inanity of “inflation rewards” vs.
“network fees” because no one is using any of these networks today, but at least you can game participation in the games of stakes.Staking rewards (net of tax) should be value destructive, but we could see some major pops for a while as some teams “optimize for the monetary premium” – aka design token pump schemes.
We’re seeing this already with Tezos as staking exchanges scramble to acquire XTZ on behalf of their customers.Some three quarters of Tezos is already staked, yet Coinbase, Kraken, and Binance need to buy more for their bonds if they want more users to stake.Not only that, but you can think of all this as practice marketing for the real staking bubble leading up to ETH staking early next year.All the staking services will be falling over each other marketing that.
9 Crypto-securities will continue to disappoint.As I predicted last year, nothing in the securities market has been very interesting yet.At least none of the tokenized real estate / private company shares / corporate bond projects have come to market.That’s because their liquidity pools are elsewhere, and markets follow liquidity, not the other way around.
What has been interesting is the proliferation of tokenized quasi-securities.I’m bullish on exchange tokens with token burn models.I like synthetic DeFi protocols that mirror real world equities (buy the S&P as an Indian investor).I really like the design space that’s opening up around DAOs, which is probably the logical end state for most “utility” network tokens that power protocols of any utility in the future.(Perhaps this is the path to value of the 0x token, e.g.) The trick is going to be winning the market without running afoul of SEC guidance – at least in the U.S.
The great irony is that fear of the SEC may be preventing a number of teams from upgrading features of their tokens that would give the assets, ya know, actual compelling fundamental value.Adding smart contract functionality to markets such as real estate, energy, insurance, and even human capital will happen eventually.Though issuing a token under Reg A+ as a security will have to be one of those areas that dies in a fire sooner rather than later in the 2020s.
I can’t wrap my head around how that makes any sense at scale.Crypto moves too fast to wait on the SEC to come up last year’s learning curve.10 Stablecoins will soon eclipse bitcoin in size.The stablecoin wars are heating up, and it’s the best thing for the long-term viability of crypto.We have a whole top 10 section dedicated to them this year, but suffice it to say: interoperable global stablecoins could become bigger than bitcoin in short order if some of the major central bank digital currency projects take root.I’m not sure whether Facebook (via Libra) or Binance (via Venus) is well-positioned for success if more governments get serious about their own stablecoins, but Tether might be.More on all of these later.(Note: Some may dispute that CBDCs are actually cryptocurrencies.
Not arguing semantics, but we’ll cover them at Messari.) 11 I’ve come around on crypto funds.I can’t believe I’m writing this, but I’m a net buyer of crypto fund managers generally.I still think most of them will be alpha negative, but there’s an accessibility element I underestimated when I first scoffed at 2 & 20 funds in 2017.That is, the unique tax, tech, and regulatory issues presented by crypto leads to a situation whereit doesn’t make economic sense to spin up infrastructure in-house as an asset manager unless you’re really going all in.
Institutional investors who want exposure will (and probably should) take LP interests in blue chip managers and maybe buy bitcoin directly.That’s about it if you’re managing a large portfolio.I don’t expect this approach to frequently lead to alpha vs.the bitcoin benchmark, but it might lead to absolute outperformance as an LP if it’s part of a broader investment portfolio.
Watching pensions and endowments finally enter the fray has been wild.The virus is spreading.12 I’m bullish on funds despite major coming markdowns.I’m a buyer of the crypto funds as a class despite (because?) so many of the OG funds have been sucking wind these past couple of years.Out of the crypto native funds, it seems Paradigm, Placeholder, and Polychain are in a class of their own reputationally.That said, there is some real toxic waste on some of these books that I’ve heard are aggressively marked.(The shadowy world of crypto valuation firms is probably fodder for one of our 2020 Pro research posts.) Fortunately, more of the top tier funds seem to have structured longer lock-ups and more credible LPs than may have been expected two years ago, so runaway liquidations seem unlikely.I’d be surprised if there were a high-profile (in terms of reputation, not AUM) fund blow-up next year, even if (when?) the “ETH killers” come to market and fizzle entirely.
The worst has passed.13 How about passive products? Everyone got a bit ahead of themselves in late 2017 regarding the tokenization of everything.This was back when bitcoin dominance fell to historic lows of 36%.(36%!!!) Back then I predicted “most crypto funds (net of fees) would underperform vs.BTC and ETH as benchmarks…sooner rather than later, institutions will wise up to the reality they shouldn’t be paying carry on funds denominated in BTC and ETH.When that happens, you’ll see a massive influx of capital to passive index funds.” This was arguably right, but I overestimated the probability of crypto ETFs getting approved within two years, which is what continues to make crypto funds so attractive.As it turns out, the regulators only want to approve crypto products that depress the price, not add fuel to the fire.
14 Long Grayscale, short crypto.
You’d expect passive crypto products to get ruthlessly competitive on fees, similar to the exchange market.But it’s not the case.Digital Currency Group’s Grayscale Investments sits in a unique regulatory position as an asset manager.They essentially have a strange temporarily monopoly on the U.S.crypto ETF market, where their “ sidedoor ETFs ” allow them to add AUM to the trust that essentially can never exit.I’ve written about the Grayscale trade, and how their products work in the past.
But in brief, the odd structure allows institutional investors to create new shares in the trust, flip them after a year at a huge public market premium, then recycle the gains post-tax at a higher cost basis.In return for the clever structure, Grayscale gets all of the benefits of running an ETF business with an insane regulatory moat to defend the 2% management fee on their 4-5 public products for the foreseeable future.And the plot thickens! DCG is also one of the best positioned U.S.crypto unicorns to access the public markets via an IPO, as their combined businesses throw off close to ~$100 million in high margin revenue, and they have a vast digital currency and venture portfolio.(We also did a sum-of-the-parts valuation on DCG last quarter.) But the irony is that DCG likely needs to go public before a crypto ETF gets approved, which would likely lead to increased competition (and a fee slashing) for Grayscale’s products.Could a quasi-index fund go public if an ETF can’t? 15 The Alchemy of Crypto.Meltem had a great post on the history of alchemy that explained crypto economics’ current status as pseudoscience.
“Practitioners of alchemy had good intentions, and wanted to use knowledge as a tool to help humanity for the better…these pursuits played [a role] in the development of branches of philosophy, chemistry, biology, physics, geology, and more.What began as a psuedo-science, with its roots in mysticism, began to evolve into proto-science with practical applications and very real implications for the future of humanity.” This strikes me as sensible, and the best way to value crypto assets today may still be on a relative value basis or in baskets.Trade BTC/LTC , ETH/ETH Killers, XMR/ZEC when the relative values get too far out of whack vs.
historical averages.Otherwise, when it comes to emerging fundamental metrics, there are three I like best: 1) Market Value / Realized Value ratio for proof-of-work coins.This measures the accumulated value of each newly mined coin based on the market price at the time of its original issuance, and then compares it to current market capitalization.The two times bitcoin’s MVRV dropped below one historically were the cyclical bottoms for bitcoin in Jan 2015 and Nov 2018.
LTC’s MVRV has fallen by 50% since this summer, and ZEC is at just 0.32.This only works if you believe in the monetary fundamentals of a given asset, as you know it’s human psychology for people to hold underwater positions in the hopes they will rebound.Here’s the chart to watch to track MVRV from our friends at Coinmetrics.2) Real 10 Liquidity Coverage ratio.Which I coined just now while writing this sentence.
We use our “real” volumes from exchanges we believe omit wash trades from their public APIs, so we have a proxy for actual buy-side support.If you take that and divide it by the daily dollar-value of newly sold / mined crypto from a given network you could get a “Liquidity Coverage Ratio.” This would give you a sense of whether there is enough exchange liquidity on a daily basis to handle new liquidations without completely tanking the price.Low Liquidity Coverage ratios typically lead to slow and steady grinds lower in individual markets.It’s why I continue to hate XRP and love ZEC as a 2020 personal investment thesis.(NOT TRADING ADVICE, IDIOTS.) 3) Network fees as a % of new issuance.As I mentioned in my blurb earlier on staking, I’m all in on network transaction fees as a driver of fundamental value for network tokens, and I hate inflationary rewards.Network fees mean people are actually using your platform, and that’s a good thing! Even better if your fees ultimately overtake what you’d expect to earn from new block rewards.
This will emerge over many years, not necessarily next year, but keep an eye on it as it will be a proxy for legitimate adoption.16 The macro footrace.It might seem dramatic, but the next 12-24 months may decide whether crypto emerges as a serious asset class in the 2020s, or fades to a long, nuclear winter.It’s a coin-flip right now.
We probably need a 20x rally from here (which would put us on par with the dotcom bubble), before crypto feels too “big to fail” or difficult to regulate out of existence.This is a big number (about $4 trillion), but it’s not that big when you consider it might only take 10% of that market cap ($400 billion) to move the market price that high.With institutions (and maybe central banks?) serving as the last money in, and trading, custody, and compliance solutions coming online, those sort of inflows are at least feasible.We’re 20 years and a good deal of globalization beyond the dotcom bubble.
17 ICOs are dead, but ecosystem funds are alive.There doesn’t seem to be much of a catalyst for growth in the 2020 ICO market, and private token liquidations will likely serve as the official death knell for ICOs for a while.
The time to make money in ICOs was in 2015 and 2016 when they were contrarian.Going forward it will be interesting to watch how some of these foundations manage their enormous coffers.Ripple, Tron, Block.One, and Tezos have serious capital to deploy (more than almost all of the crypto funds) and have not been shy about their investing pace in complementary crypto and legacy businesses.
The jury is still out on whether most of this capital will be squandered.Block.One paying $30 million for the voice.com domain certainly seems like something you’d do if you could set money on fire with no repercussions.Ripple and Tron seem to be more strategic so far.TBD on how disciplined the Tezos Foundation proves to be.Smart capital allocation is critical for the teams with mercenary vs.
missionary communities: they’ll need to be razor sharp at how they deploy capital to support their networks.18 DAOs for LP Money.Investment stakes in decentralized autonomous organizations are the original security tokens, both as an experiment and according to the SEC.We are just starting to see the emergence of DAO infrastructure, and it comes at a time when the SEC has conceded they must do more to open private markets to retail investors and re-think accredited investor statutes.
For a full breakdown on my thinking of DAOs, you can read my meatier post from October as a reference guide.
The gist is that the killer app of DAOs may not be in disrupting the VC managers directly, but rather liquifying the limited partner pool of capital that backs those managers.
This could be a boon for specialists and legitimate value add investors with large networks, and it may be the most exciting segment of crypto in 2020+.If Messari folded up shop tomorrow (don’t worry we won’t, but you should still pay us money and go PRO), I’d work on a project in the DAO space.19 Infrastructure M&A A couple of bitcoin miners and the major global exchanges make almost all of the money in crypto.To the extent other businesses also make money, it’s selling tools and services to the exchanges.The result will be a continued (accelerating?) acquisition pace by top exchanges as they build out their suites of services.I predict BitMEX, Coinbase, Binance, Kraken, and Huobi will make nearly $1 billion of acquisitions within the next 24 months.The number of deals will increase in a bear market.The size of deals will increase in a bull market.
Either way, they’re going to go shopping, particularly in the areas of compliance, trade execution, and custody/staking tools.Here are some of the largest deals to date, courtesy of TokenData .20 Protocol M&A.I was certain we’d see more protocol M&A by now, but a necessary pre-condition of chain mergers was likely tools that actually make chain migrations simpler.In the past year plus, we’ve seen ERC-20 tokens migrate to native blockchains, and non-ERC-20 tokens move to Ethereum (e.g.
Tether).Cosmos launched as well as Polkadot’s “parachain” testnet.With so many token teams sucking wind and watching their coffers diminish, this seems inevitable for teams that want to avoid the fate of becoming “zombie projects.” TRON just announced its acquisition of content platform SteemIt, and it’s a matter of months before we see teams use treasury assets to buyout competing networks.
This activity seems inevitable in proof-of-stake systems.We’ll likely see some of those aforementioned ecosystem funds deployed (via token holder votes) to gobble up (51% attack?) smaller competitors.This is a companion discussion topic for the original entry at https://messari.io/article/20-bits-of-investment-advice-this-is-not.
