Why can’t everybody just get along?

For anyone who didn’t notice, last week saw one of the biggest one-day crashes in the crypto market ever. Drawdowns of more than 50% in a single day saw almost US$10bn of liquidations across futures trading accounts, with more than 750k trading accounts liquidated in 24 hours according to exchange data on The Block.

Volatility is par for the course when it comes to crypto. But what really was laid bare was a much more profound problem: a massive schism between the two sides of the crypto debate that appears beyond reconciliation.

Ground zero of this slugfest: twitter.

On one side, we have crypto twitter: from bitcoin maximalists to crypto fund managers to influencers, from CEOs of listed companies to anonymous meme accounts with Pepe the Frog (or other animals) profile pictures, crypto twitter is diverse in shape and form. But its rallying cry is simple: crypto is about to change the world, and everything in the legacy financial system will be eaten up by crypto.

On the other, there is “traditional” fintwit: amongst these we find veterans of investment banking and investment management who have cut their teeth through multiple market cycles on the trading floors of Wall Street, London, Hong Kong, Tokyo and other financial powerhouses. They look upon crypto with skepticism (not necessarily cynicism), although several have outright decried crypto as a full-blown ponzi.

The past year had seen a meteoric rise in crypto asset prices. And crypto twitter had a fantastic time, hurling memes and slogans like “Have fun staying poor” (aka “HFSP”) at any of their critics. “Up only” was the order of the day, and well-meaning advice to trade carefully was promptly mocked and put down to “old men with incentives to see the old regime remain in place” (or something along those lines).

No surprise then that when last Wednesday came along, Twitter exploded: the cries of “I TOLD YOU SO” and “IT WAS ALL A PONZI LOL” was traditional fintwit’s chance to get back at Crypto Twitter.

The amounts of schadenfreude that we saw was unprecedented and honestly somewhat shocking.

Any sensible observer would start with a base case that reality is somewhere in the middle, but therein lies the problem: there is no middle ground in this debate. That schism, arguably, is a function of the memes – simplification removes nuance, and without nuance there is no compromise, no middle ground, only absolutes. This tribalism that has emerged is only to the detriment of all sides: crypto’s proponents believe it is paradise on earth, while its opponents believe it is the antichrist manifest.

So, for the first time, we will stick our heads above the parapet, and attempt to find the middle ground.

We may not beat the memes, but we’re pretty sure we’re doing both sides a favour by calling out the top 3 memes that, whether we notice them or not, we believe are short-circuiting our thinking processes.

Meme #1: Bitcoin = Blockchain, Bitcoin = Crypto

Sound money. Store of value. Digital Gold. Remedy to central bank fiat profligacy.

These are some of the arguments put out in favour of Bitcoin, particularly by Bitcoin maximalists who believe that Bitcoin is about to take over the world.

While there may be some validity to those assertions, and a non-zero probability that the world will ultimately be run on Bitcoin, this Bitcoin-centric approach to crypto is archaic and absolutely irrelevant.

Bitcoin is just ONE of many cryptocurrencies. It was the first blockchain, the first cryptocurrency, and it is the largest by market cap (at this point in time), but there is no reason why its acceptance should be the prerequisite of a broader acknowledgement of the relevance of crypto, whether as technology or an investable asset class.

But by making Bitcoin front and centre of the debate about crypto, the Bitcoin maximalists have made accepting Bitcoin a prerequisite for accepting crypto as relevant. This Bitcoin-first meme is a handicap. Just think about how many debates about the validity and viability of cryptos (as a whole) which pan out something like this:

The flaw in the argument flow is that it starts with Bitcoin. The result: everyone gets stuck at the “how to value Bitcoin” question, thinking that it is the essential hurdle that needs to be crossed before proceeding to discuss the rest of the much bigger crypto space. Sometimes things even get quite personal, with politics and philosophy getting dragged in. To what end?

Here’s our take: Bitcoin is just another commodity. Yes, it may be like gold, but it could well be like copper, iron ore or nickel. Could it be productive? Potentially. But can it be valued on the basis of its cashflows? No – it has none. Fees that are generated on-chain go straight to the miners – if anyone wants to value cashflows, it needs to be the Bitcoin miners themselves.

But more importantly is the meme. Bitcoin isn’t blockchain, and Bitcoin certainly isn’t crypto. Bitcoin maximalism, especially when politics gets into the picture, prevents us from getting to the real interesting discussions. Bringing politics into the picture drags in so many other arguments that get personal too quickly and detract from the more important question: can we make money from this and if so, how?

No further do we need to look than the twitter account of Mike Green, whose work and writings we deeply admire. As one of twitter’s most outspoken critics of the idea of Bitcoin as the magic escape valve from government control, the extent of ad hominem attacks on him as a person is upsetting, to say the least. It certainly doesn’t help the case for Crypto Twitter as a credible source of thought leadership.

This applies for any form of maximalism – by attempting to meme your favourite crypto into being the one ring to rule them all, it actually impedes the ability of the rest of the ecosystem to develop its credibility as an asset class and subverts the debate into the realm of the personal.

No point getting the One Ring if everyone hates you.

Meme #2: Same-same but different

Take the consequences of Bitcoin maximalism and add an overdose of cynicism and some degree of intellectual shortcuts and we get the crypto-sceptic view of “If they can’t even value Bitcoin properly, imagine how dodgy the others are!”.

Let’s lay out the meme in play here: crypto as an asset class is like the market for stocks. The megacaps are the blue chips, the midcaps are spicy and the small caps are dodgy. Therefore, since Bitcoin is the largest of the lot, added to what the “crypto people” (Bitcoin maximalists on Twitter, especially) say, and I have a mountain of unanswerable questions about Bitcoin, surely the rest of the “altcoins” (another misnomer) must be even more indecipherable.

The result is that for the most part, correlation between crypto assets is high. Thankfully, dispersion occurs in pricing and performance over time, but over shorter time periods, especially in response to external shocks, price movements are highly correlated.

Hence we see memes like this going around: everyone’s in the same boat, and it just takes one single factor to trip a switch, and everyone falls off the back of the truck.

Such assumptions preclude any effort to conduct meaningful fundamental analysis on projects that are in reality highly cashflow generative and – importantly – able to be valued on more traditional metrics like P/E and P/CF.

How cash generative, one may ask? One need only look at the revenue numbers of some of the top protocols in the Decentralised Finance space, for example, to get an idea. Ethereum itself generates just under US$13bn of total revenue from transaction fees per year, while the largest decentralised exchange in DeFi, Uniswap, generates an annualised revenue number of US$3.54bn from commissions. On a P/S basis, Ethereum trades at 25.9x, while Uniswap trades at 7.9x.

Very different from “How do we value Bitcoin/Litecoin/Dogecoin”. On that note, top of the list of revenue generators: Ethereum.

The point that we want to make here is this: there is room for huge dispersion in performance within the space, and by glossing over the differences between protocols in terms of their functionality, their purpose and their design, we risk missing out on opportunities to generate alpha from real, value-generative projects.

Same-same but different simply doesn’t work.

Meme #3: Tulips 🌷🌷

Wild West, unregulated, dominated by retail and anonymous crypto twitter traders, or worse – drug traffickers and child smugglers.

This is the counter-meme staged up by crypto’s opponents: that this new technology is dangerous and opens the doors to bad actors to access the financial system to do bad things. As a result, buyer beware, this might be a zero once it gets shut down. Tulips all over again. Or South Sea Bubble. Or Internet in 2000.

Charts like this occupy the mindspace of traditional investors: no one wants to be Newton (at least when it comes to investing), and that fear is the absolute mindkiller.

Let’s be clear – we don’t disagree that of the plethora of crypto projects we see now, in all likelihood few more than a handful will survive. Most of them – as was the case with .com companies post 2000 – will fade into obscurity, surviving only in the annals of bubble records. On a single-instrument basis, the price charts could very well end up looking like this.

Crypto had its first wave of boom and bust in 2017-18. It won’t be the last.

Unlike Tulips, however, technology leaves behind progress in its wake. And that’s what excites us: crypto and the blockchain are technological developments. Bubbles come and go – even in “normal”, “regulated” assets. But once technology has been discovered, it can’t be un-learnt short of a cataclysmic wipeout of all knowledge. The fact that a “bubble” has come, and burst, is a red herring – a distraction from the technological advances that crypto can bring.

In fact, the ability of chunks of code running on a decentralised global computer allowing uncensored, unbiased access to capital and financial services should make every incumbent financial institution reflect on what their value proposition could be in a decentralised future.

Understanding that this is a technological development whose value is necessarily non-zero behoves proper appreciation of the brilliance of what has been built.

Looking beyond just “Bitcoin = crypto” and “Same-same but different” very quickly allows us to realise the possibility that boom and bust, in an accelerated timescale with 24/7 trading, is part of crypto’s coming of age. First generation chains have failed and disappeared, new projects come along which are better, faster and more usable.

Great progress has been made since these days gone by – never forget those that did get zero-ed:

Remember meme #2: they’re not “same-same but different”.

Also remember those revenue numbers.

Cyclical? Yes.

Reflexive? Definitely.

Zero? Most probably not.

Bubbles aren’t exclusively the domain of Tulips🌷🌷.

A call for sensibility

When everything is a meme and animal spirits run high, it’s easy to let our Primitive Mind (as Tim Urban terms it in “The Story of Us”) take over because it just feels SO GOOD to see the other side be proven wrong. Because, well, Schadenfreude ist die schönste freude – as the saying goes.

But it really shouldn’t be. So we’re calling for a ceasefire – instead of memeslinging from both sides of the debate, why don’t we take a more civil, polite approach to finding a middle ground in this debate, because we truly believe that both sides have much to contribute to advancing how the future of finance (and potentially everything else) gets shaped and designed.

Crypto twitter has much to learn from hardened Wall Street market veterans – perhaps even benefiting from some moderation on the exuberance of “up only”. Ultimately, there is no benefit from ostracising traditional capital. Rather, directing that capital in an educational manner would benefit everyone.

When Coinbase’s direct listing hit the market, its stock became Wall Street’s purest way of expressing its views on crypto’s near-term prospects. Perhaps if crypto perma-bulls had listened…

Conversely, the old guard may also be able to learn from team crypto, getting a new perspective on how things could be better. After all, no one who has spent any reasonable time on a bulge bracket trading floor can really say that business is really booming, firing on all cylinders. One cylinder at a time, maybe. Structural growth opportunity? Might want to look at commission rate cards and think again.

And yes, sometimes the forecasts in those click-and-drag excel models could actually be wrong. Having your name on an article like this isn’t exactly a badge of honour – the internet remembers:

Let’s talk, learn and move forward together. We’re still early to the crypto party – if everyone takes a step back from the memeslinging, we might all find that the middle ground is much bigger than we think.

Because as always, WAGMI.