Will the market value of Ethereum exceed that of Bitcoin? | Re-evaluate the narrative logic of the encryption industry

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Arthur Hayes believes that as investors, we need to face our fears, put aside dogma, and re-evaluate the narrative logic of the crypto industry.

Original title: “Approaching Fear: Will the market value of Ethereum exceed Bitcoin? 》
Author: Arthur Hayes
Compiler: Echo, Hu Tao

More and more voices in the crypto industry believe that the possibility of Ethereum’s market value surpassing Bitcoin is increasing.

One of them is Arthur Hayes, the founder of BitMEX. Earlier, he wrote that the price of Ethereum is likely to reach 10,000 US dollars (” How to value the future of Ethereum? “). Today, I wrote an article that the market value of Ethereum may surpass that of Bitcoin. Bitcoin, and gave many arguments, and this is also the most feared thing for many Bitcoin believers.

Arthur Hayes believes that as investors, we need to face our fears, put aside dogma, and re-evaluate the narrative logic of the crypto industry.

I can’t be afraid.

Fear is the killer of the soul;

Fear is the god of death that brings complete destruction.

I will face my fears.

I will allow it to pass over me and penetrate me.

After the fear, I will use my heart to find its trajectory.

There will be nothing where the fear disappears.

Only I will stay.

Paul Atreides, “The Dunes”

I like science fiction. At any time, I am reading at least one science fiction novel. “Dune” by Frank Herbert is by far the best science fiction novel. The best science fiction series is Liu Cixin’s “Three-Body” trilogy. It is surprisingly good. I even hope that my Chinese is better so that I can read the original Chinese rather than through an English translation.

American traders and investors are simple creatures driven by fear and greed. Greed can drive humans to do many incredible things, but the fear of loss is overwhelming. The economist Daniel Kahneman has a large number of works describing why human decisions are not as rational as classical economists believed.

Especially compared with monetary gains, monetary losses often cause more damage to our souls. As we explore this epic crypto bull market in more depth, the assessment of panic is critical, because one or more of these narratives can replace trader BTFD (i.e. Buy the Fuck Dip, inter-trader A kind of joking, which means the desire to overcome the weakness of human nature and buy on dips.

Big reversal

A few weeks ago, I suddenly received a message from Su Zhu (the founder of Three Arrows Capital). He asked me how likely it is that the market value of Ethereum will surpass Bitcoin in this bull market. I answered 0 and then asked his opinion. He responded with a probability of 50%. Shortly thereafter, Goldman Sachs executive Raoul Pal’s “Global Macro Investor” was published, which included a long report written by Nikhil Shamapant, which demonstrated why Ethereum might reach 150,000 by January 2023 US dollars. After reading the report, I sent another message to Su Zhu, raising the possibility of overtaking to 30%.

Some people in the Bitcoin community stay awake at night, and they worry that Ethereum will surpass Bitcoin one day. Bitcoin supremacists believe that Bitcoin is the true god of money in the field of encryption, and everything else is at best auxiliary, and at worst pure evil.

On the other hand, the person in charge of mETH believes that Ethereum can be both the most reliable form of cryptocurrency and the best decentralized computing network in the world. For them, after ETH 2.0 starts and completes the conversion from POW to POS (currently scheduled for later this year), the market value of Ethereum will quickly surpass Bitcoin.

I try to eliminate my dogmatic thoughts, lest I become associated with a way of thinking that becomes obsolete over time. Like everyone else, I will fail in this endeavor, but I hope to reduce future losses by reminding myself of the possible consequences and taking corresponding actions. The dogma surrounding Bitcoin and Ethereum must be reduced to the actual basic idea of ​​each cryptocurrency. Then, we can build a review of the current state of affairs and assess whether the narrative is fundamental.

Big reversal

The best form of currency has no industrial use. Fiat currencies are very useful for business because they are essentially worthless. The need to use a specific legal currency depends entirely on the practicality of its network. In this case, the network is the number of domestic and international trade opponents, and they will accept a specific legal currency in exchange for goods and labor.

The reason why currency in the form of commodities is not suitable for daily use is because their value is related to certain use cases in the real world. A barrel of oil is a terrible currency. Compared with labor and commodities, oil will have two sources of demand that affect its price: one is the demand of energy consumers. The second is the demand as a medium of exchange.

How to use a barrel of oil to measure the price of labor? The value must be calculated based on the usefulness of oil for daily energy needs. Others believe that its value lies in the goods or services they trade. With the increase in the number of economic participants, the supply of oil and the speed of currency circulation contain interdependent vectors, making this problem quite complicated.

Ethereum’s primary task is to power the world’s largest decentralized computing network. Ethereum is valuable because the Ethereum network is the most commonly used smart contract protocol. It has the most developers, DApps, and the largest total value lock (TVL). Ethereum is a commodity used to pay for Gas, so you can use the Ethereum decentralized network.

My belief is the market. In the past 5 years, the market value of ETH is 30 times that of ETC. The focus of the market value is that Ethereum is the best smart contract protocol and trying to become the most reliable cryptocurrency collateral.

Ethereum’s inflation schedule

If the EIP-1559 proposal is approved, it will drastically change Ethereum’s inflation schedule. In essence, Ethereum will not transfer from users to miners in the form of gas fees, but destroys basic fees and provides tips to miners. It is understood that up to 70% of the gas in a transaction may be destroyed. In my previous article, I talked about if DeFi can replace a small part of CeFi, Ethereum’s gas fee will have room for substantial growth.

If the amount of gas increases exponentially with usage, and these costs are destroyed, then the inflation schedule will soon become deflationary. As the platform becomes more useful, the supply of ETH will decrease. If we underestimate the impact of DeFi on human economic interaction, in the future, we will not be able to provide enough ETH to make the system work.

The objection to this is that the extremely high price of ETH solves the supply problem. But this is not the case. If the marginal mining profits are expanded enough, there will be no room for mining. The network will not generate enough ETH through block rewards to satisfy its use in Ethereum.

At this point, the economics of the network have failed. The price of ETH is high, and HODLers are playing an ace of spades, but if a DeFi application that requires a gas fee obtains it at all costs, it will soon become poor. Considering that we know how the community will respond to the existential threats it faces (see the DAO hacking incident), do you want them to stand by and watch the network commit suicide due to the wrong inflation plan? If you have implemented a hard fork, you can hard fork again. The deflationary issuance and the destruction plan of gas fees will be sacrificed so that DApp can be used with the capacity required to power the decentralized computing network.

Therefore, those who bet that the current EIP-1559 inflation schedule will never change, need to review the history of the agreement. One of the main drivers of this bull market is that exponential growth of DeFi must be traded on the chain, causing more fees to be spent and then burned, thereby reducing supply and increasing prices.

If the price of ETH really reaches $150,000 and the network is eliminating the parasitic CeFi mechanism, just suggesting that the agreement must change its inflation schedule to continue to crack the CeFi skull, it will push the price to the bottom of the Mariana Trench. If you cannot understand the impact of the deflationary destruction mechanism timetable on the currency driven by the underlying technology that supports the price, it may have a fatal impact. Until it achieves its true mission of powering the global decentralized computing network, Ethereum will never be the most reliable form of cryptocurrency.

However, this does not mean that the market value of Ethereum cannot surpass Bitcoin. This simply means that it is much more difficult to achieve this goal, because Ethereum cannot get cakes and food.

Technology is more valuable than money

The global reserve currency is the most valuable because it has the largest network of participants who are willing to accept it in exchange for goods and labor. It is currently U.S. dollars. The approximate value of currency value is M0, which is the amount of base currency in circulation. The current US dollar M0 is 5.8 trillion US dollars.

The total market value of FAANG (Facebook, Apple, Amazon, Netflix and Google) is 6.36 trillion US dollars. The US dollar is just a pure currency running on the network of the US financial system. It is not more valuable than companies that provide actual goods and services in dollars.

Dollar holders will not cry on social media like children, because the market value of companies selling products denominated in dollars is higher than the dollar. So why are Bitcoin supremacists threatened by the inevitability that other cryptocurrencies with industrial use cases will be worth more than Bitcoin? This feeling does not seem to be mutual. Many of the most successful altcoins have used Bitcoin to raise initial capital.

If Bitcoin’s market value is significantly lower than current levels, it is essentially equally useful as the most reliable crypto collateral. Bitcoin holders must believe that Bitcoin collateral exists in any cryptocurrency-enabled economy. They should work hard to support this mission, because doing so will further strengthen Bitcoin’s role as the foundation of an external encryption pyramid.

Gresham’s Law

Fiat currency and gold require living humans to exchange other forms of currency, goods and/or services. These traditional forms of money rely on human networks. As long as there are humans, this network can operate.

Although Bitcoin is the strongest currency ever created, in addition to humans, it also requires a group of selfish miners to spend the energy of the real world to maintain this network. Miners only get rewards of Bitcoin. If the exchange rate of Bitcoin to energy is faltering for various reasons, miners will not mine and the network will disappear.

The higher the bitcoin transaction speed, the more on-chain fees will be generated. In addition to block rewards, these fees also allow miners to purchase energy to maintain the network. We all know that the amount of block rewards will be halved every 4 years and will stop until 2140. Fortunately, the number of transactions on the chain has greatly increased.

Bad money is spent, such as U.S. dollars and other banknotes; good money is hoarded, such as Bitcoin. This is Gresham’s law. Although hoarding gold will not reduce the value of Bitcoin, in extreme cases, hoarding Bitcoin in the future without using it in any way will destroy the economics of the network that gives Bitcoin value, because after the block reward ends , Miners will only get transaction fees, if there are no transactions, no fees will be charged, and miners will have no incentive to maintain the network.

Bitcoin network transaction volume may decline

Most people want a simple way to get Bitcoin’s exposure to fiat currency. In other words, they believe that the price of Bitcoin will rise, but they have no interest in becoming a financial institution. They want to call 1-800 when they forget their password, and find someone to complain when things don’t go according to plan. Service providers are happy to sell paper bitcoin derivatives that provide asset exposure, and at the same time deal with all annoying blockchain issues for a fee.

Judging from the success of Grayscale GBTC, Coinshare’s XBT provider and other paper derivatives, ordinary investors only want price risk. All my close friends who are actively trading also use these products because they are easy to use. They fully realize that if you do not keep your cryptocurrency, the truly revolutionary side of the blockchain will be completely lost. But it doesn’t matter, because what they want is an inflation hedge, not a new financial ecosystem.

In the long run, a large number of bitcoins stored in custodial accounts may drag down the profitability of miners, and these accounts are not used for commercial activities or used as collateral in the new digital financial economy. Another drag factor is those who fully believe in the idea of ​​”being your own bank”, but they would rather spend fiat currency on necessities of life than spend precious bitcoins. If both ends of the belief system are firm, the growth of on-chain transaction volume will slow down and/or drop completely.

Due to the continuous shortage of semiconductor chips required to manufacture new mining machines, the huge profit margins of mining machines will continue to exist when Bitcoin and energy prices are relatively high. Even if you have the money to buy a machine, it is not enough to significantly increase the network hash rate.

As a reminder, the really important exchange rate is Bitcoin versus energy. Fiat currency will come and go, but miners must use the earned bitcoins to buy electricity in some way to maintain operations. The remaining bitcoins after the purchase are their profits. One dollar can buy 1 kWh or 1000 kWh; however, 1 kWh is always 1 kWh.

The current large mining farms do not need a significant increase in transaction volume to pay for continuous capital expenditures. Even on second-generation mining equipment, they are printing so many banknotes that it doesn’t matter whether Bitcoin is used in actual business.

When primary commodities, intermediate commodities, and final commodities are all priced in Bitcoin, Bitcoin-denominated credit can be extended to all steps of the value chain. The real Bitcoin economy allows unsecured loans to be offered in the form of Bitcoin. When/if this future comes, the transaction volume on the chain will soar.

The revelation of Dogecoin

The most powerful force in the universe is the power of human collective imagination. Every unnatural physical object we interact with begins with the imagination of one or more individuals. Everything starts with believing and then transitions to physical reality.

The value system that underpins our collective illusion is closely guarded. We only need to record the millions of people who have lost their lives due to different views on political systems and religions in human civilization over the past few thousand years. When it comes to the monetary system, it is not surprising that people take their beliefs very seriously. They should, because your currency belief system may be the difference between leisure life and unnecessary work.

Humans are born to know that money is pure fiction. Therefore, when you challenge their belief system with other stories, they may become hostile. The best way to get a response is humor.

The most talented comedians take our most cherished beliefs as a society, and show logical fallacies through humorous arcs. If you can’t make a joke, then you may need to think about why you are so insecure about your beliefs. Maybe it’s because you know in your heart that they are utter nonsense.

Dogecoin angered both traditional financial officials and crypto cowboys. This is an incredible Internet currency, and there is no pretense in terms of lack of technological innovation. It is a cute dog displayed on the computer screen. Its founder, Jackson Palmer, who left Doge out of anger a few years ago, emphasized that it is absurd that he thinks this obvious cryptocurrency joke still has value.

Elon Musk, one of the best salesmen in the history of mankind), using Dogecoin to illustrate the absurdity of our current monetary system is more appropriate. The market value of Musk’s Tesla is more than that of most car companies combined, and the number of cars produced at the same time is 1/60 of that. This is pure hype without concealment. Musk created more shareholder value through his Twitter megaphone instead of providing safe, fast and environmentally sustainable electric vehicles.

Whether you love him or hate him, he is the spokesperson of the era of rising numbers! Dogecoin jokes have created many millionaires who live in the basement. This will surely make traditional financial gatekeepers angry, who hype value and growth investment on TV, while global central banks have expanded their balance sheets at a compound annual growth rate of 15% since the Global Financial Center (GFC) in 2008. Times, but barely achieved a single-digit rate of return. This is a joke.

This joke also happened to those utopian cryptography believers who preach decentralized technology. Their dogma is also threatened by Dogecoin. How can this technically flawed cryptocurrency enter the top ten market capitalization? What does this show about the value system of their peer projects? They lamented that dogs “make us look bad” and “make the encryption industry look unprofessional.” If professional means wearing a suit and tie or a black pencil skirt and earning a substandard return, then give me Dogecoin.

The crypto industry has nothing to fear about Dogecoin. Instead, it should be used as a foil to show that the emperor has no clothes. Money is a psychological abstraction. The sooner a generation realizes that everything is fictitious, the sooner they can transition from physical government-issued banknotes to purely digital decentralized currencies.

Both of them are the same fake. Given the rising costs of energy, food and housing, which story can retain your purchasing power? Which story is inclusive, not exclusive? Which story can you participate in the development of?

I will face my fear

This is very simple. I am worried that global central banks will slow down the growth of their balance sheets. Without this, there is no reason why the value of any cryptocurrency is several times today. When currency prices are no longer distorted, traditional cash flow analysis will again become meaningful.

The various fears I talked about in this article are specific to specific cryptocurrencies. Just like stocks, real estate and commodities, with the increase in asset issuance, the entire asset class will continue to grow. Understand your fears and choose the right ecosystem to protect your wealth from inflation.

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