Money Reimagined: Narratives Wall Street Can’t Control

• What’s going on here? Well, before we try to answer that, a caveat: If the past week’s WallStreetBets-vs-hedge funds spectacle has taught us anything, it’s that in today’s meme-consuming, radically democratizing markets, confidently defining fundamental reasons for price movements is difficult. What matters is which narrative is winning.
• Narrative? So prices are just make-believe? Well, yes, but stories have always been about how people – and thus markets – reach consensus. It used to be Wall Street controlled the narrative. It’s unclear whether that’s still the case.
• So, what narrative best explains ETH outperforming BTC? Well, let’s first challenge the “Tulip Bubble” angle that mainstream crypto critics might instinctively apply here: The idea this is a rerun of the 2017 bitcoin rally, which pushed speculators into comparatively cheaper tokens only to foster the mother of all bubbles. The loss suffered this week by short-selling hedge funds at the expense of hordes of retail investors from the r/WallStreetBets subreddit shows it’s dangerous to conclude that large groups of determined bulls are inherently wrong.

  This is not to say ETH’s price won’t correct as bitcoin’s has this month. It just means we owe it to ourselves to explore other narratives.

• Such as? Here’s one: There’s a BTC-to-ETH price rotation going on that suggests thoughtful investors are starting to see Ethereum, and more specifically the decentralized finance (DeFi) applications built on it, as a constructive complement to Bitcoin. As sophisticated investors increasingly recognize bitcoin’s potential as a “digital gold” store of wealth, the thesis goes, they will soon see DeFi as a means to creatively unlock that value – for payments, for loans, for insurance, and so forth.

  This take sees Bitcoin as the base layer protocol for a software stack that handles the internet’s value storage and exchange. Bitcoin the currency is a simple yet hard-to-change, highly secure store of value. Much like gold, it doesn’t do much; you just lock it away and use it as security to back up your other investments and financial activity. But because it’s built on a permissionless protocol, developers can still do many more creative things with it than, say, a gold custodian can do with bullion.

  That’s where Ethereum and DeFi come in. With smart contracts, oracles, decentralized exchanges and multi-sig systems for securing digital assets, the degens of DeFi are now incorporating bitcoin into their freewheeling, “composable” world of decentralized financial products. Hence the summer explosion of wrapped bitcoin tokens such as WBTC.

  To go back to the software stack analogy, Ethereum is middleware and DeFi occupies the application layer.

• Analogies are also being made to the traditional finance “stack.” RealVision CEO Raoul Pal says bitcoin is “pristine collateral” that could even take on the $123 trillion market for U.S. Treasury bonds as the base-level security for all credit. It’s appeal is not only that it’s a provably scarce asset, but also that it can be locked up in escrow through a decentralized smart contract that leaves neither lenders nor borrowers vulnerable to the failures of a middleman. You build DeFi’s lending, borrowing and insuring products on top of that feature and you now have the makings of a financial system.
• Now a mega-name celebrity investor is also warming to the thesis. Asked by CoinDesk contributor Jeff Wilser if he would ever see bitcoin as something more than a speculative investment, Dallas Mavericks owner and CNBC “Shark Tank” personality Mark Cuban responded, “Sure. If DeFi and BTC can evolve together in a manner that allows BTC to effectively be a bank account without the bank. That creates utility for BTC.” What does he think of Ethereum? “I like ETH. Obviously it’s a primary foundation for DeFi, and we will see what happens with ETH 2.”
• Ah, Eth 2. The Elephant in the Room. If Ethereum 2.0 succeeds, over the next couple of years the blockchain will transition from a proof-of-work consensus model to proof-of-stake and will allow massively more transaction-processing capability. That scalability is needed if Ethereum is to play a meaningful role in the global financial system. But the transition is incredibly difficult to pull off within a large, decentralized community of users where billions of dollars are at stake.

  Still, there seems to be early optimism around Eth 2.0. The amount of ether locked and staked on the transitional Beacon Chain has steadily risen to more than 2.8 million ETH as of Wednesday (an amount currently worth about $3.89 billion). Indeed, ether’s steady January gain to an all-time high of $1,476.12 on Sunday was itself an expression of confidence in that project.

• There are other ticks in the plus column for Ethereum. There’s a boom in non-fungible tokens, also captured in the Cuban interview. And there’s support, including from suddenly in-the-news social media platform Reddit, for using so-called layer 2 scaling solutions such as Plasma to expand Ethereum’s use cases. Meanwhile, EY blockchain lead Paul Brody is predicting financial institutions will bring DeFi to the masses.

  All of this points to an expanding and diversifying Ethereum ecosystem. For a blockchain, that’s the best story you can tell: a growing network.

Then, inevitably, the WSB phenomenon spread into the crypto world’s very own “meme token,” Dogecoin, which soared more than 800% to a new record high.

• Guggenheim Partners Chief Investment Officer Scott Minerd, who made waves last year when he assigned a long-term target of $400,000 to bitcoin, didn’t exactly retract that prediction but added an implicit “not any time soon” caveat. In a Bloomberg interview he said, “Right now, the reality of the institutional demand that would support a $35,000 price or even a $30,000 price is just not there.” After Friday’s jump, that comment is looking a little off.
• Journalists are always looking for comments from Dallas Mavericks owner and CNBC “Shark Tank” personality Marc Cuban. Crypto journalists are no exception. So, we were thrilled that CoinDesk contributor Jeff Wilser had a rich exchange with Cuban this week. As discussed above, Cuban sees real potential in bitcoin, especially if it can team up with DeFi. But as a standalone investment for now, his current view is, let’s say, “meh.”
• We’ve also long been trying to get legendary Bridgewater Associates founder Ray Dalio’s thoughts on bitcoin. He has remained mostly skeptical, even if his tone has become moderately more upbeat over time and his view has emerged only via small snippets of commentary. Finally, in his widely read Daily Observations newsletter, Dalio and his team have delivered a detailed, deep-dive analysis of bitcoin’s opportunities and challenges. I’d say Dalio still has a small amount of learning to do – for example, on why bitcoin can’t easily be replaced by a “better” cryptocurrency – but otherwise this is a brilliant analysis. His team’s assessment of bitcoin’s infamous volatility and why that makes it hard for portfolio managers to adopt it as loss-mitigating uncorrelated asset is masterful. (Oh, and I’m super excited to tell you that Dalio will be a headline keynote at CoinDesk’s Consensus event in May. Stay tuned for more exciting speaker announcements as we update the events page.)
• Perhaps the most important news of the week on the institutional investor side was Ian Allison’s scoop that the trustees who run the endowments of Harvard, Yale, Brown and other universities have been investing in bitcoin for over a year. What we need to know is why. The colleges are, for now, keeping the justification for their entry into this market close to their chest. Without that, it’s hard to know whether they’ll keep it up.