Artikel: Crypto Theses for 2022 (Ryan Selkis)

The Collapse in Institutional Trust

  • Maybe you’re a populist – from the right or the left – that seethes knowing Wall Street faced no repercussions for fueling the last financial crisis, and tends to profit from federal policies that punish their customers. Or you’re worried about Big Tech’s monopoly power, censorship, and control over your personal data. For you, crypto is a shot across their bows.
  • Of course, you could just be into crypto for the fast money, memes, and jpegs. That’s cool, too.
  • That brings me to my first prediction for 2022: things will get worse before they get better in the “real” world. Inflation will remain above 5% throughout 2022 (70% confidence), while late year interest rate hikes stall the stock market’s momentum and hurt growth stocks (60% confidence the S&P dips next year)
  • That will be good for crypto short-term, but risky in the medium-term, as more crypto companies and their users get deplatformed and censorship from western tech and banking platforms accelerates amidst the Biden administration’s crypto crackdown.

Crypto/Web3 is Inevitable

  • Chris Dixon calls it “the internet owned by the builders and users, orchestrated with tokens
  • I have 99% conviction that crypto will be an order of magnitude larger by 2030 because the user economics here are an order of magnitude more attractive. We’re at the brink of a total transformation of the global economy. One that’s bigger than mobile, and maybe even the internet itself.
  • We’re going from an internet built on “rented land” with monopoly overlords, to an infinite frontier of new possibilities.
  • The best part about being young and broke … is that “you have little to lose.” That’s especially true when younger people view legacy institutions as exploitative.
  • My probabilities are split among three scenarios: 1) most likely, we experience a blow off top before the end of Q1 2022, followed by a shallower, but still painful multi-year bear market; 2) we rocket to a $20 trillion bubble that lasts all year, and sits on par with the dotcom boom in real dollars – unlikely, but possible given accommodative monetary policies worldwide, neverending government spending, and crypto’s accelerating narrative momentum; 3) we march slowly and steadily higher into perpetuity (the “supercycle” thesis).

Bridges and Nifties and DAOs

  • “Web3” is a good all-encompassing term that captures cryptocurrencies (digital gold & stablecoins), smart contract computing (Layer 1-2 platforms), decentralized hardware infrastructure (video, storage, sensors, etc), Non-Fungible Tokens (digital ID & property rights), DeFi (financial services to swap and collateralize web3 assets), the Metaverse (the digital commons built in game-like environments), and community governance (DAOs, or decentralized autonomous organizations). I expect growth everywhere across Web3, though three areas are particularly underdeveloped: NFT infrastructure, DAO tooling, and inter-protocol bridges.
  • … DAO tooling, which is an existential need right now across crypto communities, where voter apathy is reaching crisis levels and investments are taking far too long to process.
  • If the future is multi-chain, then those who build better cross-chain connectors and help move assets fluidly across parachains, zones, and rollups will inherit the (virtual) earth.

The Decoupling of Cryptos

  • Different crypto sectors have different value drivers. We’ve gone from “everything is a cryptocurrency” to “actually, there’s currencies, fat protocols, DeFi apps, distributed computing platforms, NFTs, workto-earn markets…”
  • It’s still a meme-driven market, but many of the memes are reflecting – dare I say – fundamentals?

Permanent (Venture) Capital: In, Up, & Down, Never Out

  • It’s tough to comprehend the size of the private crypto fund market right now. When we raised $25mm for DCG in 2015 it was one of the biggest rounds in a crypto investment firm at the time. Today, firms like Polychain, Paradigm, a16z, Multicoin, 3AC and others are each managing billions of dollars (in some cases, $10 billion+) or more, and investing $25mm a clip in their medium-sized deals. Hedge funds plan to deploy 7% of their assets into crypto within 5 years, and pensions are starting to buy direct, too!
  • When newcomers enter the space, that money tends to flow in two directions – in and down. Not out

How High Can We Fly

The crash, which we all know is coming, might be more muted than those of prior cycles, but how about the remaining upside? Even with the tailwinds we just discussed, doesn’t it just feel a little toppy? The $30 billion Shiba Inu market caps, the Times Square NFT billboards?

  • Bitcoin: As a monetary asset with no earnings, it’s an asset that is priced vs. valued, which means it’s almost always judged on a relative basis to its analog cousin, gold.
  • Market cap vs. realized value. When MVRV > 3, sell. When MVRV < 1, buy.
  • At today’s prices, parity with gold would bring us a $500,000 bitcoin. So there may still be a 10x investment opportunity there, but even that moon case offers a relatively low ceiling compared to bitcoin’s historical returns
  • Could ETH overtake BTC this cycle? Unlikely. Not with Ethereum’s persistent scaling challenges, its Layer 1 competitors, and the willingness of infrastructure companies and application builders alike to embrace the likelihood of a multi-chain future.
  • Long DeFi, short the bankers, amirite!? Despite DeFi’s monstrous 2020 run, DeFi trades at less than 1% of the global banks’ market cap, which shows how much upside remains long term

Surviving Winter

  • Many will lose faith and won’t be able to stomach the soul crushing multi-year grind lower that is a crypto winter. “Wow, the government might actually regulate this out of existence,” “It’s just too early for these products,” and, of course, “I told you this was a bubble” will be among the drumbeat of negativity you can expect to hear parroted by critics.
  • ❄️ Winter survival tips: unwind leverage early, cash out tax obligations when incurred, but for the love of god, do not try to time “the top”.
  • And one more thing for the falling knife catchers, who think “wow, this will be great. I can’t wait to buy discounted coins in the next bear market.” Crypto can always go lower than you think, for longer than you think, and it will.
  • The time to go all in with crypto on your balance sheet was last year. I’d be more cautious here: 10 year and 10 hour thinking only.

Public Options: Coinbase Opens the Floodgates

  • The BITO ETF was the fastest ever ETF to amass $1 billion in investor capital. Nice. But those public stocks are like crypto’s college diplomas. They may matter to your parents, but not so much to your friends, who can access better crypto-native vehicles (including tokenized exchanges and indices) instead.

Copy-Trading: WAGMI

Copy-Trading: We Like the Coins

Messaris analytikere kigger efter følgende i 2022:

  • ✅ Multi-chain
  • ✅ Infrastructure for web3 (AR, GRT, AKT, LPT)
  • ✅ Decentralized cloud compute
  • ✅ Off-chain collateral
  • ✅ NFT platforms (RARI, RARE)

WAGMI

  • “We’re all going to make it” is my favorite crypto meme in years. It says “we’re still early” without coming across like an obnoxious, early MLM punter. It’s a memeable twist on the famous Balaji quip, “win and help win”, which is a personal favorite
  • And if you are still skeptical of crypto, no sweat. Just don’t be openly hostile and closed-minded to its potential. Bad faith critics like Jamie Dimon are NGMI.

Please Check on Peter Schiff

“Gold will get demonetized so brutally your grandkids will think a golddigger is someone
who scavenges for metal scraps in the dumpster to sell for sats.”

– Su Zhu
  • Bitcoin has eaten gold’s lunch for a decade. This should have been a boom time for gold bugs – high inflation, low trust in government, commodities booming – but instead gold was outflanked by a faster, younger, wilder horse in bitcoin. Investing $100 in gold 10 years ago, would have yielded…$102 today, underperforming inflation. Meanwhile, investing $100 in BTC over that time period would have yielded $1.7 million.
  • Bitcoin outperforming gold: “Shows no sign of slowing down” (#FamousLastWords)
  • The strongest tailwind at our back was best summed up by Marty Bent who noted: “the money owed to pensioners is simply too much, the returns produced are too low, and even when they are realized they are denominated in a currency that is losing purchasing power by the day.”

The King Stay The King: No Flippenings

  • Ethereum’s scarce resource is the finite capacity of its global settlement ledger, and this year proved how quickly other Layer 1s could siphon demand for crypto transaction settlement when Ethereum’s ledger gets too expensive. [Think: SOL, AVAX, …]
  • Bitcoin’s scarce resource is its simple monetary meme. Its pure play “money” competitors are less intimidating: Dogecoin, Shiba Inu, Bitcoin Cash, Craig Cash and the forks of their forks are not much to write home about.
  • On Dogecoin: Jokes get old, and even early holders will eventually realize they’re sitting on real gains and find a less expensive joke [On the other hand, contrast with r/WSB and the Gamestop meme. That shit never gets old]
  • An unserious user base could also lead to a large swath of users who panic sell in Q1 once they get their tax forms and realize the magnitude of their obligations.

The Multichain Reserve

  • More than 1.5% of the bitcoin supply is already wrapped on ethereum through BitGo, more than twice as much as was locked at the end of last year. But that may be the tip of the iceberg as millions of bitcoins begin to hit other blockchains as well.
  • I think wrapped / synthetic bitcoin tradeable on other blockchains will double again in 2022 (75% confident we’ll see 3% wrapped, at least), as more long-term bitcoin holders realize they can borrow more cheaply against their holdings in DeFi than on centralized services.

The Great Fall of China(’s Bitcoin Industry)

  • For years, Chinese miners accounted for over 70% of bitcoin’s hashrate. Then the CCP turned hostile last year, and implemented an outright mining ban this spring, leading to a multi-billion reversal of fortune for the West, and the most incredible chart I’ve seen in eight years
  • It’s such a senseless strategic blunder that it’s hard to imagine the CCP failing to undo the mining ban at least, even if they continue to keep a close eye on trading and capital controls in 2022. It sounds like these policies are already being reconsidered, for good reason. I predict mining is back in the mainland by mid-year (70% confidence). Especially as the CCP realizes that proof-ofwork mining can double as a clean energy stimulus.

Bitcoin as Clean Energy Stimulus

(Har sprunget det meste af denne sektion over, se dog nedenstående)

Let’s talk about bitcoin’s actual role in our clean energy future. The tldr:

  • 1. Curbing global emissions in a reasonable time period is politically impossible.
  • 2. Still, we should try to curb the biggest emitters to “bend the curve.”
  • 3. Bitcoin can help reduce emissions by recycling otherwise wasted/stranded energy.
  • 4. Mining infrastructure could actually help subsidize new clean energy capacity.
  • 5. All while bitcoin offers S and G solutions in ESG, as well.
  • Big numbers, but not if crypto otherwise automates large swaths of financial services, whose current footprint is closer to 3% of global emissions vs. bitcoin’s 0.1%.
  • If anything, most of us bitcoiners realize that the bigger concern is around bitcoin’s current disinflationary supply schedule. The declining block rewards as a percentage of total market cap brings on the risk that, if anything, a fees-driven block reward will not attract enough energy to secure the network.
  • “The University of Cambridge estimated that global flare gas recovery potential is 8x larger than the bitcoin network’s energy usage in 2021. In other words, virtually the entire Bitcoin network in its peak 2021 form could hypothetically be run off of stranded natural gas in the US, let alone the rest of the world.” Flaring converts carbon commodities that would be 100% wasted, into bitcoins. This isn’t theoretical. It’s magical.
  • You could argue the financial industry (25x the carbon intensity) and the military industrial complex (50x the carbon intensity?) should at least be included in any comparative environmental analysis. But the real problem with ESG militants’ attempted cancellation of bitcoin – aside from the fact they’re wrong about the negative “E” externalities – is that they also ignore the “S” and “G” benefits of crypto in the process.
  • Alex Gladstein from the Human Rights Foundation summed it up best in an incredible piece on the hidden costs of the US Dollar. Namely, even if policymakers think bitcoin is irredeemably dirty and wasteful and crippling to the future of the planet, they shouldn’t be able to discriminate on energy usage preferences when the petrodollar props up authoritarian regimes, leads to military aggression, and fuels more fossil fuel consumption in the process.

Proof-of-Stake Works because Proof-of-Work Worked

“PoW and PoS are not substitutes, they are not even complements, they are two
fundamentally different things and should not be compared or contrasted.”

Meltem
  • Proof-of-work burns energy in order to prove the network is providing fair settlement assurances at global scale without reliance on the network’s owners, who could easily centralize over time. The separation of transaction processing incentives and ownership responsibilities is important for a network that aims to be a non-sovereign alternative to money
  • By contrast, it’s suitable to think of proof-of-stake networks (which employ token holders as collective governing bodies) as business analogs. Each individual proof-of-stake network comes with centralization, censorship, and coercion risks, but that’s ok! The real PoS decentralization comes from the thousands of interoperable PoS blockchains, which will each offer their own unique token incentives, emissions schedules, governance rules, target applications, etc. over the long-term.
  • You wouldn’t want a monetary system where Elon Musk owns a large percentage of the money supply and a large vote in which economic activities were valid on that underlying network and a large claim on the fees and seigniorage generated by that network. Too much power over one half of all transactions. On the other hand, you’d probably have no problem if he accumulated a similarly large percentage of a decentralized selfdriving taxi service, as it’s merely a single web3 application.

The Bitcoin Roadmap

  • Nearly the entire global bitcoin mining apparatus signaled support for the “Taproot” upgrade this spring, and the upgrade went into full effect in November.
  • Development on bitcoin is like building a rocket, while development on Ethereum has historically been more similar to building a Silicon Valley startup. The stakes are higher in bitcoin (arguably, we’ll get into this in Chapter 6), and you need rocket science level security to build a reliable cryptographic alternative to Fedwire
  • v22.0 (released this fall) connected bitcoin to a second anonymous communication protocol, the Invisible Internet Project, in order to complement the Tor integration and build resiliency to bitcoin’s secure messaging capabilities, making it even harder to de-anonymize users

Lightning Strikes El Salvador

  • For all their progress, though, neither ERC-20 stablecoins nor any other crypto asset accomplished what bitcoin did this year as “money.” I’m talking, of course, about bitcoin’s acceptance as legal tender in El Salvador.
  • I like Lightning. It’s cool … I’m a sucker for the news 2.7 million Salvadorans will get airdropped $30 in BTC for downloading their new Chivo wallets, and which allow users to pay with Lightning on their phones. I’m sure it’s all just propaganda. I’m a sucker for Twitter’s Lightning tipping service going live for 186 million users. And I’m a sucker for believing Snowden might be onto something when he estimates countries with 650 million underbanked adults could make similar moves to El Salvador as part of a post-USD monetary strategy.

American Crypto Policy

  • Biden’s Infrastructure Bill passed with its disastrous “broker” definition intact, not to mention an intrusive extension of the Bank Secrecy Act’s Know Your Customer (KYC) requirements that might create impossible individual compliance burdens.
  • China banned most domestic crypto activity to prevent the “disorderly expansion of capital.”
  • India grew more open-minded, then reverted back to open hostility
  • Israel proposed a dystopian financial reporting rule requiring citizens to report all assets over $61,000 (crypto privacy = felony).
  • There are some thoughtful locales. Japan’s Financial Services Agency has created a division to tackle DeFi regulation. Portugal offers 0% capital gains tax treatment on crypto, doesn’t tax foreign income, and has been recruiting crypto innovators. Within the US, cities like Miami and states like Wyoming have been building crypto safe havens.

Setting the Stage: The American Battleground

  • We need to win over these technological progressives quickly because losing America is not an option: US policy will dictate whether we have a golden decade of growth like the 90s or whether other Western countries slowly follow our lead to create a global dystopian CBDC hellscape

Setting the Stage: Real Risks & Self-Regulation

  • In a battle with a superior fighting force, you at least need to maintain the moral high ground. Most of the real policy risks crypto presents are solvable, and we have a number of obvious opportunities to garner goodwill with policy makers and head off crises before they emerge:
    • Exchange Risks: User crypto funds aren’t FDIC insured. Hacks, exchange outages, and identity theft arepossible.
    • Stablecoin / Lending Risks: Our central bank high priests can’t respond to crypto booms and busts with adjustable monetary policy or serve as a lender of last resort. This is a feature. But we should recognize that crypto does weaken monetary sovereignty in some areas (Argentina), and that trend will accelerate as assets like bitcoin become units of account (El Salvador). The Fed will either lose control over the exploding crypto Eurodollar system (Tether) or it will wise up and embrace projects like USDC and Paxos.
    • Banking Integration Risks: Banking access for crypto companies continues to present a single-point-offailure risk for the industry. On- and off-ramps to the “real world” are arguably the only existential needs the industry still has. We need more compliant, chartered crypto banks to prevent shutdown risks, and individual deplatforming risks.
    • AML Surveillance Risks: Illicit activity accounts for just 0.34% of crypto transactions (lower than TradFi), but the borderless and pseudonymous nature of crypto makes embargoes and blacklists difficult or impossible to enforce […] We should continue to drive down illicit activity, while pointing to blockchains’ surveillability as a law enforcement godsend.
    • Tax Evasion Risks: The government might come after you with guns if they find that you misreported your crypto trades, or suspect you have unreported private transactions.
    • Securities Fraud Risk: Crypto is risky and volatile. The fat early tail often makes money at the expense of the latecomers. That doesn’t make crypto a “ponzi scheme”, it makes it a bubble-producing tech paradigm subject to hype cycles, like railroads or the internet.

Setting the Stage: Regulatory Jump Balls

  • Contrary to popular belief or political attack lines, crypto entrepreneurs and investors want smarter crypto policy. We simply don’t want the tech regulated out of existence within the US.

Crypto Eurodollars and Systemic Risks

  • First, there is concern that stablecoin issuers are helping to create a parallel digital dollar economy outside of modern financial surveillance systems. This is somewhat true.
  • Stablecoins power highly speculative bank- and dollar-enabled markets which offer rates that obliterate their TradFi partners and competitors. DeFi lenders and TradFi lenders (commercial banks) do play by different sets of rules, and the banks don’t think that’s very fair. Banks have been preaching to regulators for years – first with fintechs and now with crypto – “same activities, same risks, same regulations.”
  • … most stablecoin and lending activity has been done on a fully collateralized basis so far

Smart Crypto Banking Integration

  • Avanti CEO Caitlin Long pointed to some important structural differences in a recent comment letter to the Fed: how would the Fed handle a hard fork on a blockchain with stablecoin deposits?

Crypto is Bad for (Bad) Business

  • There seem to be weekly reminders that using crypto for nefarious purposes leaves an excellent paper trail for prosecutors to lock in a conviction

Tax Enforcement vs Tax Products

  • Crypto accounting is a nightmare – tax reporting doubly so. It’s less likely that crypto investors are evading taxes, so much as struggling to report clean data.

Local & Metaverse Battles

  • Wyoming is doing great things, and innovating like crazy on crypto banking structures and DAO governance rules. Mayors are starting to compete with each other to become crypto hubs: I like that NYC is showing a little fight and two of my other favorite cities – Austin and Miami – are already safe zones.
  • We should fight for an open metaverse. In the physical and virtual realm we should be fighting battles at the decentralized edges.

There’s Nothing More Punk Than the Battle for
American Crypto

“There is no more natural home for crypto than the United States of America. There is no
more natural strategic weapon for the United States of America than crypto. The USA has
never gone wrong betting on freedom and things are no different this time.”

Punk6529
  • Punk 6529 top threads: https://twitter.com/punk6529/status/1429399888786333697

The Bitcoin Futures ETFs Are State-Sponsored
Pieces of Sh*t

  • The Bitcoin futures ETFs that were approved in mid-October are terrible for non-Wall Street investors. Despite nominal fees of just 65-85 basis points, it’s likely these toxic assets will cost investors closer to 5-10% / year in hidden costs due to their structures, bitcoin’s ongoing volatility, and the market’s long-term bullish trend
  • Arthur Hayes has a great post on how these work in plain English.
  • We need only look at similarly structured commodity ETFs to see how extreme the underperformance to spot is likely to get: the oil futures ETF USO is down 38% in the past five years compared to a 62% spike in the underlying asset.
  • Ben Thompson also pointed out that at least we now know the net cost of regulation: hundreds of millions of dollars worth of contango/backwardation costs for products that make no sense, other than that they are “regulatorily possible.”

CeFi vs. TradFi

  • I still don’t think people really get it. Banks, legacy trading desks, major asset managers… they can all enter crypto, and probably will sooner rather than later with a variety of offerings. But the game is basically over
  • Short of indiscriminate crackdowns, recordsetting M&A deals, or something similar, crypto’s “CeFi” firms have won, and will not cede their leads back to Wall Street.
  • Sure, there will be corporate innovation groups, crypto executive officers, and press releases (god wait until you see the press releases!), but crypto companies are simply bigger, faster, more aggressive, and unshackled by the distractions of maintaining 50 year old parallel TradFi infrastructure.
  • We’re not stuck waiting for the institutions to arrive, we’re the barbarians at the gates eating all of their lunch. (Nom nom nom I write with satisfaction as I think of every slicked hair “blockchain not bitcoin” 2015-vintage banker with each one of my victorious keystrokes.)

CEX Ed

  • Today, there are basically three tiers. The top 3 “God tier” exchanges are Coinbase, Binance, and FTX, where primacy will likely come down to new products and regulatory wins
  • Then there’s Kraken, Huobi, Kucoin, Gemini, OKEx, and Bitfinex in the “behind in volumes” camp, but “could still dominate” if any of the top 3 fall or stall.
  • Coinbase: But it’s their Web3 initiatives that may be most interesting. I’m keeping an eye on their Coinbase Wallet and DAO plans, not to mention their upcoming NFT marketplace.
  • FTX: FTX moves at an otherworldly speed and has built a $25 billion business in less than three years with under 100 employees. They’re the fastest growing company of all time, ahead of Coinbase, Stripe, and even Binance, and they did it in the ruthlessly competitive crypto exchange market

RegTech

  • If you want to enter the crypto fray as an investor or contributor, but also want to feel like you’re a sheriff in the Wild West working to bring order to the frontier, then crypto’s regtech plays are a good place to start.
  • Public blockchains are open to inspection by their nature, so it’s a good thing that these companies help authorities (with probable cause) nab money launderers, tax evaders, and terrorists. Strong compliance tools help bring credibility to our claims that public blockchains make cryptocurrencies terrible vehicles for crime.

Payments Innovation

  • To me, the most exciting trends in crypto payments are probably obvious. Stablecoins have exploded. Settlement volumes on both bitcoin and ethereum are up by multiple orders of magnitude in the past couple of years. And every time I send a USDC payment to fund an investment, I weep tears of joy that I don’t have to initiate a wire on a banking interface that looks like it was designed by someone who still plays Frogger in their spare time.
  • I’m going to shill my angel bags here, because none of these companies have tokens, and they’re all killer payments infrastructure businesses that have seen volumes go vertical this year:
    • Payroll (Juno)
    • Streaming Payments (Superfluid)
    • Quadratic payments (Gitcoin)
    • Charitable giving (The Giving Block)
    • Emerging-markets (Valiu)
  • Coinbase announced a partnership with Visa and rolled out its Coinbase Card. BlockFi announced a bitcoin rewards credit card. Stripe is hiring a crypto team and added Paradigm co-founder Matt Huang to its board. Mastercard partnered with Bakkt. Visa leaned into the punk rock ethos by buying a Punk. Ramp raised at $300 million. Moonpay raised at $3.4bn+. It’s all too bullish. I can’t take it.

The National Security Case for Crypto Dollars

  • Political polarization has gotten much worse, deficits are at World War II levels (because no one can agree on a responsible budget), and with interest rates near zero, we’ve opted to monetize our debts at a massive scale. Some 40% of USD that has ever entered circulation was printed since the beginning of 2020
  • A digital cash instrument that has the full faith and credit of the US Treasury, but can trade pseudonymously (auditable supply) would be amazing, and attract global counterparties. A closed loop Federal-Reserve maintained central bank digital currency (dystopian overreach) would likely fail, as no nation-state in its right mind would invite that sort of granular foreign oversight into its banking system.

“The existing, thriving ecosystem of private USD-denominated stablecoins can help the
U.S. act quickly to win the emerging geopolitical arms race in financial innovation. The
United States should condemn the surveillance authoritarianism embodied in China’s
digital renminbi project–not attempt to imitate it. American policymakers should be
cautious about building massive, centralized payments infrastructure. Doing so would
impose unprecedented demands on the government’s limited capacity to stand up critical
technology platforms, present significant privacy risks, and create an immensely attractive
target for attackers.”

a16z

DCEP

  • DCEP = Digital Currency Electronic Payment
  • China’s DCEP offers a special sort of hellscape (social credit scores ftw!), and you’ll notice this is one of the only times I’m referencing them in this report because otherwise, I don’t view anything crypto-related in China as interesting.
  • DCEP – as with all CCP crypto policy – is ultimately designed to eliminate leaks in the country’s capital controls. One analyst says DCEP will reduce capital flight to Macau by $600 billion.

Fedcoins & Western CFDCs

  • The trajectory we are on in the US (and Europe) includes state-run digital currency payment rails that would allow for ubiquitous transaction surveillance, censorship, and negative interest rates that steal deposits as a mechanism to enforce wealth taxes or punish savers in periods of sluggish spending. We’re trying to build a shittier version of China’s DCEP, but without the requisite authoritarian values to pull if off in the West.

NFTs & Web 3 Plumbing