Another Table at the Wall Street Casino
The Blind Squirrel's Monday Morning Notes, 16th December 2024.
This week the 🐿️ draws a dotted line between Satoshi Nakamoto and Withnail & I. Something for everyone!
Before we get going, a quick 🐿️ media plug. Last Wednesday, I was delighted to join on her Talking Markets show. We covered a number of interesting global opportunities.
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Another Table at the Wall Street Casino
We need to talk about my distant (and more successful) cousin, Peanut the Squirrel. The meme coin launched in memory of the unfortunate rodent’s untimely demise became a Trumpian avatar in the run up to the election and continues to hold a market capitalization of almost $1.2 billion. The pinned tweet of $PNUT’s fan account on Twitter (55k followers!) states proudly that “the most entertaining outcome is the most likely.”
Are you not entertained? Have we reached peak financial nihilism? I believe it was Demetri Kofinas that coined (pun intended) the concept of financial nihilism, defining it as a ‘casino capitalism’ investment philosophy that incorporates belief that "everything is just a narrative".
In the world of the financial nihilist, the notion of objective value in financial markets is fiercely rejected. Fundamentals are subservient to ‘the community’ and to ‘the lolz’. Leading crypto players even now publish manifestos that say the quiet bit out loud: “A Lack of Pretense That Any of This Shit Does Anything or Will Ever Do Anything”.
It looks like ‘Team Crypto’ may be about to enjoy the last ‘lolz’ with the incoming US administration appointing a crypto czar to the team. A quick review of the clip below would suggest that a fox might have just been appointed to oversee the hen house of the financial nihilists.
I suspect that one of the possible reasons that the ‘lure of the surreal’ with $PNUT or $FartCoin is so strong is that Bitcoin, the ‘digital gold’ and apex predator of the crypto sphere, has already effectively been co-opted by ‘Big Retirement’. Bitcoin is now fast becoming just another table at the Wall Street casino.
Satoshi Nakamoto, the pseudonymous founder of the Bitcoin network, must be holding his head in his hands with despair. He created the cryptocurrency with the lofty goal of creating a decentralized, peer-to-peer electronic cash system that eliminated elite intermediaries and gave financial control back to the individual.
Blackrock, Citadel and Goldman Sachs are in charge now. There is no cruelty like irony. The financial opportunity on offer from securitizing and leveraging the asset to satisfy their ‘flow’ machines was just too tempting. Bitcoins are of no use to Wall Street if they are being ‘HODL-ed’ by ‘maxi’ believers in cold storage wallets.
The goal of the financial overlords is to do to Bitcoin (and then to Ethereum and the rest) what they did to the precious metals with the creation of ‘paper’ gold and silver markets 20 years ago. No money can be made from the hoarders of bars and coins.
My friend JJ
has been chronicling this theme in excellent detail in his daily notes. Epsilon Theory’s Ben Hunt has also been predicting this path for some years. Ben’s ‘Bitcoin as art’ is by far a more persuasive mental model than Bitcoin as money.The 🐿️’s crypto journey.
It may just be an excuse to liberally quote a favorite movie, but all this talk of nihilism keeps on making me think of the 1987 classic, ‘Withnail and I’. The movie is set 1969 London. Two unemployed young actors represent a youth disillusioned with the unkept promises of the previous generation.
The pair’s response to the societal decline and a hopeless financial position is to opt out of it in a fog of alcohol and narcotics. Click below to enjoy.
There is a dotted line from the economic and societal decay of the late ‘60s that leads directly to punk rock counterculture of the 1970s. In some ways, Satoshi is a sort of nerd’s version of Sid Vicious from the Sex Pistols. But with (we presume!) an advanced math degree. The early adopters of the cryptographic monetary revolution even called themselves cypherpunks!
Regular readers will have noticed that this is the first time your rodent has addressed the topic of crypto head on (beyond the odd tilt at an over-earning Coinbase or Robinhood).
I guess that these days the 🐿️ would best be styled as a ‘no coiner’ but this rodent does have a past in crypto! I have been through a full narrative arc from skeptic to curious to experimenter to degenerate feverishly checking prices ‘24/7’ to doubter to hater to calm acceptance that the asset class is now just another part of the financial market casino. I don’t write about it that much as I have limited interest in picking fights with cults.
“But 🐿️, why do you choose to have fun staying poor? HaVe yOu aCtUalLy dOnE tHe wOrK?” Am afraid so. I have read all the books, the whitepapers and the manifestos. I spent 3 months of pandemic lock down getting into the weeds of blockchain strategy via an Oxford University program. I have traded on most of the centralized exchanges and several decentralized ones. I know my DAOs from my Dapps. I have bought and sold ETH options on Deribit. I looked into operating a Helium DePIN WiFi node. I have given children and godchildren Ethereum as Christmas presents. I have minted an NFT. I have staked tokens in DeFi protocols. I have participated in token airdrops (and of course been rug-pulled by a fake token airdrop!). Oh, and I consulted for one of the world’s largest bitcoin miners / crypto venture capitalists for a couple of years. Yes, this rodent has done the work.
Don’t get me wrong, blockchain technology has the potential to be immensely valuable. Digital payment rails could be massively improved with the help of stablecoins. The integrity of industrial supply chains could be revolutionized with distributed ledgers secured by blockchains.
However, it is not necessary for most those protocols to be fully decentralized with the employment of expensive and energy-hungry consensus mechanisms. In most cases, a private / enterprise blockchain will suffice. However, the lack of a ‘proof of work’ or ‘proof of stake’ consensus mechanism means no tokens (i.e., no speculation, no ‘number go up’ and (crucially) no flow).
Crypto was never a ‘financial justice warrior’ ‘cause’ for this rodent. To be honest, the 🐿️’s anarcho-libertarian credentials are not that great. I believe that those that want to ‘end the Fed’, the return to a ‘hard money’ standard and live in a world without fractional reserve banking, have not given sufficient thought to what the world looks like in that particular reality (hint: think Mad Max).
Please also spare me from lectures about the ‘unbanked’ and financial inclusion in the developing world emanating from fleece-gilet-and-Rolex-clad millennials in New York, London or Dubai (minus the fleece).
The 🐿️ was fortunate enough to participate very profitably (and I now consider it fortune not skill) in the Bitcoin rally and ‘DeFi summer’ of 2020. While I fully acknowledge that Bitcoin is becoming the new digital gold for younger generations, it comes with a vicious drawdown profile that I find inconsistent with its purported role as a store of value. I also have issues with Bitcoin ownership concentration (who is really in charge?), but that is a topic for another day.
What ultimately drove me away from the asset class pretty much completely was crypto’s infamous year of greed, grift and incompetence in 2022.
The sequence of spectacular collapses of Terra/LUNA, Three Arrows Capital, Celsius Network, Voyager Digital that culminated with the demise of the ‘JP Morgan of crypto’ FTX was enough to convince this rodent that the whole digital asset space needed to put in another decade in the wilderness. The industry needed to grow up and let the grifters move on to the next grift.
But I had not counted on the determination of the finance industry to create another table at the Wall Street casino.
Love it or loathe it, crypto has now become an accepted financial asset of the macro and multi-asset tool kit. Those readers with any connection to the tyranny of relative benchmarking know that to completely ignore it these days is an active asset allocation decision with the potential for significant relative performance consequences.
The good news for them is that the process of institutionalization means that Bitcoin is now starting to behave a lot like any other risk asset. It has been neutered.
The ebb and flow of central bank liquidity is probably now the most important driver to watch (and I note that global liquidity guru Michael Howell is calling for a new round of major monetary stimulus out of China). ‘Big Retirement’ fund flows to the new alternative asset class will also continue to be a key factor to monitor.
I guess we should take a second to consider one possible esoteric flow, namely Senator Lummis’ Strategic Bitcoin Reserve. This would be very exciting for the members of ‘Team Number Go Up’ that donated so generously to Mr. Trump’s (and Ms. Lummis’!) campaign.
However, for the United States to undermine its monetary hegemon status by supporting a competing ‘currency’ does not strike this rodent as a great thing for ‘Team USA’ in the long term. “Mr. President, I have Mr. Bessent on ‘Line 1’. He sounds agitated.”
The next esoteric flow that needs to be considered is the extent to which the ‘Spot Bitcoin’ ETF adoption effect has now been fully absorbed and priced. I will be the first to admit that this rodent massively under-estimated the success of January’s launch of these products.
Spot Bitcoin ETFs, sponsored by reputable fund shops like Wisdomtree have been available outside of the US for years but as one of my loyal readers observed to me the other day on our Discord: “Americans would rather buy the mezzanine tranche of a CDO than a foreign ETF. Give your head a wobble, Squirrel!”. Thanks Whirly!
The success of the US-listed spot ETFs has been remarkable. Their aggregate market value is now north of $104bn, representing over 5.2% of outstanding Bitcoin and 1.65% of all US-listed ETFs (and not far off the upper bound of Blackrock’s recent 2% asset allocation recommendation).
When you contrast that number with the market value of aggregate physical gold ETFs ($121 billion and 0.86% of the $14 trillion of mined gold), could we be getting close to an initial saturation point (after which point only incremental savings flows will drive AUM growth)?
For fun, I constructed a generic ‘YOLO’ portfolio. Judging from social media, an equal weighted (no rebalancing) portfolio of MicroStrategy, Nvidia, Palantir, Tesla and Bitcoin is basically the new ‘risk parity’ portfolio (minus the meme coins) for your average financial nihilist.
The YOLO portfolio has left the broad equity market and even my (constituents remain a state secret but are principally profitless tech) Garbage™ Portfolio in the dust. With Christmas approaching, seasoned investors can anticipate some ‘this is how you invest’ advice from younger relatives at the festive dining table.
In Section Two, the 🐿️ takes readers through some coping strategies. Not psychological advice!
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