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MEMO W12 MAR 2024

How to think is way more important than what to think. - xh3b4sd

Anecdotally, this week I heard something along the lines of "this crypto bull market is only four months old". The point of the Powerlaw blog is to come up with practical theories about the world we live in. This world is subject to constant change. We have to define a hypothesis, time and time again, and reflect on it, time and time again. Every time we make a statement and every time we come back it we effectively underwrite our theory from scratch. Underwriting something is the act of assuming risk in expectation of some benefit. There is no free lunch in this world. And so there is no possible gain without taking any risk. Continuously trying to benefit from something does automatically imply to continuously taking on some form of risk. And as we walk through life, we are committing ourselves to our convictions and their continuous renewal of the risk we are willing to underwrite, time and time again. Understanding this very principle is the search for truth. I think everyone gets to choose whether they want to be in search for truth or not. Truth has to serve a purpose. That is also why the world isn't just fair and why the right thing is not always the thing that is going to happen. There is the choice and those who benefit from it. When you work with money then you have to know how something actually works. And then it is not really relevant how you feel about it or what you think the world should be like or whatever. When you understand the mechanism behind something you can be better off. And being better off here means not losing money. I am now wondering why somebody would frame a bull market one way or another. The alternative reality that I believe in is this. Everything is synchronized with the debt induced global liquidity cycle, and it lasts about 5 to 6 years from bottom to bottom. If we do not want to roundtrip all of our gains we have to measure the liquidity cycle from bottom to top. We also have to understand that assets like BTC and ETH are subject to delayed liquidity effects. That means that BTC and ETH react to global liquidity roughly 6 weeks after the fact. The delayed effects do not make much of a practical difference in cycle length. In any event, we can expect the beneficial parts of the global liquidity cycle to last for about 30 months from bottom to top, give or take. As described in previous Powerlaw memos, our reference point for the current liquidity cycle is at the bottom around June 2022 when ETH printed its cycle bottom too. For our purposes we can expect a reasonable minimum cycle length of 18 months and an unreasonable maximum cycle length of 30 months. The attentive reader will notice that we crossed the reasonable minimum expectation of 18 months liquidity cycle length around January 2024. From here on out we may or may not get another 12 months of liquidity tailwinds. Note that all of the moon math here should only serve as another contextual data point. We always have to understand the current context of our environment and treat the available data points according to any given context. One of the more important principles that a lot of people get wrong is the context in which market dynamics play out. You may have a rule book and best practices for a particular kind of market, but those rules applied in fundamentally different market conditions may yield wildly different outcomes. If history is any guide then it is going to get a lot weirder over the coming months. One question on my mind is how we are going to work through the typical summer hole and how the start of the next year is going to turn out. Until then, enjoy the ride.

Last week I wrote about a seemingly forced selloff that impacted the market overall. We are still in retracing territory with wildly increased volatility to the upside and the downside. What has been interesting to follow are the BTC ETF flows. GBTC continues to have massive outflows every day measured in hundreds of millions of USD. Great to see is that some of the outflows are compensated by inflows into the other BTC ETFs. The GBTC outflows are somewhat expected, and expected to continue because of their outrageous management fees of 1.50%. Compare those fees with BlackRock's IBIT of 0.25% and you understand where the money is flowing. In other news, we heard some anecdotal estimates of the ETF sales machinery progress. People seem to think that about 20% of capital allocators are already allowing their clients to participate in the spot Bitcoin ETFs. Those 20% are expected to grow to 80% by the end of this year. While this is only anecdotally, this data point helps us understand where we are in the cycle and what is yet to come. Higher for longer!

A quick refresher who BlackRock is and what BlackRock does. BlackRock is the largest asset manager on the entire planet with a total of roughly 10 trillion USD in assets under management. Just this week the "BlackRock USD Institutional Digital Liquidity" fund with the ticker symbol BUIDL became operational on Ethereum. Crypto Twitter took note of the onchain action when BlackRock's smart contract was funded with 100 million USD in onchain liquidity. BUIDL is some form of investment vehicle that generates yield using US Treasury bills and repurchase agreements, allowing accredited investors to earn income while holding the token in their non-custodial wallets. Larry Fink did not joke around when he said tokenization is the future of France. Now the proof is in the pudding. And the cooking happens on Ethereum.

After the recent Dencun upgrade on Ethereum mainnet, we are now seeing several metrics change as expected. For the first time there have been four L2 rollups that were more scalable than Ethereum mainnet based on the recorded transactions per second. The transaction count is steadily increasing. Fees paid by users is dropping significantly. Rent paid by the L2 rollups to Ethereum mainnet has so far dropped from 2.5 million USD to below 500,000 USD. And the number of distinct addresses interacting with the Ethereum ecosystem on a weekly basis reached an all time high of more than 4.6 million. All of that means we are in fact scaling Ethereum.

At last, I would like to invite anyone of my readers to reach out, if there are any questions or ideas for collaboration. I want to write about your startup, strategic execution and elegant mental models. My brand archetypes are sage, outlaw, magician and creator. If you would like me on your cap table as an angel investor, then feel free to send your pitch my way. If you would like my feedback or engage in an interesting conversation, then I am happy to chat or have a nice dinner over some sweet red wine. If you are a writer yourself, then I would love to talk about the art of writing and maybe get your feedback on my writings here. If you think we should work on something cool together, then please reach out and let's be friends.

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