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MEMO W21 MAY 2024

Don't think in quarters. Think in generations. - xh3b4sd

I am usually trying to not cover news on here that are already all over the timeline. Though we have to mention that this past week the ETH spot ETF got approved by the SEC. Most people in this industry thought this was impossible. It happened, and we proved everyone wrong once again. Remotely related, I heard Andrew Huberman talk about the discourse on the common internet as being a borderline organism. Everything discussed on social media is either painted to be way better or way worse than it actually is. We can usually only find overly positive or overly negative content online because that is the type of friction that those platforms optimize for, simply because drama generates clicks and views. What we could learn and take away from this ETF approval turn of events is once again the implications of the Dunning Kruger effect. Let's look for instance at the few popular analysts who made their characters about "informing" Crypto Twitter about ETF updates. The first instance of getting updates about the BTC ETF process appeared to be informational and helpful. The messaging was constructive and positive throughout the process, leading into the BTC ETF approval in early January 2024. By means of keeping people updated about the BTC ETF approval process, those few analysts gathered a Crypto Twitter following and somehow became some kind of authority that many started to base their own opinions on. The attentive reader may already be able to see how the plot of this story is about to turn and what the Dunning Kruger effect has to do with any of it. Based on my perception, the ETF analysts got perceived to be competent in one case because their reporting was rather accurate and constructive to begin with. What then happened throughout the process of the ETH ETF approval process was a completely different story. The picture painted by those analysts in the latter case was so dramatically more different. We have been told that the ETH ETF is definitely not going to happen. That on its own is not a report on real events but an interpretation of the real world, read opinion. We have been told that there is no engagement with ETF issuers. We have been given all kinds of insight or lack thereof and almost everyone out there took the gospel to heart as if it was the absolute divine truth. The Dunning Kruger effect is a common bias in which people project their competence in one area to another area and in the process overestimate their own competence in an area in which they may do not have any competence at all. Colloquially, people tend to lean too far out of the window. And if this in itself is not bad enough, all the lemmings out there believe all the nonsense that is thrown around by those almost falling out of the window. The crux we are getting at here is basically how to look at the world and what information to trust, if we cannot even trust ourselves most of the time. Understanding those types of biases and how we maybe even fool ourselves is crucial to survive any market across the fullness of time. Nobody could have predicted that US politics makes a complete turnaround on crypto policy. But making definite statements and claiming low single digit probabilities while having no real control nor insight yourself is a bit too far off for my taste. In my mind it was pretty evident that the ETH ETF approval was only about time, regardless at which date the approval itself actually happened. The very negative tone along this process coming from the overrated analysts, regardless the facts in front of us, was a clear sign for me who not to listen to. Ask yourself how right or how wrong all kinds of analysts out there are on average. Stay save and be careful who you listen to.

Based on the events described above, here is my view on the implications of the ETH ETF approval. Days before the formal approval by the SEC we saw a pretty big anticipation candle on the charts of like 25% within 24 hours. ETH / BTC ratio is only back to around 0.055 while the SOL / ETH ratio dropped to about 0.045, which keeps both ratios still quite in range. The future net inflows into the ETH ETFs will most likely average out over the long run based on the market cap weights between BTC and ETH. My base case here is not in line with most bullish estimates out there. I do not believe that the ETH ETF flows will equal the BTC ETF flows right out of the gate. There is a future version of the universe in which ETH overtakes BTC in flows and/or market cap, but I cannot tell in what order those things would have to happen. My best estimate would be that we will see ETH ETF flows in the ballpark between 20% and 30% of the BTC ETF flows throughout the remainder of 2024. Regardless all the price speculation, I think the ETH ETF approval has far more important implications for the future of Ethereum and crypto as an industry. Based on US regulation, BTC and ETH are now both digital asset commodities in a class of their own. Those blue chips are distinctly differentiated from anything else in this industry. The implications of regulatory clarity are so meaningful that there is now no career risk anymore in traditional finance when getting involved in the Ethereum ecosystem and any of its financial primitives. Tokenization of the world economy will continue from here on out. Remember, our plans are measured in centuries.

In other US regulatory news, a bill passed the House of Representatives to ban the Federal Reserve from issuing a CBDC. We still have to see how the Senate votes on the matter, but seeing the House pass such a bill made me hopeful to not eventually end up in an even more dangerous surveillance state. The important bit here is that we got a temperature check on what the people want and how politicians react to that information. I am afraid that Europe doesn't really have any meaningful democracy left for that matter, because all signs show CBDC over there, regardless what the people want. The more important it would be for the US to not follow along the paths of China and Europe. And the more important it is also to establish fully functional and flourishing DeFi ecosystems that provide trustless financial services to anyone in the world. The vision here is that any authoritative financial surveillance regime will lose against the trustless open source version in the long run. Once again, our plans are measured in centuries. As already mentioned above, nobody could have predicted that US politics makes a complete turnaround on crypto policy, but Trump picked up on the sentiment and a huge voter base of over 50 million Americans owning crypto. He leaned into sovereign property rights and assured us this week that he will protect the industry and the right to self custody. When we will look back after the US election, some time around this week was the moment when he tipped the scales and secured his victory. And nobody will have see it coming. We are going so much higher.

This past week I thought that the markets feel kind of orderly overall. Many charts are near all time highs, but there is no meaningful exuberance or stupidity in the markets. Even the recent GME hype seems to have calmed down quickly again. And despite NVIDIA record earnings, the state of the nation seems to be that we are simply operating on a higher baseline now. Which in turn simply means we go higher from here.

To some interesting numbers. I have heard that about 30% of questioned 18 to 45 year olds have crypto exposure, while only 5% of surveyed 65 years olds and older own crypto. To no surprise, crypto is a generational issue and it is no wonder that deceased giants like Charlie Munger were never able to make sense of it all. What the provided numbers tell us here is the generational shift happening in front of our eyes. Maybe it is a little bit like boiling the frog, which is why all the frogs out there do not appear to notice it. But in time, our baselines for all kinds of metrics will simply increase with every year and every election cycle moving forward. One other major metric I want to acknowledge here this week is the recorded 7 million weekly active addresses across Ethereum's L2 ecosystem. This is an unheard of all time high. Addresses are admittedly not users, but the steady increase in active addresses indicates a steady increase in active users over time. It is metrics like these that make the negative sentiment around Ethereum look to be so absurd and misplaced. As mentioned in last week's Powerlaw memo, all growth metrics are up into the right and the average Crypto Twitter anon's opinion about ETH as an asset is rather meaningless for the future success of this ecosystem. Know who to listen to. Know thyself. And take care out there.

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