BTC is up 245% and Ethereum is up 730% over a one-year period. Of course, both are now down a lot over the last month. But the price on its own tells us very little information.
The efficient market hypothesis would have us believe that information advantages, like knowing what a blockchain is, or thinking that a network with no transactions is worth less than a network with transactions, get absorbed into markets through arbitrage opportunities. If you have an information edge, no matter how fundamental or obvious or small, you act on that edge and get rewarded through profits over some time period. Therefore, incentives force rational actors to rationalize irrational markets.
But let’s not forget that social media and memetics exist, in part, to make machines out of our lizard brains and network them into the limbic system of the internet of attention.
The price, then, is not just a cold calculation of truth revealed. Rather, the price is a signal to be politicized, warred over and worshipped. If you can more easily move the sacred number with your heart than with your mind, which would you choose? No need to do math homework. Just join the bannered tribe of the Bitcoin maximalists, Link Marines, XRP Army, Doge army or some other multi-agent Twitter centaur, and tear into anything and everything that stands counter to your narrative.
The fact that people dote on price, and do nothing but talk about it – as a flag – is not new. But perhaps the amount of purchasing that is done based on that flag-waving alone is novel with leading cryptocurrencies. Financial rallying cries are now the norm to teach enemies their lesson in financial ruin.
Correlations are another data point here. Coin Metrics has a fantastic tool for plotting crypto asset correlations here. We can see correlations across projects starting to converge to the 0.6 to 0.8 range. Assets with very different stories, such as bitcoin, ethereum, Uniswap, Aave, Binance and Yearn are collapsing any difference in performance toward higher and higher correlation.
Perhaps that signals a lack of discrimination from institutional actors when they take an asset allocation approach. This would imply putting money into a “sector,” rather than into a project. Thus you would put 10% of your hedge fund into crypto, rather than into particular assets. Then, when there is a need to deleverage or rotate into a different position, you would reduce a portion of your overall allocation, and thereby impact all the sub-component parts. But it’s a bit hard to believe. Being pioneers among their peers, the crypto funds playing in the space are immensely sensitive to risk and market structure.
Bitcoin’s status as a store of value has retail actors selling off well-performing but non-core assets to park whatever remains into bitcoin. As the market overall has become bearish, selling off winners to pay off collateral calls or to turn off risk starts making sense. This seems more likely, and also sucks.
If you want to be rigorous in thinking about crypto networks, what are the metrics to actually track?
Bitcoin and ethereum come with very different stories, and thus what to track is quite different. Bitcoin is digitally scarce, and therefore can be viewed as “hard and sound” money. The hardness refers to how difficult it is to create additional units of the currency. It is backed by its mathematical truth – with supply limited as pre-ordained by code. While the Chinese authorities may attempt to stomp out bitcoin mining like a weed, it does little to change the network’s ability to secure transactions and generate a store of wealth for people who want to do so away from their governments.
In this way, Bitcoin is a political tool aimed at sovereigns, meant to strip away their monopolies on wealth. To the extent that a country cannot collect taxes, control its economy through monetary policy and otherwise rule its people economically, that country is not sovereign in the medieval sense. When a decentralized internet nation comes with its own decentralized internet currency, and promises of freedom and happiness, citizens of a country have an easily accessible alternative to the hegemon. We may soon find a better social contract with a decentralized autonomous organization (DAO) than with a corporation or a nation. Thus the sovereign will use force to enforce the social contract it finds existential.
Bitcoiners, however, believe market forces to be inexorable, assuming infinite demand. For example, the "Bitcoin Stock to Flow" pricing model takes the schedule of BTC emissions with its halving events and overlaps it nicely on a logarithmic scale with the BTC price. Thus, the harder it is to generate the next bitcoin, the higher the price of bitcoin will be.
But maybe this is also just two exponential charts overlaid on top of each other? Like, you take one number and divide it by two and then you take another number and you multiply it by two, and then you mess around with the vertical axis until your time period matches.
Another bit of the puzzle, when you know what supply looks like, is to try to project demand. There are various analytics about which types of accounts are selling (e.g., large of small), institutional inflows and outflows, and other leading indicators to transaction count. This is an attempt to quantify how people feel about the future, and all sorts of alchemy exists in looking at social sentiment.
In our opinion, still some of the best charts for understanding the current valuation of bitcoin have been developed by Willy Woo and are available here. The NVT (network value to transactions) cap, which is based on historic money flows relative to network value, suggests bitcoin should be worth over $1 trillion. The value of all coins at the price of their last transaction is $370 billion. The market is floating somewhere in the middle.
Note, however, that the main variables in all these models are how bitcoin relates to its own value. It is valuable to the extent people paid for it – the store of value – and at what rate they are performing such activity. And frankly, we can’t tell apart correlation and causation, because by design much of finance is recursive, reflexive and self-similar.
It is a breath of fresh air to switch from talking about existential geopolitics and who gets to be the money god – a monarch, a president or a computer program – to talking about creative computation.
Once you layer in programmability into blockchains, you are no longer constrained into talking about money. Yes, money is lovely. But it is also a mere derivative of actual things that actual people do. Money does not exist without some work that has gone into the tangible world, and then became abstracted into something else.
To us, it is that work that is important. While upgrading the transformation function that saves abstractions to be more modern and free is a gigantic opportunity, can’t we have a digitally native economy first instead of worshipping a golden calf?
Paying for your sandwich in BTC or Apple stock is not a digitally native economy. Building software that runs on Ethereum, or another bridged computational blockchain, definitely is.
Having open-source, mutualized financial engines that provide the best financial functionality in the world is a worthwhile goal. Fixing the original sin of the internet by rewiring human creativity out of attention-eating advertising monsters and into economic exchange seems like a pretty good goal too. Designing, congealing and governing an emerging metaverse to make the cyber expanse feel grounded and worth inhabiting may be the largest goal of all.
To that end, we find it much easier to root in Ethereum’s fundamentals because it welcomes non-canon extensions, whether they are scalability networks like Polygon, Optimism or Arbitrum, or whether they are the myriad decentralized applications extending the financial uses of ETH through trading, lending, investing, insurance, structuring and asset management.
The more others build, and the easier it is for them to build and therefore generate economic exchange and transactions, the better off everyone becomes. This is like watching the number of applications grow in Apple’s iOS or the number of merchants connected to Alibaba go through the roof.
To believe in the future of the crypto economy, you don’t have to believe in stories about sovereigns, digital or flesh. Rather, you have to believe in stories about the benefits of non-coercive peer-to-peer economic exchange. To that end, instead of swapping out old governments for the internet, the thesis is that you are swapping out the old economy for the internet. This then is our favorite chart, showing how Ethereum’s 1-plus million in daily transactions is now combined with another 7 million daily transactions from Polygon.
Or maybe this one, showing 135 million contract calls in May – the song of software running code.
As the crypto markets continue to display both (1) pronounced volatility and (2) increased correlation between different asset types, it’s important to articulate the main difference between the motivating purpose of Bitcoin and Ethereum. We do not think crypto prices are telling a useful or clear story, so it is worth considering the fundamentals of what one is betting on to become true.
Bitcoin and Ethereum/Web3 are aiming for quite different goals and will take very different paths to get there. Perhaps during some beautiful singularity, they will converge. The Twitter universe will yell at you until you comply to its price narrative, so be vigilant and pay attention to core principles. A lot is at stake.
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