BitMEX Founder Arthur Hayes: The Looming Fear Will Ether’s Market Cap Surpass Bitcoin?

Arthur Hayes argues that we as investors need to face our fears head on, put aside dogmatic thinking and reassess the narrative logic of the crypto industry.

BitMEX Founder Arthur Hayes: The Looming Fear Will Ether's Market Cap Surpass Bitcoin?

I cannot be afraid.

Fear is the killer of the mind.

Fear is the death that brings total destruction.

I will face my fear head on.

I will allow it to sweep over me and penetrate me.

After the fear has passed, I will search for its trajectory with my heart.

Where fear disappears there will be nothing.

Only I will remain.

— Paul Atreides, Dune

I love science fiction. At any given time, I am reading at least one science fiction novel, and Frank Herbert’s Dune is by far the best science fiction novel of all time. The best science fiction series is Liu Cixin’s Three Bodies trilogy, which is so amazingly good that I even wish my Chinese was a little better so I could read the original Chinese instead of reading it through an English translation.

American traders and investors are simple creatures driven by fear and greed. Greed can drive humans to do many incredible things, but the fear of loss overwhelms everything else. Economist Daniel Kahneman has a large body of work that describes why human decision making is not as rational as classical economists would have us believe.

In particular, monetary losses can often be more damaging to our minds than monetary gains. As we explore this epic crypto bull market in greater depth, an assessment of panic is critical, as one or more of these narratives can replace the desire of traders to BTFD (i.e. Buy the Fuck Dip, a banter among traders meaning to overcome human weaknesses and buy on the cheap).

The Great Reversal
A few weeks ago, I received a message out of the blue from Su Zhu (founder of Three Arrows Capital). He asked me how likely it was that ethereum market cap would overtake bitcoin in this bull market. I answered 0, and then asked his opinion. He responded with a 50% probability. Shortly thereafter, Goldman Sachs executive Raoul Pal’s Global Macro Investor was published, containing a lengthy report written by Nikhil Shamapant arguing why Ether could reach $150,000 by January 2023. After reading the report, I sent another message to Su Zhu that raised the likelihood of transcendence happening to 30%.

There is a segment of the Bitcoin community that sleeps at night, fearing that Ether will one day overtake Bitcoin. Bitcoin supremacists believe that Bitcoin is the true monetary god of the crypto space and that everything else is at best ancillary and at worst pure evil.

On the other hand, mETH principals believe that Ether can be both the most reliable form of cryptocurrency and the best decentralized computing network in the world. For them, after ETH 2.0 launches and completes the conversion from POW to POS (currently scheduled for later this year), Ether will quickly surpass Bitcoin in market cap.

I do my best to eliminate my dogmatic thinking so that I don’t associate with a way of thinking that has become obsolete over time. Like everyone, I will fail in this endeavor, but I hope to mitigate future losses by reminding myself of the consequences that may result and acting accordingly. The dogma around bitcoin and ethereum must be reduced to the actual basic idea of each cryptocurrency. We can then build a review of the current state of affairs and assess whether the narrative is fundamentally relevant.

The Great Reversal
The best form of currency has no industrial use. Fiat currencies are very useful for business because they are essentially worthless. The need to use a particular fiat currency depends entirely on the usefulness of its network. In this case, the network is the number of domestic and international trade counterparties who will accept a particular fiat currency in exchange for goods and labor.

The reason why fiat currencies in commodity form are not suitable for everyday use is because their value is related to certain real-world use cases. A barrel of oil is a lousy currency. In contrast to labor and commodities, oil will have two sources of demand that affect its price: One is the demand of energy consumers. The second is the demand for it as a medium of exchange.

How can a barrel of oil be used to measure the price of labor? Oil must be valued based on its usefulness for everyday energy needs, and others see its value in the goods or services they are trading. As the number of economic participants grows, the supply of oil and the rate of money circulation contain interdependent vectors that make this problem quite complex.

Ether’s primary mission is to power the world’s largest decentralized computing network. Ether is valuable because the Ethernet network is the most commonly used smart contract protocol. It has the largest number of developers, DApps and the largest total value lock (TVL). Ether is the commodity used to pay for Gas so that you can use the Ether decentralized network.

My belief is that the market, in the last 5 years ETH has a market cap 30 times that of ETC and the market value is focused on Ether being the best smart contract protocol and trying to be the most reliable cryptocurrency collateral.

Ether’s inflationary timeline
The EIP-1559 proposal, if approved, would dramatically change the inflation timeline for Ether. Essentially, instead of transferring from users to miners in the form of a gas fee, Ether would destroy the base fee and provide miners with a tip. It is understood that up to 70% of the gas in a transaction may be destroyed. In my previous post, I talked about how if DeFi could replace a small portion of CeFi, there would be room for a significant increase in Ether’s gas fee.

If the amount of gas grows exponentially with usage and those fees are destroyed, the inflationary timeline will quickly turn into deflation. As the platform becomes more useful, the supply of ETH will decrease. If we underestimate the impact of DeFi on human economic interactions, then in the future, there will not be enough ETH available to make the system work.

The counterargument to this is that the extremely high price of ETH solves the supply problem. But this is not the case, and if marginal mining profits expand enough, there is no room to mine. The network would not generate enough ETH through block rewards to satisfy its use in Ether.

At this point, the economics of the network fail. the price of ETH is high and HODLers are playing an ace of spades, but if DeFi apps that need gas fees go out of their way to get it, it will soon go to poverty. Considering that we know how the community will respond to the existential threat it faces (see the DAO hack), would you want them to stand by and watch the network commit suicide over a misguided inflationary scheme? If a hard fork has been implemented once, it can be hard forked again. The deflationary issuance and gas fee destruction plan would be sacrificed so that DApps could be used under the capacity needed to power the decentralized computing network.

Therefore, those betting that the current EIP-1559 inflationary schedule will never change need to review the history of the protocol. A major driver of this bull market is the exponential growth of DeFi having to be traded on the chain, causing more fees to be spent and then burned, thus reducing supply and raising prices.

If the ETH price does reach $150,000 and the network is eliminating the parasitic CeFi mechanism, the mere suggestion that the protocol must change its inflationary schedule to continue cracking the CeFi skull will push the price to the bottom of the Marianas Trench. Failure to understand the impact of a deflationary destruction mechanism schedule on currencies driven by the underlying technology that underpins prices could be fatal. Ether will never be the most reliable form of cryptocurrency until it achieves its true mission of powering a global network of decentralized computing.

However, this does not mean that Ether cannot surpass Bitcoin in terms of market capitalization. It simply means that it will be much more difficult to achieve that goal because Ether won’t be able to have its cake and eat it.

Technology is more valuable than currency
The global reserve currency is the most valuable because it has the largest network of participants who are willing to accept it in exchange for goods and labor. Currently it is the U.S. dollar. The approximate value of the currency is is M0, the amount of base money in circulation. The current dollar M0 is $5.8 trillion.

The total market capitalization of FAANG (Facebook, Apple, Amazon, Netflix and Google) is $6.36 trillion. The U.S. dollar is just pure money running on the network of the U.S. financial system. It is no more valuable than the companies that provide actual goods and services in dollars.

Dollar holders don’t cry like children on social media because companies that sell dollar-denominated products have a higher market cap than dollars. So why are Bitcoin supremacists so threatened by inevitability that other cryptocurrencies with industrial examples will be worth more than Bitcoin? The feeling doesn’t seem to be mutual; many of the most successful cryptocurrencies have raised their initial funding in bitcoin.

Bitcoin is inherently just as useful as the most reliable crypto collateral if its market cap is significantly lower than current levels. Bitcoin holders must believe that bitcoin collateral exists in any cryptocurrency-enabled economy. They should strive to support this mission, as doing so will further cement Bitcoin’s role as the foundation of the external crypto pyramid.

Gresham’s Law
Fiat currency and gold require living, breathing humans to exchange for other forms of money, goods, and/or services. These traditional forms of money rely on a network of humans. This network can function as long as humans exist.

While Bitcoin is the most robust currency ever created, in addition to humans, it requires a group of self-serving miners to expend real-world energy to maintain this network. Miners are only rewarded with bitcoins. If the bitcoin-to-energy exchange rate falters for any reason, the miners won’t mine and the network will disappear.

The higher the rate of bitcoin transactions, the more on-chain fees are incurred. In addition to block rewards, these fees allow miners to buy energy to maintain the network. We all know that the block reward amount is halved every 4 years until it all stops in 2140. Thankfully, the number of on-chain transactions has greatly increased.

Bad money gets spent, such as dollars and other paper money; good money gets hoarded, such as bitcoin. This is Gresham’s Law. While hoarding gold does not reduce the value of bitcoin, in the extreme case, hoarding bitcoin in the future without using it in any way will destroy the economics of the network that gives it value, because at the end of the block reward, miners will only receive transaction fees, and if there are no transactions, no fees will be charged and miners will have no incentive to maintain the network.

Bitcoin Network Trading Volume May Be Headed Downward
Most people want an easy way to get exposure to bitcoin to fiat currency. That is, they think the price of bitcoin will go up, but have no interest in becoming a financial institution themselves. They want a 1-800 number to call when they forget their password and someone to complain to when things don’t go as planned. Service providers are happy to sell paper bitcoin derivatives that offer asset exposure while charging to handle all the pesky blockchain issues.

Judging by the success of Grayscale’s GBTC, Coinshare’s XBT provider and other paper derivatives, the average investor only wants price risk. All of my close friends who actively trade also use these products because they are so easy to use. They fully realize that if you don’t keep your cryptocurrency, the truly revolutionary aspect of the blockchain is completely lost. But that’s irrelevant because it’s an inflation hedge they crave, not a new financial ecosystem.

In the long run, a large pool of bitcoins held in escrow accounts that are not used for commercial activities or as collateral in the new digital financial economy could be a drag on miners’ profitability. Another drag is people who fully believe in the ‘be your own bank’ philosophy, but would rather spend their fiat currency on necessities than precious bitcoins. If both ends of the belief system are firmly in place, the growth of on-chain transactions will slow down and/or decline completely.

With the continued shortage of semiconductor chips needed to build new mining machines, the huge profit margins for mining machines will continue to exist given the relatively high price of bitcoin and energy. Even if you have the money to buy a machine, it won’t be enough to significantly increase the network hash rate.

As a reminder, the exchange rate that really matters is bitcoin to energy. Fiat currency will come and go, but miners must somehow buy electricity with the bitcoins they earn to stay in business, and the bitcoins left over after the purchase are their profit. 1 dollar buys 1 kWh or 1000 kWh; however, 1 kWh is always 1 kWh.

Current large mines do not need a significant increase in trading volume to cover ongoing capital expenditures. Even on second-generation mining equipment, they are printing so much money that it is irrelevant whether bitcoin is being used for actual commerce.

When primary, intermediate and final goods are all priced in bitcoin, bitcoin-denominated credit can be extended to all steps of the value chain. A true bitcoin economy allows for unsecured loans in the form of bitcoin. When/if this future arrives, on-chain transaction volumes will soar.

The Dogcoin Revelation
The most powerful force in the universe is the power of the collective human imagination. Every non-natural physical object we interact with begins with the imagination of one or more individuals. It all starts with belief and then transitions to physical reality.

The value system that underpins our collective delusion is closely guarded. We need only keep track of the millions of people who have perished over thousands of years of human civilization because of differing views of political systems and religions. It is not surprising that people take their beliefs very seriously when it comes to the monetary system. They should, because your monetary belief system can be the difference between a life of leisure and needless toil.

Humans inherently know that money is pure fiction. Therefore, when you challenge their belief system with other stories, they may become hostile. The best way to get a response is with humor.

The most talented comedians use our most cherished beliefs as a community and show logical fallacies through the arc of humor. If you can’t afford to make jokes, then you may need to think about why you are so insecure about your beliefs. Maybe it’s because deep down you know they’re complete nonsense.

Dogcoin has angered both traditional financial officials and crypto cowboys. It is the incredible internet currency and has no pretense of technological innovation when it comes to lack of it. It is a cute dog displayed on a computer screen. Its founder, Jackson Palmer, who left Doge a few years ago out of anger, stressed that he thought it was absurd that such obvious cryptocurrency jokes still had value.

It is only fitting that Elon Musk, one of the best salesmen mankind has ever produced,) uses dogecoin to illuminate the absurdity of our current monetary system. It is unabashedly pure hype that Musk’s company, Tesla, has a market cap greater than most car companies combined while producing 1/60th the number of cars. Musk has created more shareholder value through his Twitter megaphone than by delivering safe, fast and environmentally sustainable electric cars.

Love him or hate him, he’s the face of the digital ascendancy! The doggy coin joke has created many basement-dwelling millionaires. This is sure to infuriate traditional financial gatekeepers who tout value and growth investments on TV while barely achieving single-digit returns in an era when global central banks have expanded their balance sheets at a 15% compound annual growth rate since the Global Financial Center (GFC) in 2008. This is a joke.

The joke also happens to those utopian cryptography believers who preach decentralized technology. Their dogma is also threatened by dogcoin. How did this technically flawed cryptocurrency make it into the top 10 by market cap? What does this say about the value system of their peer projects? They bemoan the fact that dogs “make us look bad” and “make the crypto industry look unprofessional. If being professional means wearing a suit and tie or black pencil skirt while earning substandard returns, then give me dogcoin.

The crypto industry has nothing to fear from dogcoin. Instead, it should be used as an accompaniment to show that the emperor has no clothes. Money is a mental abstraction. The sooner a generation realizes that everything is fiction, the faster they can transition from physical government-issued bills to purely digital, decentralized money.

They are both equally fake. Which story retains your purchasing power in the face of rising energy, food and housing costs? Which story is inclusive, not exclusive? Which story can you participate in?

I will face my fears
It’s simple, I fear that global central banks will slow down the growth of their balance sheets. Without that, there is no reason for any cryptocurrency to be worth several times what it is today. When currency prices are no longer distorted, traditional cash flow analysis will once again become meaningful.

The kinds of fears I’ve talked about in this article are specific to particular cryptocurrencies. Just like stocks, real estate and commodities, the entire asset class will continue to grow as the number of assets issued increases. Know your fears and choose the right ecosystem to keep your wealth safe from inflationary damage.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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