Howdy partners 🤠,
How are you? After respective trips to West Virginia and Austin, we’re feeling refreshed and quite … bullish.
We’d forgive you for not feeling the same way if your portfolio of tech stocks and BTC has been getting hammered amidst broadening inflation fears (*gasps*) and Elon shenanigans. Bull or bear, we’ve got another edition of Heavy Hitters for you.
What’s included? Everything under the sun we found interesting in tech, markets, and more over the past few weeks.
Sound good? Let’s jump in.
Twin Supercycles?
When people think about absurd returns these days, often they think of crypto. In our last issue however, we started off by highlighting another 🚀🚀🚀 that’s normally more plain-vanilla: Lumber.
Lumber is far from the only commodity that’s seen outsized returns this year. Commodities ranging from grains and crops like corn and rice to coffee have been charging in their own right recently, leading many to start taking the inflation chatter more seriously.
Why are folks finally talking about inflation now, catching up to a drum we’ve been beating since last year? For one, it's showing up in prices people actually care about, like gasoline and food (and it’s in the government data, too). See below for consumer mentions on social noting concern over gas prices recently:
The key question now that some level of higher inflation is here is whether it is ‘transitory’ (short-term), or whether we’re in a commodity “supercycle,” i.e. a sustained and strong growth period for commodities.
What is a supercycle, anyways? The term is often used specifically in the commodity asset class. As Mark Burton defined it in a piece on Fortune, a supercycle is:
“A sustained spell of abnormally strong demand growth that producers struggle to match, sparking a rally in prices that can last years or in some cases a decade or more. For some analysts, the current rally is rekindling memories of the supercycle seen during China’s rise to economic heavyweight status beginning in the early 2000s. Commodities have experienced three other comparable cycles since the start of the 20th century.”
We’re quietly on the side of this being more of a supercycle, at least in the sense that we think the move will be sustained for months to come and will lead to a paradigm shift in markets out of the muted inflation we’ve seen since 2008. Strength in commodities aligns to one of our key predictions that we entered the year with. In our 2021 forecast edition, we saw merit in...:
“Getting closer to real assets again, whether in metals (precious and industrial alike), food and agriculture, and energy.”
We also talked about Bitcoin being an attractive asset in our note at the beginning of the year. What we didn’t foresee was that we’d be talking about a potential supercycle in the entire crypto asset class as well.
While past run-ups in the price of Bitcoin have ended in massive drawdowns in the coin’s price (frequently north of 50%), so far this year the price seems ‘stickier’. As institutional consensus forms around Bitcoin as a viable asset and cryptocurrencies as a viable asset class, dips in the Bitcoin price have (so far) been met by waves of buyers, even when these dips are occasioned by scares about regulation or taxation. And yes, we are aware that BTC has dipped back below $50,000 here as we get ready to send this note out (it quickly reclaimed the $50k mark). Let’s see where it lands in a month.
Anyways, what’s perhaps more important to the cryptocurrency supercycle argument is the performance of other cryptocurrencies and blockchain technologies. 2021 has been strong for Bitcoin, sure, but other projects, perhaps most notably Ether (the currency built on top of the Ethereum blockchain), which is up over 400% YTD, are actually outperforming. Similar to what’s happening in commodities, we’re not seeing all capital flow into single assets. As of this writing, Ethereum’s market cap is north of $400B, making it larger than all but a few of the companies in the world.
What would a supercycle mean in the context of crypto? Well, as we noted earlier, past crypto booms have ended in tears. A supercycle in crypto would be the one that stamps it permanently as tech and an asset class that’s here to stay. We’re cautiously optimistic that’s the case here.
One key detractor from the cryptocurrency supercycle argument? Well, while the Ethereum blockchain has thousands of serious projects built on top of it (more on that later) and has attracted very real development talent and capital, other cryptocurrencies that are performing well are … er… a bit less serious.
You would have been hard-pressed not to hear about Dogecoin in the past few weeks, which, thanks in part to Elon Musk’s meme-support in favor of the currency, has gone ballistic, shooting up from less than $0.01 per coin last year to almost $0.70 last week. The Dogecoin code is basically a carbon copy of other cryptocurrencies’, except that it’s supply is unlimited, meaning it isn’t scarce, which is part of the appeal of assets like Bitcoin.
Cryptocurrencies also remain quite easy for developers to spin up, promote, and subsequently pump. A new coin that attracted north of $100M in investor capital is CumRocket, or $CUMMIES for short. Similarly, ElonSperm has a market cap of almost $50M after launching just last week. With lots of these new… unsavory projects cropping up by the week, it’s easy for naysayers to say the crypto space is a dangerous bubble, and that capital is being allocated completely thoughtlessly.
Our take? Detractors are right to caution that 99% of cryptocurrencies and projects will probably fizzle and go away. But the same could be said of investing in public and private equities. The lion’s share of companies don’t survive, either. Those that do often play a critical role in shaping our day to day lives with their products and services. We’re ultimately not fully sold that we’re in a supercycle for commodities nor for cryptocurrencies. But the eye-watering moves we’ve seen of late haven’t waned as fast as they did in previous cycles either. Which is worth taking note of.
WTF is DeFi?
Another space we’re particularly interested is DeFi. WTF is that, you may ask? Really, the DeFi space just refers to traditional financial applications that can be executed via blockchain technology.
We’ll continue to dive deeper into the space over the spring and summer, as there are countless, cool projects that are useful (sorry, ElonSperm, you won’t make the cut).
For today, let’s succinctly walk through one of the first use cases that’s gotten a lot of play in DeFi (and attracted a lot of capital): Lending & Yield Generation.
Why would anyone want to borrow crypto? For one, as is the case in the traditional stock market, borrowing something is one of the easiest ways to bet against it.
Want to short Bitcoin?
Borrow it, sell it, pocket the cash.
Then you hope to re-buy it at a later date and at a lower price.
Once you do, you return it, and if you bought it back at a lower price, you’ve made some coin.
Example:
Buy 1 BTC at $60k
Sell it immediately (cash inflow of +$60k)
Wait
Buy 1 BTC when the price is lower, e.g. $50k (cash outflow of $50k)
Return it — you’ve made $10k.
And there’s a benefit to the crypto lender, too. If you part with your tokens, you get paid interest by borrowers. And so far, these yields are much higher than what you can earn on corporate bonds or traditional savings accounts, considering how low global interest rates are.
Especially when crypto prices are high (and demand to ‘short’ is correspondingly high), we’ve seen yields ranging from 5-20% APY across protocols like Maker, Compound, and Aave to name a few. Incidentally, all these projects we named are built on the Ethereum blockchain.
Of course, no return is riskless. In DeFi, counterparty risk is mitigated by pooling liquidity. Hence, much of the risk is at the protocol layer; with most projects aiming for decentralization, the question becomes whether the code itself is sound & secure?
So far, major DeFi applications have attracted nearly $100B in capital. This in particular is a space where we see lots of room for growth; in effect, we’re bullish on the applications built on blockchains like Ethereum as the currencies tied to the blockchains themselves skyrocket.
Sneak peak at the type of coverage that’s to come? We can’t divulge too much — nor have we truly thought all that far ahead — but nvo was on the phone with Deadmau5 for two hours last Thursday discussing his digital projects, including Audius.
WTF is Ethereum?
We’ve spilled some good ink on Ethereum already in this newsletter. So… WTF is it?
Rather than give you the nitty gritty details and potentially indecipherable programmer speak, let’s start differently:
When people talk about buying or minting their NFTs, more likely than not, those transactions are happening on the Ethereum blockchain.
When people talk about exchanging their cryptocurrencies on decentralized exchanges (“DEXs”), like Uniswap, it’s likely that those DEXs leverage the Ethereum blockchain. Decentralized here means absence of a central custodian or middle man, as opposed to a traditional brokerage.
When people talk about DeFi, like the lending applications we discussed, many of those are built on the Ethereum blockchain.
At its most basic form, one major piece of Ethereum is “smart contacts”, aka algorithms that say if x, do y; these have countless applications and are the building bocks of lots of applications on the Ethereum blockchain. And whereas financial contracts, e.g. the deed on a house, might normally require bankers and lawyers to execute and transfer, with sound code, they can be decentralized.
Ethereum applications are already much more ubiquitous than you may think. Uniswap, the DEX we mentioned above, already does billions of dollars of trading volume daily (far short of the ~$250B in daily trading volume on the NASDAQ, but hey, it’s just a youngin’). And there are many other DEXs (don’t get is started with the Sushiswap drama).
As Ethereum has seen its ETH token price increase exponentially, many are openly calling for a ‘flippening’ that would see its total market value surpass Bitcoin’s. Why? Well, maybe there’s something behind the idea that stores of values should be productive (i.e. you can do something with them), vs., say Gold and Bitcoin, that are more or less nice things to behold (yes, we know gold has a number of industrial applications — that’s not why every Central Bank in the worlds holds it in its vaults).
Of course, we’re not here to just beat the Ethereum bull case. Every transaction executed on the Ethereum network costs ‘gas,’ aka a transaction fee. And as the Ethereum network gets more congested and the ETH price increases, the dollar-denominated value of these transactions fees has increased massively too. As of this writing on 5/12 at 9:30 pm EST, it would cost $500 to mint a new NFT on rarible.com. That’s prohibitively expensive for artists, most of whom would want to sell their piece for less than that. This chart shows the cost of average transactions on the Ethereum network over time:
Who knew we’d be talking about expensive gas at the ⛽ and on the blockchain?
Further, considering the meteoric success of the Ethereum project since 2014, there are plenty of competitive chains, like Cardano and Solana, that offer similar value propositions to the OG Ethereum vision (and tout much cheaper fees). Those will have to be the subjects of future notes.
Bonus Heavy Hitters: Required Reading / Watching / Listening
Lastly, here are some fantastic reads that we think you might enjoy, too.
Epsilon Theory: Bitcoin as art / identity + the risk of Bitcoin bastardization (here)
Go Deeper on the Crypto Supercycle: Su Zhu from Three Arrows Capital walks through crypto markets. Will we see you at the citadel? (here)
Listen to Vitalik Buterin, creator of Ethereum...talk Ethereum (here)
That’ll be it for us today, folks. Looking for more content to plow through? Nvo’s got you covered; he and another close friend of ours are spinning up slick reads over at keepcool.co. They dropped their first report on Mycelium yesterday — give it a 👀.
Adios,
nvo + Mark