How Investors Will React to Bitcoin in 2024

Fed officials predict three rate cuts next year, investors are seeking safe havens in cryptocurrencies, Bitcoin is up 228%, DeFi is one of the most ridiculous cryptocurrency themes out there, and real world assets (RWA) are tokenized items like real estate, securities, stocks, etc. 2024 will be the year with the most national elections, and investors should buy Bitcoin and start their crypto journey to fight the devaluation of fiat currencies.

(Any opinions expressed below are the personal opinions of the author and should not be used as the basis for investment decisions, nor should they be considered as advice or opinions to participate in investment transactions).

It’s that time of year again when I travel from the mountainous, semi-tropical regions to the snow-capped peaks of northern Japan. In addition to enjoying world-class snow, another delightful aspect of skiing in Hokkaido is the amazing seafood. One of my favorite crustaceans is the Hokkaido king crab. Sure, you can buy frozen crab anywhere in the world for a reasonable price, but in the hands of the chefs here, the crab is so delicious that you’ll be spoiled for choice.

There’s an old, hard-nosed Australian in my ski town who’s been making the most delicious frozen crab legs for decades. He and I got off to a rocky start when my friends and I first tried dining at his restaurant. A bunch of aggressive Hong Kong finance bros didn’t get along with this master chef. Over the years, our relationship has improved to the point where, pre-COVID, I could walk into his restaurant on almost any given night and get a table for crab legs without a reservation. His poached and iced crab legs are the best representation of the animal. Sadly, post-COVID, he’s only doing takeout. But I can assure you, even eating them in his own cabin, the taste is still top-notch.

What do king crab legs and financial markets have in common? Every ingredient or investment theme has its own uniqueness. As we think about the ongoing fiat debasement, what is the best way to profit from the demise of the dirty fiat financial system? What is the best form of such a trade?

This is one of my favorite charts and it clearly shows that Bitcoin, and cryptocurrencies in general, are the best representation of the fiat-debase trade. I compared Bitcoin (white), Gold (yellow), the S&P 500 (green), and the Nasdaq 100 (red) to the Federal Reserve’s (Fed) balance sheet and indexed each currency to 100 as of January 1, 2020. Bitcoin is up 228%, leaving all other risk assets in the dust.

If the assets were indexed to 2010, when Bitcoin began trading on exchanges, the results would be more favorable to Bitcoin.

Fundamentally, why is this happening? Cryptocurrency represents a movement to decouple money and finance from the state. Using computers, the internet, and most importantly cryptographic proofs, we the people have created the hardest money ever created, Bitcoin; we have also created a whole new decentralized financial system (DeFi) powered by public blockchain networks like Ethereum… and others, but they are all bullshit, so I won’t mention them ;). This new crypto-financial system relies on math and grassroots support from dissatisfied humans, not violent coercion from the state and its banking minions. Capital, a simple conversion of energy, is looking for a safe haven from debasement, and is therefore creeping into the crypto space. But in fiat terms, the market cap of cryptocurrencies is minuscule compared to the total value of all fiat financial assets. This is why the small amount of capital that escaped the collapse of the fiat financial system was able to create such huge gains in such a short period of time.

All tokens and investment themes in crypto are not created equal. As the year comes to a close, I wanted to present some of the value traps in crypto that are peddled by both the well-intentioned and the ignorant. As always, my goal is to present different perspectives and leave readers with questions. By answering these questions, hopefully you can make better investment decisions.

Duck Jay

In my article “Bad Gurl”, I argued that Fed Chairman Jay Powell is at best a sidekick to US Treasury Secretary Janet Yellen. His deference to the broader objectives of Yellen and the big boss, US President Slow Joe, was on full display at the December FOMC press conference. I suspect Jay’s knee braces were worn out in the green room backstage before he spoke.

The Wall Street Journal, the mouthpiece of the financial community, clearly spelled out the significance of Powell’s pivot:

The Fed's official policy statement showed policymakers leaving the door open for another rate hike. "It's too early to declare victory, and there are certainly risks," Powell said.

But Powell’s comments made the carefully crafted policy communique look stale less than an hour after it was released, suggesting officials had turned their attention to rate cuts. “There was a broad expectation that, going forward, this would be an issue for us. That’s really what happened at today’s meeting,” he said.

Powell’s speech, along with new projections showing Fed officials expect to cut interest rates three times next year, marked a stark turnaround after he warned for more than a year that they would raise rates as needed to reduce inflation even if that triggered a recession.

Powell's comments on rate cuts were surprising because just two weeks ago, in a speech at Spelman College in Atlanta, Powell said it was too early to speculate when it would be appropriate to cut interest rates.

US 2-year Treasury bond yield

The first and biggest pivot came in the first quarter of 2023, when the Fed and the Treasury joined forces to implement a roughly $4 trillion bailout of the U.S. banking system and Treasury markets using the Term Funding Program for Banks. Powell’s recent comments are just a confirmation of the U.S.’s loose monetary policy.

What has changed in two weeks? ... Politics.

What's the worst thing that can happen to a politician? Not getting re-elected.

The second worst thing for an American politician who is a member of the Democratic Party? Trump getting re-elected along with a large group of Republican congressmen and senators.

Using these two guiding principles, the politics behind the Fed’s actions from 2021 to now become fairly clear.

As post-COVID inflation raged, the slow-moving Powell sat down and instructed him to control inflation. As can be seen in the above chart, the US Treasury 2-year rate surged from a base 0% to 5% by March 2023. This is the fastest rate hike by the Fed since Volcker's tenure in the 1980s.

Unfortunately, by locking civilians in their homes and forcing them to become guinea pigs for the flu… oh sorry, I mean COVID-19 mRNA vaccines, a huge amount of money was printed to appease them; an equally huge amount of inflation was unleashed, the largest in over 40 years. A few months of Fed tightening will not be enough to slay the beast before the crucial US midterm elections in November 2022. It is predicted that the Democrats will be beaten worse than Sam Bankman-Fried's son staring at a photo of Caroline Ellison. The Biden administration then decided to drain the US Strategic Petroleum Reserve and flood the market with oil, thereby lowering gasoline prices before Election Day. This is a very "strategic" deployment of scarce resources... to get members of the party re-elected. It worked; the red wave was blunted, and the best is yet to come.

It doesn’t really matter which clown is in charge of the US; the reasons for the empire’s decline are written in stone due to policies enacted decades ago. In 2023, the Biden administration, in partnership with “bad woman” Yellen, is trying to put lipstick on a pig by significantly increasing fiscal spending and shifting lending to the short end of the US Treasury yield curve. I discuss this in detail in “Bad Gurl”. The result is a booming US economy, with real GDP growth of 5.2% in the third quarter of 2023 and an estimated 2.6% in the fourth quarter, which are impressive numbers for the world’s largest economy. But even this will not be enough to appease voters’ dissatisfaction with the countless mistakes made by Slow Joe and his team of Democratic bureaucrats. Due to Biden’s poor performance, if the election were held today, the person Americans fear most, former US President Donald Trump (aka Orange Man) would defeat Biden. Oh, how terrible, democracy is about to die because most voters may decide to elect someone the establishment hates. How ironic ;).

The Orange Man must be stopped, and Slow Joe knows how to get the job done.

To further stimulate the economy and keep all financial asset holders happy, Powell must loosen financial conditions, even if that may lead to more inflation. Hopefully, said inflation will come after the November 2024 election. That’s why Powell was equivocal about the Fed’s desire to keep financial conditions so “tight.” Don’t forget that current financial conditions are not tight enough according to a variety of widely held economic theories, including the Taylor rule, flexible average inflation targeting, and core CPI above the Fed’s 2% target. Powell stood at the podium and made it clear that a rate cut in 2024 is being actively discussed. As the Wall Street Journal noted, less than two weeks ago, Powell was singing a completely different tune about the possibility of a rate cut.

This is how I imagine it.

Yellen called her duck into the office and told him what was what. Powell did so…rate cuts are on the table. Now, financial assets will rise until the U.S. falls into recession or inflation picks up sharply. Given the federal government’s determination to spend as much money as it can to keep GDP growth high, I don’t expect a recession in election year 2024. Whether food and fuel inflation, which would cause protests and instability, will emerge before November 2024 remains to be seen. But let’s not get too hung up on the future. Right now, the leaders of the Fed, the U.S. Treasury, and the U.S. Pax Americana are all yelling buy, buy, buy. Don’t be a fool, back off and participate in the best expression of this trade: cryptocurrency.

Other major countries or economic blocs, such as China, Japan, and the European Union, will play along and allow the dollar to weaken against the yuan, yen, and euro. As the dollar weakens, everyone wins except those who don't have enough financial assets to protect against the inflationary effects of a weaker currency.

With a firm grasp of the macro reasons to be bullish on cryptocurrencies, let me help you avoid some potential value traps.

Permissioned DeFi

This is one of the most ridiculous cryptocurrency topics out there. If we think about what these words mean, it should be clear to any thinking person that these projects are doomed to fail.

Permission - here the meaning is that some central entity decides who can and cannot trade.

Decentralization - What this means is that there is a network of participants that collaborate to operate the financial network in a trustless manner. This is a permissionless activity that is not directed by a central entity.

Given what these words mean, how do we create a decentralized financial network? Or a permissionless financial network with permissions? It doesn’t make any sense… unless you’re a TradFi mogul who wants to find another way to defraud retail investors.

These projects are built for institutional investors, and institutional investors have all kinds of rules that, in many cases, prohibit them from trading on real DeFi projects. This is bad because in the real DeFi free market, there are a lot of retail investors trading, and institutional investors can't participate. Markets filled with retail investors are the best type of markets because they provide opportunities for "smart" institutional money to profit from "stupid" retail investors because they have faster computers that can execute trades without human emotion. At least this is how the TradFi market works, because exchanges have special order types and latency rules that give large high-frequency trading companies a huge advantage. Michael Lewis has a great book on this called Flash Boys.

The reality is that there won’t be a critical mass of retail traders using these permissioned DeFi primitives because they don’t need to trade with institutional investors. Institutional traders need to trade with retail. DeFi is appealing to retail crypto traders worldwide because it has a different market structure than the TradFi equity and derivatives markets. After the hype fades, these permissioned DeFi markets will be nothing more than a swarm of HFT shops sitting on bids and offers, waiting for the other side to cross the spread and get wiped out. When directional retail investors can’t show up in large numbers to justify the capital invested in these protocols, institutional investors will pack up and leave. The result will be ghost towns with zero activity or interest from both retail and institutional traders.

VCs, who are basically well-paid puppets, are jumping into this theme. So they will continue to burn capital, just like they did when investing in the "blockchain, not bitcoin" theme in 2014-2017. Most of them have passed by or missed investing in projects such as Uniswap, dYdX, Compound, Aave, etc. Instead of analyzing what caused them to miss out on these groundbreaking primitives, they decided to jump into something that looks similar on the surface and sounds super sexy. What investor doesn't want to own a trading platform that brings together institutional investors with a huge capital base and DeFi?

As always, there will be people who will start to act up and sell snake oil to these desperate VCs who want to invest in crypto but are not bullish on the current crypto ecosystem due to the weirdos and unpopular people who inhabit our wonderful industry. I have nothing against the founders who peddle this nonsense; it’s good for them that they can get money from accredited investors with questionable IQs. But for you, dear reader, don’t be the exit liquidity for these bullshit projects when they launch governance tokens. Use the project if you want, but please do some critical thinking and avoid trapping yourself in a token that is bound to become worthless over time.

Real World Assets (RWA)

RWA is an evolution of the security token theme that emerged in the last bull market cycle. Simply put, the purpose of the RWA project is to create a special purpose vehicle (SPV) for items such as real estate, securities, stocks, etc., and then provide partial ownership to ordinary people who cannot afford to buy a whole house or enter the market for a specific asset through tokenization.

I fully believe that any crypto token that relies on state law to exist cannot succeed at scale. Decentralized public blockchains are expensive because they don't require the existence of a state. Why pay a premium for decentralization when centralized options exist and are already very cheap and liquid? The most direct example is real estate fragmentation.

The problem right now is that many millennials and the middle class can’t afford to buy their own homes due to asset inflation (which is a direct result and goal of central bank policy). What if they could own a small portion of a home or apartment and get on the property ladder? It’s a noble goal, but there are some problems with it.

First, young people who want to leave the nest or start their own families don’t want a house or apartment in the void. They want a building with four walls and a roof that they can actually live in. Buying a token that gives it the financial representation of unattributable property doesn’t solve this problem.

Second, every property is unique. This lack of standardization prevents the market from being truly liquid. For example, after you purchase a token that represents 1/10 of a house, how do you find a buyer at a reasonable price when you want to sell? The buyer needs to understand the location, local real estate regulations, taxes, and finally actually want that specific piece of real estate. This will never compare to the liquidity of owning a small portion of a standardized stock or bond. As always with these types of investments, big in, small out... if you can exit at all.

Finally, and most importantly, you can already own fractional shares of real estate by buying large, very liquid REITs. Many TradFi stock markets around the world offer these securities. They are managed by large, reputable companies that have been in the business longer than most people in the target market. I see no reason to get involved in all this blockchain nonsense and launch tokens.

Buy these illiquid RWA tokens at your own risk. But a worse use of funds would be to invest in the governance tokens of the RWA issuance platform itself.

debt

Another very popular form of RWA is to create a token that represents ownership of yielding debt. The most popular projects offer token holders the yield of US Treasury bills (T-bills). One argument is that the benefit of Tether is that it enables people who may not have access to affordable USD banking channels to send USD-pegged tokens 24/7 using public blockchains such as Ethereum and Tron. However, Tether pays no yield; Tether owners receive 100% of the yield on the T-bills they invest in to reserve USD. What if there was a USD stablecoin that also offered this T-bills yield?

This is a great development and I fully support the competition to get more NIM to holders of these USD-pegged stablecoins. Using and holding these coins is not a bad thing in itself, but investing in the governance token of the project is silly. Because it is just a bet on the direction of USD interest rates.

If USD interest rates are significantly above zero, then the project generates profits, which it passes on to governance token holders. If USD interest rates drop to near zero again, then the project loses money because it has to pay developers, legal, and compliance fees, but doesn’t have enough interest income to take a cut of it. So, as an investor, why would you pay multiples of a project’s NIM to hold a governance token?

Instead, you should short liquid exchange-traded funds (ETFs) that hold Treasuries. You can make the same bet on interest rates, profiting when they rise, without having to pay multiple times to a bunch of crypto playboys. If you want to really go from virtual to real, you need to use high leverage.

In short, leave the "real" world governed by national laws to TradFi intermediaries. They are able to offer more coherent and cheaper investment products that express the same themes. True DeFi projects should rely only on well-written code, not laws that must be adjudicated and interpreted by fallible humans.

Bitcoin ETF

As soon as the baldies on the East Coast of TradFi apply, a Bitcoin ETF will become more palatable to the US political establishment. In the American world, white boys never fade. I think the Wink-Iverson twins should shave their heads and join the New York Tennis Club.

Fundamentally, if the ETFs managed by TradFi Asset Management are too successful, they will completely destroy Bitcoin. This prediction is based on an important subtle but profound difference between Bitcoin and other monetary instruments that mankind has ever used.

Every other monetary asset that human civilization has ever used actually exists according to the laws of nature. Gold as a substance is gold not because we say it is gold, but because of the arrangement of atoms. The interactions between these atoms are governed by universal laws. Money is gibberish printed on a piece of paper, but it is still a substance. Whether you believe a piece of paper has monetary value or not, it is still a piece of paper. If you dug a hole, put gold and a wad of paper in the hole, and came back 100 years later, the gold and paper would still be there. Bitcoin is completely different.

Bitcoin is the first monetary asset in human history that can only exist if it moves. After the Bitcoin block reward reaches zero around 2140, miners will only be rewarded for verifying transactions through transaction fees. That is, miners can only earn Bitcoin income if the network is used. Essentially, if Bitcoin moves, it has value. However, if there are no more Bitcoin transactions between two entities, miners will not be able to afford the energy required to secure the network. Therefore, they will shut down their machines. Without miners, the network is dead, and Bitcoin is gone.

Blackrock, the world’s largest TradFi asset manager, is playing the asset accumulation game. They absorb assets, store them in a metaphorical vault, issue tradable securities, and collect management fees for their “hard” work. They do not use the assets held on behalf of their clients, which creates a problem for Bitcoin if we look at the possible future from an extreme perspective.

Imagine a future where the largest asset managers in the West and China hold all the Bitcoin in circulation. This happens organically when people confuse financial assets with stores of value. Due to their confusion and laziness, people buy Bitcoin ETF derivatives instead of buying Bitcoin and storing it in their own wallets. Now, a few companies hold all the Bitcoins, there is no real use for the Bitcoin blockchain, and Bitcoins will never move again. The end result is that miners shut down their machines because they can no longer afford the energy required to run the machines. Goodbye, Bitcoin!

This is beautiful when you think about it. If Bitcoin becomes another financial asset controlled by the state, it will die because no one uses it. The death of Bitcoin creates space for another cryptocurrency network to develop. This network may just be a reboot of Bitcoin, or it may be an improvement on the original Bitcoin. In any case, people will once again have a monetary asset and financial system that is not controlled by the state. Hopefully, the second time around, we can learn not to hand over our private keys to bald guys.

To that end, when considering how to survive the ongoing fiat debasement, you have to pick a side. Either trade financial assets to earn more fiat, or use a financial system that is not controlled by the state to preserve energy wealth. If it's the former, then go ahead and trade ETFs. That's why they exist. In the latter case, you have to buy Bitcoin and withdraw it from a centralized exchange to your own self-custodial wallet.

Election Year

2024 will be the year with the most national elections since the idea virus of the “nation-state” infected our collective consciousness hundreds of years ago. Any politician who wants to get re-elected needs to give the people a handout. For the wealthy asset holders, give them easy financial conditions by encouraging central banks to print money. For the poor, give them handouts to pay for rising food and energy costs, a direct result of policies that favor the asset wealthy. For the middle class, give them “democracy” and tell them to pay their taxes, bend over backwards, and be thankful they have a vote. In light of this, it makes no sense for politicians seeking re-election to stop the party of fiat debasement. The votes of those who benefit from fiat debasement and inflation-linked handouts will outweigh the votes of those who suffer. Hence, the money printing presses of every “democratic country” around the world will surge in 2024.

If you think today's historical moment is special, then take a look at the chart above, which shows the value of gold in various reserve fiat currencies around the world over time. Fiat currencies always tend to zero. No political system can resist the temptation to print money.

The best time to buy Bitcoin and start your crypto journey was yesterday, and the next best time is now. Clearly, the investment community recognizes the promise of cryptocurrencies against the debasement of fiat currencies. Otherwise, how could a talentless clown scammer like Nouriel Roubini publish an article in the Financial Times about his latest scam, "Flatcoins". Therefore, choosing the best cryptocurrency expression is even more important. The state and its cronies will bring sweet and delicious candy to your child brain. But do as your parents taught you, don't accept food from strangers.