How investors should respond to Bitcoin in 2024

Author: Arthur Hayes  Compiled by: Yvonne, Mars Finance

Federal Reserve officials are expected to cut interest rates three times next year, investors are seeking a safe home in the cryptocurrency space, Bitcoin is up 228%, DeFi is one of the most ridiculous cryptocurrency themes right now, and Real World Assets (RWA ) is to tokenize real estate, securities, stocks and other items. 2024 will be the year with the most elections in the country, and investors should buy Bitcoin and start their crypto journey to combat the devaluation of fiat currencies.

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

It’s the annual ski season again, and I traveled from the mountainous semi-tropical regions to the snow-capped peaks of northern Japan. In addition to enjoying world-class snow, another enjoyable aspect of skiing in Hokkaido is the amazing seafood. One of my favorite crustaceans is the Hokkaido king crab. Of course, you can buy frozen crabs anywhere in the world and they are not expensive, but in the hands of the chefs here, the deliciousness of the crabs will make you gorge yourself.

In the town where I ski, there is an old-fashioned Australian who has been making the most delicious frozen crab legs for decades. The first time my friends and I tried to dine at his restaurant, he and I got off to a rocky start. A group of aggressive Hong Kong financial bros don't get along well with the master chef. Our relationship has improved over the years to the point where, pre-COVID, I could walk into his restaurant almost any night and find a seat to eat crab legs without a reservation. His poached crab legs and chilled crab legs are the best expression of this animal. Unfortunately, post-COVID, he only does takeout. But I can assure you, even if you eat it in your own cabin, it will still taste top-notch.

What do king crab legs and financial markets have in common? Every ingredient or investment theme has something unique to offer. 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 representation of this trade?

This is one of my favorite charts and it clearly shows that Bitcoin, and cryptocurrencies in general, are the best representation of fiat devaluation trades. I compared Bitcoin (white), gold (yellow), S&P 500 (green), and Nasdaq 100 (red) to the U.S. Federal Reserve’s (Fed) balance sheet and from 2020 Each currency will be indexed to 100 starting from January 1st. Bitcoin is up 228%, leaving all other risk assets in the dust.

If the asset were indexed in 2010 when Bitcoin started trading on exchanges, the results would be more favorable to Bitcoin.

Fundamentally speaking, why does this happen? Cryptocurrencies represent a movement to separate money and finance from the state. Using computers, the Internet, and most importantly cryptographic proofs, We the People have created the hardest currency ever - Bitcoin; we have also created a new decentralized financial system (DeFi) powered by public areas such as Ethereum The blockchain network powers it... and there are others, but it's all bullshit and I won't mention it ;). This new crypto-financial system relies on math and grassroots support from dissatisfied humans, rather than violent coercion by the state and its banking minions. Capital, a simple conversion of energy, is looking for a safe home from devaluation and is creeping into the cryptocurrency space. But in fiat currency terms, the market capitalization of cryptocurrencies is minuscule compared to the total value of all fiat financial assets. This is why a small amount of capital escaping the collapse of the fiat financial system can create such huge gains in such a short period of time.

All tokens and investment themes in cryptocurrency are different. As the year comes to a close, I want to introduce some of the value traps in cryptocurrency that are peddled by both well-intentioned and ignorant people. As always, my goal is to present different perspectives and leave readers with questions. By answering these questions, hopefully you'll be able to make better investment decisions.

Duck Jay

In my article "Bad Gurl", I think Federal Reserve Chairman Jay Powell is at best a follower of U.S. Treasury Secretary Yellen. His deference to the broader goals of Yellen and the big boss, US President Slow Joe, was evident at the FOMC press conference in December. I suspect Jay's knee pads were scuffed up in the green room backstage before he spoke.

The "Wall Street Journal", the mouthpiece of the financial community, clearly stated the significance of Powell's pivot:

The Federal Reserve's official policy statement showed policymakers left the door open to another rate hike. "It is too early to declare victory, and of course there are risks," Powell said. But Powell's remarks made the release of this carefully crafted policy communique It looked stale less than an hour later, suggesting officials had turned their attention to cutting interest rates. "There is a general expectation that, going forward, this will be an issue for us. That's really what happened at today's meeting," he said.

Powell's speech, along with new forecasts showing that Fed officials expect to cut interest rates three times next year, marked a clear turn. For more than a year, he has warned that they will raise interest rates as needed to reduce inflation, even if it triggers 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 that now It’s too early to guess when a rate cut would be appropriate.

U.S. 2-Year Treasury Bond Yield

First The biggest pivot occurred in the first quarter of 2023, when the Federal Reserve and the Treasury Department jointly used the Bank Term Financing Program to implement a bailout of approximately US$4 trillion for the US banking system and the Treasury market. Powell's recent comments were merely 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? Cannot be re-elected.

What is the second worst thing that can happen to an American politician who is a member of the Democratic Party? Trump was re-elected alongside a slew of Republican congressmen and senators.

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

With post-COVID inflation raging, slow man Powell sat down with instructions to get inflation under control. As you can see from the chart above, by March 2023, the U.S. Treasury 2-year rate jumped from a base of 0% to 5%. It was the Fed's fastest rate hike since Volcker was in office in the 1980s.

Unfortunately, due to locking civilians in their homes and forcing them to become guinea pigs for the flu...oh, sorry, I mean COVID-19 mRNA vaccines, huge amounts of money are printed to appease them; An equally huge amount of inflation was unleashed, the largest in more than 40 years. A few months of Fed tightening will not be enough to kill the beast ahead of the crucial U.S. midterm elections in November 2022. Democrats are predicted to be beaten worse than Sam Bankman-Fried’s son, who is looking longingly at Caroline Ellison’s photo. The Biden administration then decided to deplete the U.S. Strategic Petroleum Reserve, flooding the market with oil and lowering gasoline prices ahead of Election Day. This is a very "strategic" deployment of scarce resources...to get members of the party re-elected. The trick worked; the red wave was blunted, and the best was yet to come.

It doesn't really matter which clown comes to power in the United States; the reasons for the empire's decline are already written in stone due to policies enacted decades ago. In 2023, the Biden administration has teamed up with “badass” Yellen in an effort to significantly increase fiscal spending and shift borrowing toward the short end of the U.S. Treasury yield curve in an attempt to put lipstick on the pig. I discuss this in detail in the article "Bad Gurl". The result is a booming U.S. economy, with real GDP growth of 5.2% in the third quarter of 2023 and an expected real GDP growth of 2.6% in the fourth quarter. These are impressive numbers for the world's largest economy. . But even that was not enough to assuage voters’ dissatisfaction with the countless mistakes made by Slow Joe and his team of Democratic bureaucrats. Because of Biden's poor performance, if the election were held today, the man Americans fear most - former US President Donald Trump (aka Orange Man) - would defeat Biden. Oh, the horror is that democracy is about to die because a majority of 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 satisfy all holders of financial assets, Powell must ease financial conditions, even if this may lead to more inflation. Hopefully, said inflation will arrive after the November 2024 election. That's why Powell was equivocal about the Fed's desire to maintain such "tight" financial conditions. Let’s not forget that current financial conditions are not tight enough according to various widely accepted economic theories, including the Taylor Rule, flexible average inflation targeting, and core CPI above the Fed’s 2% target. Powell made it clear from the podium 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 on 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 complied...a rate cut was on the table. Now, financial assets will rise until the U.S. enters a recession or inflation picks up sharply. Given the federal government's determination to spend as much money as possible to keep GDP growth high, I don't expect a recession in the 2024 election year. It remains to be seen whether food and fuel inflation, which would cause protests and destabilize the economy, will materialize before November 2024. But let’s not get too hung up on the future. Currently, the leaders of the Federal Reserve, the U.S. Treasury Department, and the American Pax Association are all shouting buy, buy, buy. Don’t be stupid, get back on your feet and get involved in the best form of trading – cryptocurrencies.

Other major countries or economic blocs, such as China, Japan and the European Union, will cooperate and allow the dollar to weaken against the yuan, yen and euro. As the dollar weakens, everyone wins except those who do not have sufficient financial assets to withstand the inflationary effects of a weaker currency.

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

Permissioned DeFi

This is the most ridiculous one yet One of the cryptocurrency topics. If we think carefully about the meaning of these words, it should be clear to any thinking person that these projects are destined to fail.

Licensing--the meaning here is that a central entity determines who can and cannot trade.

Decentralization-the meaning here is that there is a network of participants who cooperate to operate a financial network in a trustless manner. This is a permissionless activity that is not directed by a central entity.

Given the meaning of these words, how do we create a decentralized financial network? Or a permissionless financial network with permissions? This makes absolutely no sense...unless you are a TradFi kingpin trying to find another way to screw retail investors.

These projects are built for institutional investors, and institutional investors have various rules that, in many cases, prohibit them from investing in real DeFi projects. trade on. This is bad because in a true DeFi free market, there are a large number of retail investors trading, and institutional investors cannot participate. Markets flooded with retail investors are the best type of market because they provide opportunities for "smart" institutional money to extract profits from "dumb" retail investors because they have faster computers that can operate without human emotion. Execute the transaction. At least that's how the TradFi market works, as the exchange has special order types and delay rules that give large high-frequency trading firms a huge advantage. Michael Lewis has a great book on this subject called Flash Boys.

In fact, there will not be a sufficient number of retail traders using these permissioned DeFi primitives because they will not need to trade with institutional investors. Only institutional traders need to trade with retail investors. DeFi appeals to retail cryptocurrency traders around the world because its market structure is different from the TradFi stock and derivatives markets. After the hype wears off, these permissioned DeFi markets will be nothing more than a cycle of high-frequency trading shops sitting on bids and offers, waiting for each other to cross the spread, and then get wiped out. When targeted retail investors fail to show up in large numbers to justify the capital invested in these protocols, institutional investors will pack up and leave. The result will be a ghost town with zero activity or interest from retail and institutional traders.

Venture capital firms, who are basically high-paid puppets, are jumping on this theme. Therefore, 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 missed or missed investing in Uniswap, dYdX, Compound, Aave and other projects. Instead of analyzing what caused them to miss out on these seminal primitives, they decided to take the leap into something that superficially looked similar and sounded super sexy. What investor wouldn’t want to own a trading platform that brings together institutional investors with a large capital base and DeFi?

As usual, someone will spring into action and sell snake oil to these desperate VCs who want to invest in cryptocurrencies but are unable to because they live in Those weirdos and unpopulars in our wonderful industry who are not optimistic about the current cryptocurrency ecosystem. I don’t hate the founders peddling this nonsense; it’s good for them to get money from accredited investors of questionable IQ. But for you, dear reader, don’t be the exit liquidity for these bullshit projects when they launch governance tokens. You can use this project if you want, but please do some critical thinking and avoid getting yourself into a situation where the token will inevitably become worthless over time.

Real World Assets (RWA)

RWA is on The evolution of security token themes emerging from a bull market cycle. Simply put, the purpose of the RWA project is to create a special purpose vehicle (SPV) with real estate, securities, stocks and other items, and then provide partial ownership through tokenization to those who cannot afford to buy a whole house or enter Ordinary people in specific asset markets.

I fully believe that any crypto token that relies on national laws for its existence is unlikely to succeed at scale. Decentralized public blockchains are expensive because they do not require the presence of a state. Why pay a premium for decentralization when centralized options exist, are already very cheap, and are highly liquid? The most direct example is real estate fragmentation.

The current problem is that many Millennials and the middle class cannot afford to buy their own homes due to asset inflation (which is a direct result and target of central bank policies) . What if they could own a fraction of a house or apartment and get on the property ladder? This is a lofty goal, but there are some problems.

First of all, young people who want to leave the nest or start their own families don't want a house or apartment in the void. What they wanted was a building with four walls and a roof that could actually be lived in. Buying a token so that it has the financial performance of a non-attributable property does not solve the problem.

Secondly, every property is unique. This lack of standardization prevents the market from truly flowing. For example, after you buy tokens for 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 ultimately, truly want that particular piece of real estate. This will never compare to the liquidity of owning a small portion of standardized stocks or bonds. As always with this type of investment, the door is big and the door is small...if you can get out.

Finally, and most importantly, you can already own a portion of real estate shares by buying large, very liquid real estate investment trusts (REITs). Such securities are offered on many TradFi stock markets around the world. They are managed by large, reputable companies that have been in the business longer than most people in their target market. I see no reason to need to get involved in all this blockchain nonsense and launch tokens.

Purchase these low-liquidity RWA tokens at your own risk. But a worse use of funds would be to invest in the governance tokens of the RWA issuing platform itself.

Debt

Another very popular manifestation of RWA This takes the form of creating a token that represents ownership of the yielding debt. The most popular projects offer token holders a yield on U.S. Treasury bills (T-bills). There’s an argument to be made that the benefit of Tether is that it allows those who might not have access to affordable U.S. dollar banking access to send U.S. dollar-pegged tokens around the clock using public blockchains like Ethereum and Tron. However, Tether pays out no returns; Tether owners receive 100% of the returns on the Treasury bills they invest in reserve dollars. What if there was a USD stablecoin that also provided this kind of Treasury yield?

This is a great development and I fully support competition to allow holders of these USD-pegged stablecoins to earn more Net Interest Margin (NIM). Using and holding these coins is not a bad thing in itself, but investing in the project’s governance token is just silly. Because this is just a bet on the direction of U.S. interest rates.

If the U.S. dollar interest rate is significantly higher than zero, then the project will generate profits and pass the profits to governance token holders. If U.S. interest rates drop to near zero again, the project will lose money because it has to pay developer, legal, and compliance fees but won't have enough interest income to take a cut of the pie. So, as an investor, why would you pay a multiple of a project’s NIM to hold a governance token?

Instead, you should short liquid exchange-traded funds (ETFs) that hold Treasury bills. You can make the same bet on interest rates, profiting when they rise, without having to pay many times that amount to a bunch of crypto dudes. If you want to truly turn your back on reality, 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. Real DeFi projects should rely solely on well-written code, not laws that must be adjudicated and interpreted by fallible humans.

Bitcoin ETF

As soon as the bald guys on the East Coast of the United States apply for TradFi, the Bitcoin ETF will be a threat to the American political establishment. It seems easier to accept it. In the homogenous world of America, white boys will never fade. I think the Winklevoss 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 yet profound difference between Bitcoin and other monetary instruments humans have 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 the atoms. The interactions between these atoms are governed by universal laws. Money is gibberish printed on a piece of paper, but it's still a substance. Whether you believe a piece of paper has monetary value or not, it's still a piece of paper. If you dug a hole, put gold and a stack 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 through movement. After Bitcoin block rewards hit zero around 2140, miners will only be rewarded for validating 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 were no more Bitcoin transactions between the two entities, miners would not be able to afford the energy required to secure the network. So they shut down the machine. Without miners, the network dies and Bitcoin disappears.

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

Imagine a future in which the largest asset managers in the West and China hold all 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 keeping it in their own wallets. Now, a handful of companies hold all the Bitcoins, with no real use for the Bitcoin blockchain, and the 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 them. Goodbye, Bitcoin!

If you think about it, this is really beautiful. If Bitcoin becomes another state-controlled financial asset, it will die because no one uses it. The demise of Bitcoin has created space for the development of another cryptocurrency network. This network could just be a reboot of Bitcoin, or it could be an improvement over 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 give our private keys to bald people.

To this end, when considering how to survive the ongoing devaluation of fiat currencies, you must choose a side. Either trade financial assets to earn more fiat currency, 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 the Bitcoin from a central exchange to your own self-custody wallet.

Election Year

Since the "national 2024 will be the year with the most elections in the country since the “national” ideological virus infected our collective consciousness. Any politician who wants to be re-elected needs to deliver benefits to the people. Provide easy financial conditions to wealthy asset holders by encouraging central banks to print money. For the poor, giving them handouts to cover rising food and energy costs is a direct result of policies that favor the asset-rich. 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 block the fiat devaluation party. The votes of those who benefit from fiat currency devaluation and inflation-linked handouts will outweigh the votes of those who suffer. As a result, 2024 will see a proliferation of money-printing machines in every “democracy” around the world.

If you think today's moment in history is special, take a look at the chart above, which shows the value of gold over time for various reserve fiat currencies around the world. Fiat currencies always tend toward 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 potential of cryptocurrencies to combat the devaluation of fiat currencies. Otherwise, why would a talentless clown like Nouriel Roubini publish an article in the Financial Times introducing his latest scam, "Flatcoins". Therefore, it is extremely important to choose the best cryptocurrency expression. The state and its cronies will be sweet and delicious candy for your child brain. But like your parents taught you, don't accept food from strangers.