The market is quite irrational and has been for the past year. Not only are stock prices crazy multiples of profits, or even earnings, we’re seeing behavior from the market that can only be described as completely unhinged. At least with non-profitable companies, there’s some prospect for future growth to make up for the large premium against profit or even revenue, but with some pumps going on today, there’s not even that.
We’ve seen a lot of stocks pump that have no fundamentals, including companies with little prospects for growth (AMC, GameStop), bankrupt companies (Hertz), and of course, altcoins, much of which hasn’t shown any development at all, let alone usage. This is not a new dynamic per se. Bankrupt stocks have been known to trade at levels that don’t make any sense given that they’re supposed to be worth zero. However, we’re seeing them more frequently and in greater numbers. In this article, I’m going to explain what I think is the cause and how we got here.
Nothing quite captures the current craziness like Dogecoin. It’s in the purest sense, a memecoin. There’s no purported usage and does nothing technically better than any other coin. It’s the epitome of what I call post-modern investing.
Post-modernism, of course, is the philosophy of complete relativism. There’s certainly some truth to relative value as the stock market is currently a Keynesian beauty contest. As any Austrian economist will tell you, value is subjective, and can be seen in the daily price fluctuations of nearly every commodity in the market. Post-modernists take it a step further and decide that value is not just subjective, but can be controlled by those who have sufficient willpower. Essentially, they believe they can change reality as if it’s a democracy, with a majority.
This is the philosophical underpinning of the pumps in stocks and altcoins of questionable value. Post-modern investing denies even the notion of underlying reality. There are only the market actions of buys and sells and enough believers can change price which in turn changes reality, or so the thinking goes. It doesn’t matter if a stock is in bankruptcy, if there are enough believers, they can be raised from the dead because the fundamental reality does not matter.
This attitude is largely fiat’s fault. Specifically, this is due to the cheapness of money. A money that’s valuable, one that helps people to reduce future uncertainty, would not be parted with so easily. Such money would be bound more by the constraints of reality, such as revenue and prospects of growth instead of being a speculative gambling vehicle.
Instead we have easy money where buying and selling other things is about the only utility. As the money doesn’t hold value, the money’s power is temporary, and it must, in some sense, be put at risk through some form of buying. As these are insider games based on what everyone else is buying, the game becomes more about how many other people are in the investment than about the fundamental potential returns on that investment. In other words, fiat investing is more a trading game and less an investment taking into account profit, revenue and future cash flows. A market that treats investment as a trading game is one that can be easily manipulated. A market that invests based on profit, revenue and future cash flows are not. In other words, fiat money makes market manipulation much easier.
As a result, we have pumps of purposefully useless things. In a way, this is refreshingly honest. Instead of the usual lies about what impossible things they are planning to do, there are no promises made at all. The in-crowd are imposing their will on the market. Dogecoin has no long-term value proposition and is not pretending to, yet it pumps simply because enough people want it to pump. It’s an asset detached from reality, or as the post-modern investor sees it, it’s creating its own reality.
This shouldn’t be a surprise as this is the direction that civilization has been moving for many years. Post-moderns deny any sort of reality, biological, economical and otherwise and it’s come even to investing.
For those of us that despise the post-modern philosophy, there is good news. These pumps are all short-term and cannot last. At some point, you run out of post-moderns and investing cartels, which are by nature not stable. In a sense, the post-modern investors run smack into the reality of game theory and the laws of economics.
The market can stay irrational for long periods of time, but that doesn’t mean fundamental reality doesn’t exist. It just means fiat money has made suspending reality easier and has thus created more post-modern investors.
The always thoughtful AJ Towns muses on Speedy Trial. He gives a nice overview of how Speedy Trial came about as well as the objections by those who favor the UASF approach. I thought the post was fair and gave a good explanation for why he thinks UASF is not a good idea. Speaking of which, Taproot looks very close to activating in the next difficulty adjustment period. With BinancePool, BTC.Top, HuobiPool and 1THash fully signaling, only BTC.com needs to upgrade their non-signalling servers to get the 90% needed.
Polychain Labs has a great post on how some implementations of BIP32 are not up to spec. Essentially, one out of 256 derivations will have a private key that starts with a 0 byte. Some implementations ignore the byte and others take it into account. The correct behavior is to not ignore the byte and the main implementation which has the incorrect behavior is btcd. There are many downstream projects which are affected and the post goes through the implications.
Calvin Kim explains why UtreeXO doesn’t need to validate blocks in order. The idea behind UtreeXO is that only a 32-byte merkle root is stored and every block gives proof for every UTXO being spent. As Calvin explains, this makes each block a function on the UTXO set and makes parallel block validation possible. Furthermore, because I/O tends to be the bottleneck, UtreeXO can be much faster as everything is loaded in memory. For mobile wallets, especially given the unlimited data plans everyone has these days, this should make full nodes possible without taking up much space.
River reveals their plans on how they plan to use Taproot on their platform. They are looking at p2tr address support both for deposit and withdrawal as a nice first step. The benefits to Lightning are also explained, especially with regard to privacy in channel closes. I hope more companies follow their lead compared to what blockchain.info did regarding Segwit.
Pay-per-file is a lightning paywall for websites. File downloads can be sold on a per-file basis via Lightning. Especially for micro-payments, this seems like a clear use-case. I would like to see something like this integrated into BTCPayServer.
Lightning Labs has another long post on the ecosystem happenings. In particular, they are noticing more nodes on the network, more routing node operators and more lightning apps. They have a lot of statistics and charts in the post. Strike is doing particularly well and the ability to pay lightning wallets with fiat money is a big need that’s being filled with their app. The way Lightning is growing is what organic growth looks like. That’s in stark contrast to the artificial pumping we’ve seen in various altcoins.
Economics, Engineering, Etc.
Tomer Strolight argues that what’s toxic to altcoiners is integrity. Toxicity is only targeted towards those that violate the principles of Bitcoin. Unlike altcoins that will take any and all comers regardless of whatever compromises they have to make, Bitcoin has standards and that’s unfortunately toxic to those that want Bitcoin to compromise. Toxicity itself is a strange narrative that’s being pushed, as that only works where there’s an authority. Bitcoin doesn’t have an authority, so it’s the least effective narrative to change Bitcoin.
Peter St. Onge makes the case that deflation is good. He studies the period of greatest deflation, which was during the Gilded Age, or the time the world was on a gold standard. The explanations in this article are clear and easy to understand. Deflation meant that goods cost less and less, which created some amazing tech. As Peter Thiel and Saifedean Ammous have argued, more innovation came from that era than during the fiat era, particularly the zero-to-one types.
Gigi explains how Bitcoin changes you. The main thing Bitcoin does is make the people that own it low time preference, making them more responsible. Holders, in other words, become civilization builders, not destroyers. Anecdotally, I personally know a lot of Bitcoiners that have gone down this very path and those who have been in this space a long time definitely know its benefits.
Mike Hobart looks into lithium and how terrible that is for the environment. Mike shows in the article a lot about battery construction and the raw materials that are necessary to make that work. So much of the raw materials that go into batteries is environmentally damaging to many third world countries. I doubt journalists are interested in something so obviously damaging to the environment as it doesn’t fit their narrative.
A Muslim writer gives an interesting way to look at holding Bitcoin, specifically how it’s similar to fasting. As the writer points out, both are very much about low time preference behavior. There is more I didn’t really understand as I’m not Muslim, but may be useful to those who are.
Ethereum promises again that they’ll move to Proof-of-Stake. Of course, this is something they’ve been promising since their inception 7 years ago. They have delayed its implementation at every turn, so why believe them now? Cynically, this seems like a ploy to take advantage of the energy FUD around Bitcoin. Sadly, the new people coming into this space are likely to fall for their marketing and not realize just how little credibility the ETH development team has historically.
BlockFi mistakenly gave a lot of money to some of their users.
Hong Kong may be banning Bitcoin trading.
Another week, another DeFi smart contract gets hacked.
The Programming Blockchain seminar is fast approaching for June 1-2 in Miami. That one is almost here, so if you want to attend, please apply ASAP. There will be another seminar on August 10-11 in Mexico. This is a 2-day seminar for programmers to learn about Bitcoin. You can apply here. I also have a few scholarships available for those that can’t afford it.
On this week’s Bitcoin Fixes This, I talked to Alex Gladstein about the Petrodollar. Alex went through the history, why it’s so powerful and how it affects US foreign policy.
As usual, I read through last week’s newsletter on Twitter Spaces which you can find here. I was on Tone’s show twice, first to talk about the Elon Musk vs. Michael Saylor fight and the second to talk about Bitcoin energy FUD and Taproot Speedy Trial.
Unchained Capital is a sponsor of this newsletter. I recently joined as an advisor. I know the team and am excited about what they’re building. If you need multisig, collaborative custody or bitcoin native financial services, learn more here.
Fiat delenda est.