The Big Gamble
It’s good to be skeptical when you hear someone talking about inevitable things. If we accept anything as inevitable we may struggle to actually make an effort and the inevitable becomes futile. So the following thesis does not rely on the inevitability of a crypto pump but rather presents the narrowness of the path set in front of us by circumstance.
Imagine crypto playing a chess match against the existing monetary and financial order. It is a weird chess match because crypto started out without a queen as a handicap but played several precise moves early on and suddenly it gained a playable position. The legacy monetary regime was sleeping on its laurels in the early game for too long and failed to finish crypto off while it could have.
Over the years the legacy regime has been enjoying several petty captures on the side of the board completely missing a viable master plan.
It’s not that crypto plays so brilliantly, it is that the legacy system is ignorant. Crypto, willingly offering small sacrifices on the way, is not forced to do much and is eventually capturing the central squares on the board. It may seem like a losing game but it’s legacy of slowly handing a win to crypto.
Molded by the low rates and questionable monetary policy, crypto has an opportunity to mature under higher rates. It may seem counterintuitive but as QE made rich people richer, the tightening seems to make the poor even poorer. People will not starve but they will lose a significant part of their disposable income and with the hopes of living up to the QE Tik-Tok dream they turn to crypto. It is crypto’s casino-like characteristics that drive the desire
Crypto wears many masks and in times of manias it can disguise itself but in its current state, it’s ultimately running a 24/7 permissionless casino under the hood. One could say that you can bet on the future, while the other says you can bet on the future of stupidity. The point is: you can place your bet. Hopium moves the masses.
On one hand, the FED (temporarily) kills the broader risk appetite for the asset class, and on the other SEC tries to put crypto on a leash. This creates a funnel of players seeking the thrill of post-QE pump and where to find it in a place that is the great casino and wears many faces. - It can be anything.
Few actually understand what crypto is and what it can do. What is rather obvious though is that, relatively speaking, it does not require much to pump. So what do you as a portfolio manager do when stocks and other risk assets are dead? Do you just take a three-year sabbatical? - You might as well do that.
In the public subconsciousness crypto remains a place one can get rich with little effort; bet on the right coin and the rest is history. The same characteristic that makes it so unpalatable is also its killer feature - it's unending allure.
Whether as an uninformed pleb or an experienced portfolio manager; what if you go to a casino for a while? You don’t bet big, you slowly position yourself. Then your friends will come over to kill some time and suddenly it’s a party and everyone is having fun. Amidst this all they forget they originally came here just to explore.
And what about the pleb not being able to make financial decisions for themselves? US crypto regulation will not kill crypto, eventually, it may just allow the middleman to profit or people will simply risk entering the casino through the back door which is almost impossible to watch. - Another petty capture.
The difference between the two chess players, crypto and legacy, is that crypto has a plan. It may be a vague and terrible plan, but it wants to eat the world. It’s set up in a way that conquers, perhaps indirectly, but consistently. It is a powerful revisionary force not driven by legislation but by technology that captures people’s minds and plays into their desires.
Legacy legislators do not have a plan - they are just reactionary NPCs, constantly putting out fires. Their dogma of doing less with more is not sustainable. And that’s what legacy has become - a concave bureaucratic machine that takes huge risks but looks at slim outcomes.
In a sense, this creates a funnel for crypto. The future is becoming narrower and people, portfolio managers, and the unaccredited pleb will rush through the tiny door that is crypto markets. It becomes the entry and the exit at the same time. It all begins innocently enough.
Social media opened us to the horizontal perspective of the world where everyone can be a millionaire while monetary policy began shrinking the confines of reality. This is how a casino thesis reconciles with the master strategy at the chess board. The intolerable disparity leaves one with few choices.
Thanks to Luffistotle for a conversation that inspired this piece and his edits, MrKvak for refining the chess analogy, Longsolitude for useful comments, and the legend Degen for approving the pep talk.
The Big Gamble
Great article Matti. Do u think crypto has bad a incentive structure, when most ppl come for the get rich quick sceme or is just an inherent cultural phenomenon in liberal capitalistic societies ?