Apr 21, 2021
The Enigma of Dogecoin
This week in Crypto
Never a dull moment in the crypto markets. For those of us who have been around for at least one halving cycle or more, 15% liquidations and rampant ‘’end of the world’’ style news articles are just part and parcel of the emergence of this once in a lifetime disruptive industry that we choose to participate in as traders.
It takes real time and commitment to understand Bitcoin in such a way that one is able to quickly analyze the torrent of industry news, identify the many errors and falsities in reporting and understand where the truth lies between Twitter keyboard warriors, dubious NY Times reporting and the noise of the multitude of analysts and commentators in the industry. To hold conviction in the face of manipulation induced volatility takes a solid knowledge of the many facets of the industry, and the ability to find the truth. Such important topics (that we have covered in this Weekly) include mining hashrate and difficulty adjustments, attack vectors and protocol weaknesses, China’s dominant (or not) role in mining and trading BTC, the role of derivatives and funding in price discovery, on-chain analytic metrics, game theory, market structure and regulatory arbitrage, security and privacy tools and how they work, layer 2 technologies….to name but a few!
Understanding the above combined with a solid grounding in macro and sociopolitical economics provides long term holders with the ability to shrug off turbulent market events such as this previous weekend’s record breaking ~$10bn in long liquidations, a result of a precipitous drop from ~$62k to $51.5K over 2 trading days triggered by numerous factors, all reported on with varying degrees of accuracy.
Retail investors are clearly entering the market in increasing numbers, evidenced by elevated funding rates and leverage, low value Bitcoin wallet numbers increasing and the Coinbase and Robinhood apps taking first and second spot in US downloads tables. As prices rise, violent price drops caused by some relatively complex factors result in the uninformed selling into the media fear as their long-term investment thesis has not been hardened and developed via understanding their investment. This past weekend’s price action and inconsistent and varied reporting is a great example. A sudden drop off of hashrate in China, synchronized with whales selling on Chinese exchanges, combined with reports on Twitter that ‘’financial institutions’’ were under investigation by the Treasury for crypto money laundering, led to a massive cascade of liquidations. Scary headlines disproportionately affect retail investors which drives the selling pressure until long term holders provide the floor price. Too often the noise drowns out the signal and it’s the signal which needs to be understood by new entrants but can only be achieved with a commitment to learning how Bitcoin actually works.
Aside from the expected post-Coinbase-going-public pick up in volatility, altcoins have continued to outperform BTC with BTC dominance hitting a multi-year low of ~51% — see below chart. Although BTC dominance as a share of market cap is arguably a poor indicator of Bitcoin’s dominance (liquidity, network security, value transferred per week are all better metrics in our opinion), it is useful to observe this trend in the context of altcoin performance.
With the meme-coin Dogecoin rallying over 400% in a week we ask ourselves, even after everything the market has since learnt from the post ICO boom and bust, why do assets which are unashamedly and obviously a joke / scam / unsupported technically / centralized continue to exist and perform well? Despite the irrationality of this part of the market, we must recognize the importance of what is happening here with Alts, with Dogecoin as the standout example.
This Weekly is somewhat Bitcoin maximalist leaning and we are acutely aware that Bitcoiners (and especially maxi’s) have a slightly annoying habit of spinning all market narratives in a positive Bitcoin light. But despite this bias, we do actually interpret these mind-blowing altcoin pumps as extremely bullish long-term indicators for Bitcoin. The Bitcoin industry is attempting to reengineer the base layer of global money and should BTC fulfil its promise, it will take considerable time and effort with wins and losses along the way. Within the crypto free market, the competition for market share is and will continue to be intense and along the path of BTC becoming a potential global reserve currency, there will be rivals and distractions competing for the USD’s that are already in the system and the USD’s that are coming. The majority of altcoins are purely that, a distraction, and are a way to ultimately (unintentionally) teach the market about the unrivaled characteristics and strength of Bitcoin as sound money. Unless there is a successful attack or a harder money is somehow invented with equal or greater Lindy Effect, then most alts will trend to zero, as USD’s that are looking for a store of value and a preservation of purchasing power across time, will ultimately end up in the hardest money, Bitcoin. Obviously, the investors that are seeking growth like assets, NFTs, a slice of yield producing DeFi tokens, exchange tokens for trading discount etc will sustain these asset classes alongside Bitcoin as they don’t directly compete as a store of value. However, as Bitcoin evolves and greater utility is built on layer 2, many of these altcoins’ use cases may potentially be swallowed up by Bitcoin and L2 applications.
The current drop in BTC dominance and impressive rise in the altcoin markets has manic comparisons with other areas of global markets in general. The rise and rise of SPACs, Tesla’s (and other tech stocks) crazily high PE ratios, GME price volatility, the Silver ‘’short squeeze’’ and the rise and influence of the Robinhood day traders and Reddit crew. It would be remiss of us to not mention the train wreck Greensill collapse and subsequent exposed fraud (going all the way up to ex British PM David Cameron) and of course the Archegos ‘Family Office’ implosion and resultant contagion amongst the banks — both a result of good old-fashioned greed and the plentiful leverage that is available to the elite operating within the system.
Is the Dogecoin pump just another symptom of a broken fiat-based system that is spiraling out of control? An abundance of printed (and helicopter dropped) money is all sloshing around in a system that is controlled by a bloated, fiat peddling, irrespirable government backed into a low yield corner. In a world where money is cheap and leverage is plentiful, markets will be and are becoming wild and unpredictable in their search for yield and growth (Greensill and Archegos for example) and Dogecoin may be the crypto industry’s own prime symptomatic example. People are chasing quick, fast returns in the hope of getting rich without the hard work that is often required to generate real wealth. If governments can print cash without producing anything and for zero effort, and the elite can irresponsibly leverage their trading books knowing they have a put option embedded in the banks / Governments, then Dogecoin going up 400% in a week doesn’t seem so crazy. The example set buy the state is trickling down into markets and if the elite can take massive risk and act irresponsibly then why not retail investors with altcoins and 100x leverage? Sadly, the difference here though is that retail investors won’t get a bail out.
In the fight for market share that will continue to play out in the coming years, altcoins will continue to compete with Bitcoin. But as the technological Darwinian dynamics play out, the strongest will ultimately survive and consume the most resources (hash rate) and subsequently provide utility (security) to the most people globally with increasing Lindy and network effect. We need to admit that Altcoins are an important part of the ecosystem, even those alts that hold no obvious value or are still lingering in an insolvent flux post the ICO bust, all driven up in value by short termism and get rich quick profit seeking. 400% pumping zero value alts, a symptom of a wider broken system, will provide an onramp to the valuable life raft that is BTC for those seeking to chase the pumps but need somewhere safe to hide when the inevitable happens.
