🟪 Thursday productive mailbag

December 19, 2024 | Read Online

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"Proper allocation of capital is an investor's number one job."

— Charlie Munger

Thursday productive mailbag

Q: Should I buy the dip?

Maybe — I'm not sure why a slightly more hawkish-than-expected Fed should be super price relevant for crypto.

But only you can know if this dip is right for you, because in my experience, buying things just because other people like them rarely works out.

In a previous life, I briefly worked for a head of trading who told us to look for the "moment of maximum opportunity" before buying a stock — and even when we made money, he'd call us over to his desk, point to the low point of the chart, and say, "You should have bought there."

That was less-than-useless advice and I recommend you do the opposite.

Instead of seeing that low point on the chart as a moment of maximum opportunity, you should view it as a moment of maximum pain: Imagine you were already long and ask yourself if you'd have had the conviction to hold on.

If "yes" (be honest), this might be an opportunity to buy.

But you'll have to answer that yourself because conviction cannot be borrowed.

Q: Is there a "Trump put" on bitcoin now?

Bitcoin surged to new highs earlier this week amid more chatter about a US strategic reserve, but this seems like a classic case of price coming before narrative — people need a story to explain why one bitcoin might be worth $108,000.

Polymarket odds of a bitcoin strategic reserve haven't changed much since the election — and we should note as well that the US doesn't have to buy bitcoin for the bet to pay out, it only has to decide to keep the bitcoin it seized in various law enforcement actions.

If anything, the idea that the US government should buy bitcoin seems to be losing steam, with arguments against proliferating (even among devoted Bitcoiners).

On the other hand, now that President-elect Donald Trump has taken credit for the surging price of bitcoin, he might be inclined to drop hints about buying it whenever the price starts to falter.

This could have real consequences: The theory of hyperstition suggests the more often he says it, the more likely it is to happen.

So, yes, there might now be a "Trump put" in crypto that looks a lot like the Fed put we sometimes have in equities — if you miss a chance to sell on the way down, you'll probably get another one when Trump starts talking up the strategic reserve again.

Q: Should the US return seized bitcoin to victims?

US law enforcement usually returns stolen property to its rightful owners, but in the case of bitcoin, they sell it and keep the proceeds for themselves.

If this seems unfair, recall that the whole point of crypto is 1) if you hold it, you own it and 2) the transactions that led to you holding it are irreversible.

So once the government takes hold of bitcoin, no real Bitcoiner should expect them to give it back.

Not your keys, not your coins!

Q Should bitcoin profits be tax-free?

The case for making capital gains on bitcoin tax-free rests on the idea that using it to buy, say, a cup of coffee shouldn't be a taxable event.

But most people don't use it that way.

"People use bitcoin as a speculative asset," Jerome Powell said recently. "People are not using it as a form of payment."

Larry Fink agrees: "I don't believe [bitcoin is] ever going to be a currency. I believe it's an asset class."

Even bitcoin's chief evangelist agrees: "Bitcoin is not competing with the dollar," according to Michael Saylor. "It's not a currency."

And even if it were a currency, it would be a foreign one, so all transactions in it would be taxable events.

If an American buys a London home for 500,000 pounds, for example, and later sells it for the same 500,000 pounds, you might think there's nothing to report to the IRS — but if you bought the home when the pound was 1:1 with the dollar and sold after the pound had risen to $1.20, the IRS would consider that a taxable 20% profit (even if no dollars were ever involved).

If you want bitcoin gains to be tax free, you'd have to rewrite that part of the tax code too.

Q: Should capital gains on US-based cryptocurrencies be tax-free?

Considering that crypto companies were actively fleeing the US as recently as Nov. 5, it's wild this idea is even being discussed — what an incredible turn of events.

But no, it's of course a terrible idea.

The purpose of any financial market is to facilitate the allocation of capital to its most productive uses.

Making some cryptos tax-free would distort that process by incentivizing the misallocation of capital into "dinocoins" and other unproductive things just because they're domiciled in the US.

Crypto already struggles with the misallocation of its limited capital (as evidenced by Fartcoin hitting a billion-dollar market cap today), and this would make things comically worse.

Q: Should I buy into the AI-agent bubble?

Travis Kling makes a convincing case that you should, noting that "now is the time that the market wants to blow a bubble" and AI agents are the obvious candidate: "Most other things going on in crypto are utterly uninteresting."

But we should be fully aware of what we're allocating our money to: GOAT, Fartcoin and Zerebro, for example, aren't AI agents, they're just memecoins informally associated with things somehow related to agentic AI.

Those three coins have a collective market cap of $2 billion, which is not much relative to, say, dogecoin.

But $2 billion is still a lot of investor money that's being allocated to explicitly unproductive things.

And even the AI-agent coins that do something — what they do is create or trade memecoins, which doesn't seem much more productive.

This could, however, become a case of dumb stuff accelerating serious stuff — like the Story protocol, which seeks to develop "a framework for [AI agents] engaging in binding contracts" and the partnership between ai16z and Stanford, which will develop "trust mechanisms" for AI agents.

AI-agent memecoins are just as ridiculous as all the others, but they're already incentivizing a lot of potentially useful experimentation.

For better and worse, incentivizing behavior is what crypto is good at.

Q: Is crypto incentivizing quantum computing?

I am fully convinced by Robert Leshner's theory that Satoshi was an AI from the future who traveled back to 2009 to incentivize the development of quantum computing by inventing Bitcoin — the honeypot of Satoshi's poorly protected one million coins is the incentive.

What other explanation can there be for Satoshi leaving their own coins most at risk?

Q: Is ETH money?

I think it is to a degree, but less so than it was before yesterday's news that you can now pay gas fees in USDC instead of ETH when transacting on Base, the largest layer-two blockchain by TVL.

I believe ETH remains the unit of account in that scenario, but if people start holding USDC to pay future gas fees, it will be increasingly difficult to attribute ETH's $400 billion market cap to its "monetary premium."

Q: Does it matter if ETH is money?

The money debate can get semantic but I think it's important.

Ryan Adams believes that "ETH is money or the whole thing is pointless."

But Hayden Adams worries that "the more Ethereum narrative/mission is about ETH value…the less aligned outsourcing the funding and development is."

Narrative drives capital allocation and capital allocation will determine what kind of cryptos get built.

— Byron Gilliam

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