January 09, 2025 | Read Online

"Finance is not merely about making money. It's about achieving our deep goals and protecting the fruits of our labor. It's about stewardship and, therefore, about achieving the good society."

— Robert Shiller

Thursday hard-working mailbag

It's always difficult to disentangle causation and causality in markets, but crypto appears to be down this week mostly because US bond yields are up.

Why anyone who's interested in owning fartcoin when 30-year Treasury yields are 4.5% would suddenly be uninterested when yields are 4.9% is a mystery to me, but that is how markets always seem to work.

This makes sense with stocks, which tend to go down when yields go up because higher interest rates generally mean both lower earnings and lower DCF valuations.

It makes less sense with tokens since so few of them have any future earnings to worry about.

But the crypto market often plays along as if interest rates matter — crypto "investing" is a game and part of the game is pretending that the macro environment is relevant to the valuation of tokens.

Crypto people like to say that stock market investing is a game too ("valuation is a meme"), but the difference is that if the stock market goes down too much, investors will rotate out of bonds and into stocks because stocks represent a claim on future earnings.

No one's going to sell bonds to buy crypto, however — people mostly buy crypto because crypto is going up and sell crypto because crypto is going down.

This pro-cyclical behavior has some logic to it because 1) few tokens offer a claim on future earnings and 2) when they do, the earnings are almost always a function of trading activity, so even revenue-generating tokens are worth more when crypto is going up and less when it's going down.

This is the opposite of equities — but if crypto goes down whenever stocks go down, then higher interest rates really will mean that revenue-generating tokens are worth less, so I guess it all checks out.

(Sort of.)

Q: So crypto investing is just a game then?

Most of it is, but I wouldn't say "just a game" because games are big business: The game of US football generated over $20 billion of revenue last year, real football (aka "soccer") earned over $50 billion, and the gambling industry raked in over $300 billion.

But I think crypto might ultimately prove to be bigger and more important than any of these examples because it has a larger addressable market: our collective attention spans.

Crypto gamifies attention and that matters because where we direct our trading and investing attention determines what kinds of companies get built and what types of behaviors get rewarded.

And this will only get more important because once AI ushers in the age of abundance, the only scarce thing left will be human attention.

Crypto might turn out to be the best way to both trade it and monetize it.

Q: Are AI agent tokens securities?

The ones that make money are, yes, but only until Jan. 20.

I say that because the tokenomics of AI agent frameworks and launchpads, like ai16z and the Virtuals protocol, seem unusually explicit in their intention to treat token holders like owners.

DeFi projects used to go out of their way to maintain plausible deniability by only hinting at value accrual for their token holders.

By contrast, ai16z founder Shaw Walters bluntly declares that "the profits we make from various things will be going into the Treasury to reward token-holders and we're also doing a lot of things outside of that for buy pressure."

That is not something you ever heard from a crypto founder in, say, 2021.

Walters is clearly not worried about triggering the "efforts of others" clause of the Howey test by retaining centralized control either: "People have to trust us to build this the right way."

This all becomes academic on Inauguration Day (Jan. 20), after which nothing's a security (for a while, at least).

But I think the explicit value accrual of new tokens like ai16z demonstrates that the crypto industry is already making the most of its four-year free pass.

Even just asking whether something is a security feels like an anachronism already.

Q: What portion of ETH's valuation is attributable to monetary premium?

"Monetary premium" is very much in the eye of the beholder, so it depends how you look at it.

ETH bulls think that its monetary premium is simply whatever part of its market valuation that cannot be explained by earnings.

ETH's earnings are very low (relative to its market cap), so its monetary premium must therefore be very high.

But a paper out this week puts a finer point on it by revisiting John Pfeffer's 2017 paper in which he used the "quantity theory of money" to arrive at an estimate of ETH's monetary value.

The authors conclude that, in dollar terms, "the required monetary stock of ETH to support the onchain EVM economy" is something between $200 and $400 million — "this is 1/1000th of its current market value."

Ouch.

In price terms, that's $1.83 to $3.32 per token vs. the current ETH price of $3,215.

If you accept the paper's logic, the difference between these numbers — about $3,213 — can only be attributed to one of two things: a multiple of earnings or a "speculative premium."

The latter has always seemed more plausible to me.

Q: Is bitcoin strategic?

I guess it has to be if we think the US government should put it into a "strategic reserve."

But we should be careful what we wish for.

In an X post this week, the business professor and crypto founder Austin Campbell sketched out what the consequences might be if the US government decides that bitcoin really is a strategic asset.

"Buying BTC itself is actually kind of pointless for any strategic reason," he writes.

Instead, strategic thinking would dictate that the US government should endeavor to control bitcoin mining.

Among other things, this might involve "massive tariffs or penalties on non-US BTC," "state authority for commandeering [eg, nationalizing] miners," and "congressional authorization for disruption of and tactical strikes against mining operations in enemy states."

If you don't think the US government should be doing any of those things (which I can't imagine anyone does), you probably shouldn't be in favor of declaring bitcoin a "strategic asset" either.

Q: I thought the idea was just to pay off the federal deficit?

If it's just about price, then bitcoin would be a non-strategic asset and as such have no place in a strategic reserve — it would belong in a sovereign wealth fund instead.

But a "sovereign bitcoin fund" would have the unfortunate initials of "SBF," so we probably don't want to go with that either.

Q: What's your least favorite memecoin?

SPX6900, because its manifesto really leans into financial nihilism: "It's the S&P 500 with 6400 more. It's 'the stock market for the people.'"

No, it's not — the stock market is full of companies that make things! For people!

"You've entered an investment landscape where the stock market has already celebrated its most significant gains, leaving you to wonder what's left for you."

Ugh.

I think memecoins are a lot of fun, and I too would like to someday luck into a 10,000x instead of having to work for a living, same as I'd like to buy a winning Powerball ticket.

(Not that writing about crypto really qualifies as working.)

But just because stocks are expensive doesn't mean we should all be "investing" in Powerball tickets instead.

Memecoins lose me when they embrace financial nihilism — stocks aren't just things to make people rich, they're how we fund productive companies that make things we want.

— Byron Gilliam

Bitcoin and Ethereum's Market Dominance

The Blockworks Research analysts discuss recent market activity, Virtuals' revenue and the stickiness of pump.fun. Get their 2025 outlooks on BTC and ETH.

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