Looking for FUD in All the Wrong Places

Stablecoins and VC lovers were never true . . .

Listen to this post:

In last month’s issue, I offered my commentary on the US’s reaction to cryptocurrency.

In this month’s issue, I look at the way we think about crypto, macro, and today’s market as Wall Street starts to encroach on the space.

If you want to hear an auto-narration instead of my voice, head over to the Medium version of this post.

I asked ChatGPT to critique last month’s issue. I got some good feedback. One comment stuck out:

“While the essay acknowledges the accomplishments of the legacy financial system, it oversimplifies its complexities and challenges. The financial system is highly intricate and interconnected, and addressing its issues requires careful analysis and consideration of various factors.”

ChatGPT doesn’t realize that I always oversimplify complexities and challenges.

It’s a key part of my content strategy. Some people like it! I can get to the crux of the matter quickly and keep my posts short, or at least shorter than they’d be if I elaborated on everything.

To be clear, I’m in awe of the legacy financial system! It’s a marvel that it works as well as it does. I give mad props to Jay Powell and his crew. I’ve always pointed out things that the legacy financial system can’t do but I’ve never questioned its utility or efficacy.

My issue?

The idea that it has to work this way. That there is no other way. A blind faith in principles and concepts that sound reasonable, but do not have empirical or scientific proof. For example:

  • It’s ok for asset prices to outpace inflation as long as wages don’t.

  • 2% inflation is the right goal.

  • Only a centrally-controlled monetary system can support a healthy economy.

  • Inflation and unemployment must always have a stable and inverse relationship.

  • A small cohort of financial elites can create prosperity better than the markets can.

  • Government money is the only form of money that works.

I also object to the notion that only people with advanced degrees or deep financial networks can offer any solutions that have merit.

Why does the legacy financial system have to be so complicated, burdensome, costly, and weak?

Why does it need so much oversight to handle the simplest of financial transactions? Why does it take so much manipulation to get it to serve the public’s welfare? Why does it collapse without the interventions of central banks?

Replacement or alternative?

New financial tools

Our modern financial system is a delicate, expensive tapestry of laws and regulations that mask its inherent fragility. We accept this because it usually works, the costs are hidden from the end users, and nobody’s thought of a better way.

Why is it so outlandish to believe that computer protocols can do the work instead?

With cryptocurrency, we can test a solution in a real-world environment, on a global scale, from anywhere, at any time, with a laptop and an Internet connection.

Financial ingenuity no longer has to come from Wall Street, Wharton, or the World Bank. Anybody can contribute new ideas and invalidate old assumptions. Anybody can iterate and experiment.

If one protocol doesn’t work, you can try something else. Maybe another protocol. If that protocol doesn’t work, you can try a third one or tweak one of the prior iterations.

Your test subjects come from a small cohort of speculators. Your risks extend only to that small amount of people who put money into your protocol.

People like you and me can speculate on the outcomes of these financial experiments. We provide liquidity, motivation, support, and funding for these projects. If they fail, we lose money. If they succeed, we make money.

Isn’t that the whole point of finance in the first place? To make money?

That’s the reason banks exist. Why can’t it also be the reason cryptocurrency exists?

Take your chances

For the legacy financial system, you don't get many chances to fix a problem. Those chances may only come along a few times each decade, and always in response to some crisis.

Otherwise, you have to depend on theoretical models, speculative theories, and the hope that what worked in the past will work in the future. You have to content yourself with long and variable lags.

While that’s not a bad approach, it’s hard to see how it can outcompete the collective enthusiasm and intelligence of all humanity.

Still, let’s see where it goes. Where the legacy financial system can make money, let it make money. Where cryptocurrency can make money, let it make money.

Then, people can choose whatever system they want, mix and match as necessary, and go about their lives.

While cryptocurrency may not seem as stable as legacy finance, the hope is with enough effort and experimentation, developers and engineers will build protocols that are robust, secure, and effective. So much so, that modern finance will no longer need layers of bureaucracy, oversight, compliance, and regulation.

People will just use a protocol and not think too much about it.

Today, nobody seems to care about that.

Wall Street is asking for approval to launch ETFs and pump everybody’s bags. It must be that time of the cycle when the “institutions” narrative comes alive. “Mainstream” investors will soon flood cryptocurrency markets with a tidal wave of money, bringing unimaginable wealth to all and saving cryptocurrency from its impending death.

That may sound good now, but be careful what you wish for. Read Bitcoin or Bust: Wall Street’s Entry Into Cryptocurrency to learn more about what’s coming.

“Macro” is getting in the way

Mark, ETFs don’t matter. The global recession will crush crypto!

Yea, I know. The moment somebody says anything optimistic about the cryptocurrency market, somebody else says, “you're forgetting about the macro!” or, “nobody can put any money into cryptocurrency until governments stop tightening their monetary policies,” or, “we need to wait for more liquidity.”

Priya in the Park’s still shouting “it's going to crash!”

(She’s always right.)

I get it. The “macro” sucks. On some metrics, we’re at levels we only see after a financial crisis—and we haven’t even had the financial crisis yet! Leading indicators reached recession levels a year ago. We’re due.

Long-time subscribers know I've been talking about a looming recession since the end of 2021. If you haven't planned for that yet, plan now. Expect more shoes to fall.

The median US home price already dropped 10% from its 2022 peak (30% in some areas).

We already got tech layoffs. Next, I’m guessing we’ll see cutbacks in finance. Once corporate debt and commercial real estate loans come due, things could get ugly.

On top of that, the world’s investment institutions own over $1 trillion in collateralized loan obligations (CLOs), a type of financial product that combines high- and low-risk corporate debts into a type of tradable asset that’s very similar to the mortgage products that caused the 2008 Great Recession. Nobody knows whether those debts or businesses are rated properly!

No wonder the doomers are doomer-ing.

What about the flip side?

A 10% drop is huge for real estate—the biggest quarter-over-quarter drop in recorded history. In percentage terms, that’s a bigger, faster drop than all of 2007 and 2008. In both of those years, it took a full four quarters for prices to fall 10%. We did it in one! How much more downside is left?

Wages keep rising and housing starts spiked last month. The US government has lots of programs to help home buyers and mortgage lenders. You can bet they’ll pump more money into those programs the moment things start to deteriorate.

Did you know that $1 trillion worth of infrastructure projects are just getting started, the result of last year's infrastructure bill? The government needs to hire somebody to do that work. Stimulus!

Banks and property owners have had years to hedge against problems in commercial real estate. Maybe they did?

CLOs might behave like they’re supposed to (insulate HODLers against financial woes). Inflation may hold steady at 4% as it did for most of the 1980s, one of the best economies in US history.

The inevitable is still inevitable

Does that mean the US will not have a recession?

No! A recession is guaranteed. People are always their most hopeful just before disaster strikes.

The US economy always goes into recession within five years of hitting full employment. It's a more accurate signal than an inverted yield curve. See for yourself in this chart:

Green circles mark full employment. Grey lines mark recessions.

We hit full employment most recently at the end of 2021. You can expect a US recession by the end of 2026, if not sooner. Some predict by the end of this year.

The problem is, nobody knows what will happen between now and then.

Will the markets go up before coming back down? When will the recession start? How long it will last? How bad it will get?

In a strictly literal sense, the US had a recession in 2022, if you believe a recession is when an economy shrinks for two quarters. Does that count?

What if we get a recession like 1982? Financial markets went down a little bit, and then “only up” forever. Or, like 1990, when the stock market hit a rough patch for a few months, and then went on to notch its best decade of performance in history?

Is your timing so good that you can catch those moves?

If you get that catastrophe you’re planning for, what will you do if your government waves its magic wand and makes the problems go away, as it did with US banks and Credit Suisse? March 2020 was supposed to start a Great Depression. BRRR intervened.

How can you plan for the “macro” when your government can change the rules overnight?

Anyway, what do you define as “macro?”

BRICS now have a higher combined GDP than the G7. While so-called “advanced” economies are struggling, most low- and middle-income economies are growing. For most of the world, China, not the US, is its largest trading partner.

Meanwhile, cryptocurrency is a global asset. Its correlation to dollar-denominated assets has weakened for months.

At the same time, crypto interest, investment, talent, ownership, and growth have moved from the US to other markets.

Maybe we don’t need to worry too much – or get too excited – about the “macro” when the “macro” refers only to the US and its favorite trading partners.

Stick to the plan

Mark, are you still buying bonds, crypto, and cash?

Yes, I’m rolling over T-bills, paying down lines of credit, and buying crypto when the opportunity presents itself. My financial advisor, Empower, still manages everything else, as I explain in my portfolio strategy.

(Some people prefer money-market funds but T-bills work better for my tax situation, offer a higher yield, and are easier to buy from TreasuryDirect.)

But this newsletter is about crypto, not financial planning. For crypto, I invite you to follow my plan.

If you follow my plan, you could be up as much as 450%, down as much as 40% percent, and probably up about 25% on your investment with cash to spare.

That's better than anybody who dollar cost averaged and most traders. I'll alert you when it's time to buy, sell, or HODL.

You get the plan for free, along with my buy/sell/HODL alerts, weekly market updates, and bonus content when you upgrade to the premium plan. If you’re not on that plan, upgrade now so you don’t miss any more alerts.

Poppycock and fiddle nuts

Mark, you’re whistling past the graveyard. Plans don't matter. Technical analysis and on-chain metrics? It’s all poppycock and fiddle nuts! This pump is blatant manipulation.

Maybe. I guess I’ll take the market as it comes.

You can see the trading charts, on-chain metrics, market history, and “macro” paint a very clear picture of where the market’s at.

We’re pumping now. At the same time, we don’t see any reason to expect a sustained rally.

  • Stablecoins continue to bleed.

  • Miners Position Index remains elevated, suggesting miners continue to sell at a faster pace than usual.

  • Overall exchange volume continues to fall.

  • Flows into investment funds continue to fall.

  • Outside of a recent spike in the search score, crypto-related Google searches remain largely flat.

From looking at on-chain and exchange data, we saw at least two large private deals around the beginning of the year, as well as some shenanigans involving Binance and BUSD.

These activities cleared out a lot of sellers and paved the way for the price movement we saw over the past few months. Premium subscribers saw that play out as it happened.

Our recent pump came from shenanigans related to TUSD, not organic enthusiasm from “institutions” (most likely, they already filled their allocation or got exposure through other means). Catch my June 20 update for more on that, simplified into this chart:

Certainly, the ETF news kicked up enthusiasm and compelled some people to put money into crypto. We’ll see in the coming weeks and months how much that enthusiasm can move the market.

Outside of this little pump, we still don’t see a lot of new money coming in. Fortunately, when new money comes in, it tends to stick around. And the sat-stacking from OGs and bear market warriors is unprecedented.

Sellers will return.

Until they do, a run to $57,000 still makes sense, simply from enthusiasm and a confluence of technical signals.

If history wins over the technicals, the market will go sideways for the next few months—up 25% or 50%, down 25% or 50%, not necessarily in that order or in that amount.

Keep your eyes peeled

That may disappoint people. The good news?

All of these things can change quickly. You’ll never get the complete picture of what’s going on, but if you can fill in enough pieces of the puzzle, you can get a pretty good idea.

Today, the cryptosphere’s buzzing about Wall Street pumping the market.

Enjoy the sunshine before legacy financial institutions co-opt cryptocurrency for their own benefit.

Imagine all the money they’ll make when every new NFT needs a Wall Street partner to register with the government and apply for permission to mint a jpeg. That turns an easy way to monetize your creations into an expensive, risky business model.

Or does it?

With cryptocurrency, an Indonesian teenager with a laptop has as much power as the most prestigious Manhattan financier.

Outside of the US, you have over seven billion people with every incentive to free themselves of the legacy financial system and make a ton of money doing so. Now, they have the tools to do it.

Can Wall Street protect its profits when everybody can participate in all the realms of finance without touching a broker-dealer? Can US regulators capture a technology that has no borders, boundaries, or bosses?

Never bet against human ingenuity, creativity, or persistence. The US can regulate whatever it wants. Wall Street can register whatever it wants.

Somebody will find an alternative.

Maybe one of the altcoins in my altcoin reports?

Maybe an Ethereum L2 or another smart contract platform? Some new interface or wallet? An innovation yet to come?

The cool thing is, we get to find out together.

Solve problems and the FUD won’t matter

No, Mark! The US government’s going to wreck everything! Crypto is useless! Cycles are broken! Echo bubble!

The more US regulators attack crypto-native companies and coddle Wall Street entities, the more incentive they give developers and entrepreneurs to create the alternatives I mentioned above.

That takes money away from VCs, exchanges, and investment funds, but I'd argue that's not necessarily a bad thing. The same entities that pump the market can also dump the market. They exist solely to make money off of you.

To date, speculators have dominated the industry.

Now that the VCs, hedge funds, hucksters, and exchanges have stopped soaking up that productive capital, some of it can go to the problem-solvers—ideally, before Aunt Sally and Uncle Morton put 1% of their portfolio into that elusive spot bitcoin ETF.

The question is, what problems can they solve with crypto?

Our conversations tend to revolve around payment technology, “disintermediation” of rent-seeking entities, and protection from currency debasement and bad monetary policies.

Perhaps that’s too utilitarian. Money is a social technology. It's an expression of human belief and a tool we use to make our lives better.

How do our conversations change when we look at cryptocurrency from that perspective?

What problem does DeFi solve?

Some people have more money than they need while others don’t have enough money to do the things they want to do.

Banks solve this problem one way. Governments solve this problem in a different way.

DeFi offers another option—vast pools of capital that people can access without restriction, on whatever terms the market dictates.

When the market can’t deliver capital efficiently, anybody can create a new protocol or method for distributing capital better. They don’t need to wait for a crisis or government decree. They can just build an app or write some code. They’re already patched into a financial network.

What problem does Web 3.0 solve?

People want to own things, and for the most part, our modern Internet does not allow that.

It’s such an intrinsically human desire that is so often unfulfilled. It speaks to the heart of what it means to be human. People will work 40, 60, 80 hours a week, scrimp, save, sacrifice, fight, advocate, and dedicate untold effort and energy to own the fruits of their creations. To have some authority over the things they possess. To know that what they own is theirs and nobody can take it away.

When you use the Internet, you have no sovereignty or possession of almost anything. With Web 3.0, you do.

What problem do meme coins solve?

People want to have fun and money without any effort.

Those are some powerful human needs that the legacy financial system can't fulfill. Don't fade meme coins just because they have “no utility.” They’re more useful than most altcoins.

What problem do DAOs solve?

People want to connect with others who share similar goals. This makes us feel good.

What problem does crypto solve?

We all want better lives but we can’t get that with the legacy financial system.

What is a “better life?”

That's up to you. For some, that means more money. For others, that means financial freedom. Some people seek power, others seek protection from powerful people.

Whatever it means to you, you can find it with cryptocurrency.

Maybe that’s where the VCs and governments get it wrong. They aim to solve practical problems rather than fulfill emotional and psychological needs.

Your grand idea didn’t work out? Oh well. On to the next big thing.

Artificial intelligence? That solves a tangible problem: human labor costs a lot of money. Artificial intelligence does human work for free or at a massive discount.

You can quantify that on a spreadsheet. You can see the robot and interact with a chatbot.

It took 70 years for AI to get to this point, but now that it's here, people finally get it. Artificial intelligence is no longer a concept from science fiction movies.

Free(dom) money

Even after 70 years, AI is a work in progress. AI apps are hit-or-miss. People still debate the merits, practicality, and importance of artificial intelligence. Deep legal and ethical questions remain unanswered.

Why should we expect anything different for cryptocurrency, which has only existed for 14 years (eight years, if we start with smart contracts, the technology that enables all of those altcoins and apps)?

Do you want to get rich without doing any work or suffering any loss?

Do you want to have a source of wealth that nobody can take from you, whose value rests on the collective desire of humanity to share in its benefits rather than the backing of a sovereign that can fail, change, or disappear at any time?

Do you want to push the limits of economic theory and monetary policy?

Do you want to escape the drudgery of everyday life—a world that seems hostile, vague, unfair, and hopelessly ambivalent about your welfare?

These are innate expressions of the human spirit—a spirit that does not find comfort in utility, but rather, the peace of mind that comes from financial freedom and personal sovereignty.

While the concept of “freedom money” seems vague now, it will become one of the narratives of the next cycle.

Bull market crusaders will turn it into a meme, but there's still a kernel of truth buried in whatever hype the next wave of influencers tells you about it.

If you want freedom money, you need to pay for it.

How much are you willing to pay? Is today’s price too high for you? Should you wait for prices to go lower?

You want to get the best value for your money. So much so, that you’re willing to risk its future growth because YouTube told you we're going lower or Twitter says you have to take profits.

Good. Stay out of the market. You can't sell your crypto if you've already sold it, or if you never had it in the first place.

As premium subscribers know, there are some very obvious price levels to watch. Wait for those prices.

You’ve had some great chances to buy into the market. Those chances will come again—maybe before you read this post! I’ll let you know went they come.

If you haven’t upgraded to the premium plan, do it now. You’ll get everything this newsletter has to offer.

Relax and enjoy the ride!

Collect this post as an NFT on Mirror!

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