Bitcoin Endgames & The New Hyper-Agents

Dave Nadig has forgotten more about market structure than I will ever know. He co-founded Cerulli Associates in the early 1990s, went on to be Managing Director at Wells Fargo Nikko before selling the firm to Barclays to form BGI, before THAT got bought to become Blackrock/iShares as it exists today. In the early 2000s Dave joined what would become ETF.com, where he helped build their ETF Data and Analytics business which was sold to FactSet in 2017 or so. Most recently Dave was part of the team that formed and sold VettaFi to the TMX group from 2020 to 2023. Dave is currently an “independent financial futurist” and will tell you what that means as soon as he figures it out!

Dave writes an excellent substack called Echo Beach where you can read this note and many others. You can contact Dave at dave.nadig@gmail.com and on Twitter at @DaveNadig. As with all of our guest contributors, Dave’s post may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.

This is not a post about whether bitcoin will go up or down.

This is not a post about whether bitcoin “works” or not.

I will beg, constant reader, that you grant me some basic bona fides in the crypto space. I have read all of the original foundational documents and most of the additional information that has come out in things like the no-Wright-isn’t-Satoshi trial. I have run Bitcoin and Ethereum nodes, written smart contracts, minted and purchased NFTs, traded various silly alt-coins, and played around with both US and internationally-based DeFi protocols (before FTX blew most of the fun ones up). Heck, as far as I know I’m the only one teasing out 10bps ineffeciencies in the ETFs.

Assume “I Get It.” As always, my big questions are about the “… and thus” of it all.

#Winning

$11 billion in new flows, to an AUM pushing $30b in two months. That’s a lot eh? Following the daily flows and trading in the 10 products is now a cottage industry. Folks like Scott Melker (who writes the best crypto Substack, The Wolf Den) have spent the last 4 years getting very smart about ETFs to match their smarts on Crypto. Meanwhile, folks like Bloomberg have gotten very smart about Crypto.

BTC market cap is about $1.5 Trillion, vs about $45T for the S&P 500, or $50T for the U.S. bond market, or $120T for commodities, of which about $13T is gold. This makes Bitcoin absolutely a meaningful asset class, and the ETFs have worked, essentially, perfectly, despite me spending a month trying to find cracks in the sidewalk.

So, mission accomplished. Price will go up. Price will go down. Now what?

Psychological Commodities

The challenge in figuring out “what comes next” is that bitcoin doesn’t exist.

Bitcoin is, of course, a digital fiction created in code and is currently the most valuable psych experiment in the world. Bitcoin, like Gold, is fundamentally a psychological commodity. Psychological commodities are extremely cool and there are surprisingly few of them.

A psychological commodity is an asset whose value issolelyandcompletelydetermined by others’ willingness to pay a specific price. Most luxury and intangible values are inherently bolstered by their status as psychological commodities: Louis XIII doesn’t affect the human body differently than cooking wine, and “goodwill” is greatest the accounting slop-bucket of all time.

This is cool! After all, in a very real sense anything we ascribe value to above the bottom of Maslow’s hierarchy of needs is largely a collective fiction we all agree on.

We, people of the planet, have decided on a ruleset to manage planetary resources. We tend to forget this most of time, until the rules get broken: Russia just decides it wants to own Ukraine again. Then a whole other set of rules we may or may not choose to follow – those covering international conflict – come in to play.

Ordered society is fundamentally based on these psychological fictions, so I actually think it’s very cool that certain clearly non-utile assets, like art, or Bitcoin, or Gold, have been ascribed value. Think how monochromatic the world would be if it were any other way!

So calling bitcoin a psychological commodity is in no way a diss. But it is true. There is no floor bitcoin based on some rational Book value, nor is there some Ceiling other than global economic domination. Bitcoin’s dollar-value (or euro-value, or oil-value) at any level requires that there are others willing to exchange at that value, period.

How then, do we deal with this next phase of the Bitcoin story, where every asset manager is now promoting it as a portfolio asset in some version of this chart (from Fidelity):

As I see it they are basically two end states for bitcoin.

The Bullest Case for BTC is Awful for Humanity

If one version of the techno-optimist/Fiat-is-a-crime/taxation-is-theft maxi-credo is right, then global fiat-based economic systems will spiral into a cycle of inflation and bad policy that is net-impoverishing and rife with social unrest. Those who put power-reserves (i.e. – excess capital) outside that system are metaphorically moving their chests full of shiny rocks to some island to wait out the chaos. In even a middling version of this scenario (which plenty are arguing is the now), then there is a massive wealth transfer

FROM: ^{the late-and-slow large pools of Fiat in the world (mostly the assets of governments {those would be *our* assets} and massive institutions).}

TO: ^{crypto enthusiasts who got in early enough.}

12 years ago an analyst on the team (who I will call Bob) had pocketed a handful of BTC at movie ticket prices. Assuming that they HODLd, they are now on paper worth $1 million where before they were worth nothing. That million dollars “came from” people who just bought in at $72,000 — because that’s what sets a price: a recent transaction on the tape. If they liquidate back to dollars, Bob’s windfall is a very real and tangible transfer of power.

But importantly for Bob to DO anything with that power — buy a car, donate to a politician, feed the homeless — they need to sell some bitcoin get something that will be used for a medium of exchange – the dollar (or whatever). So unless the ONLY thing Bob cares about, for the rest of their lives, is accumulation of value in a ledger, someday they have to sell some to gain real-world power, or a Lamborghini.

Who’s buying so Bob gets his Lambo or Politician? Folks who are now just jumping on the bandwagon in ETFs. Whether those people are “greater fools” I will let you decide.

Moving back to 30,000 feet: this is a transfer of economic power from two classes: slow hyperagents – those who currently bend the global ruleset around them, and average joes now “participating” because folks like Fido are Nudging. That power is transferred to a new class – early crypto natives). Early crypto natives become the new “elite,” who, on moving back into the fiat world, arrive with the pocketbooks to be hyperagents, dominating politics, dictating policy and accelerating the slide into corporate oligopoly.

In this “hard money wins” world, the suffering implied for the rest of humanity — those folks who basically work for a wage, pay taxes, and spend most of what they earn — is immense. It is, frankly, Argentina on a bad day for most of us.

The Bubble Case isn’t Great

So what’s the second possible outcome? The naive and hopeful getting rugged.