This Week in Crypto Sept 16 2022

I discuss the market action and likely implications of the Ethereum merge as well as dissect what is really going on with the Treasury “Fact Sheet” on Crypto that came out this morning in response to last springs executive order

Read the video transcript

Happy Friday, everyone. I’m Dave Weisberger, CEO of Coin Routes. And it’s time for This Week in Crypto. And as promised, September has come and lots of news and lots of things to talk about. We’ll start with the markets.

They’re kind of boring. Bitcoin is more or less back down into towards the middle of the trading range that it’s been trading in. It’s been trading almost exactly with risk assets. This morning we heard that Federal Reserve said we’re already in a recession and the markets are down over a percent. Earlier this week, the markets dropped significantly more than that, as fears of rate rises is really cramping people’s style and Bitcoin is kind of playing right along with that.

Along the way, Ether is down a little bit more because, as you probably know, the Ether merge was completed successfully and as is fairly typical in these situations, it was a minor “sell the news” sort of event. OK, that’s what’s going on in the markets. The one thing that’s interesting, that needs to be watched with the Ether merge, is really what goes on with the Ether proof of workforce. Will it fade to zero? Will it become something?, etcetera. The reference point here is Ethereum Classic still has a $4.6 billion market cap. And while I’m not saying there’s no value there, I have absolutely no notion of what runs on the Ethereum Classic blockchain any more than the Ethereum proof of work chain that was working up until the merge. So with the markets not really being the issue, what do we have to talk about? Well, last night the Treasury Department released a fact sheet based on a set of reports that came out of the executive order from six months ago.

And for those who watch my livestream with Scott Melker this morning, they’ll know that it really was pretty harsh and it focused in two areas more than anything else, although there is a third area of concern. The area didn’t really focus on, except for one strongly worded paragraph, talking about words like environmental justice was the environment. But honestly, that’s kind of a bullshit argument, and we’ll talk about why that is in a heartbeat when I talk about why I think the merge was happening. But it did focus on two areas that matter. Area number one, people lost money not knowing why they lost money in crypto, and that’s bad.

And two, the governments around the world want to have more and more control to be able to impose sanctions and impose their will on people. And crypto does provide the potential for evading that. Now, in practice, let’s talk about sanctions first. In practice, that’s not really that true. It’s only the minnows, the small people who can avoid what’s going on.

The big people can be found. And the FBI is really good at using blockchains to track down bad doers. But predictably, the Treasury Secretary and the fact sheet focuses on the negatives because they want to use that as a tool of control. When it comes time, however, to investors and what happened, there is reality there. The fact is, investors and companies like Voyager and Celsius thought they were putting their crypto into a company who would loan it out and create yield for them.

They had no idea of the risk they were taking. They didn’t know that in some respects they were investing in a hedge fund that was doing proprietary trading to generate that yield, and that they lost the money. Oops! ‘Oops’ was never part of the vocabulary. They didn’t know, in the case of Voyager, that their CEO was going to okay making an uncollateralized loan to a foreign entity because he thought that they were good and they could pay a good yield. No one who was investing in Voyager thought they were effectively in a high yield or junk bond fund, but more or less, that’s what they were.

So the fact that the regulators are pushing and saying, hey, we need to actually have disclosures, we need people to know what they’re doing, we need investors to know what they’re investing in, all actually makes sense. Now, when cooler heads prevail and it gets time to actually propose rules and to build things that make sense, hopefully the industry will work with the regulators who will actually get something to do what is intended, which is to provide disclosures and provide ways for investors to know what was happening. But in any case, today, sitting here the morning that this is out, it’s undeniably not a good thing for crypto because the government is looking to leverage in the case of the US, they want to leverage their relationships worldwide to have other people adopt similar styles to regulation. The other thing that happened as soon as the merger was complete, and I tweeted that it’s as predictable as mushrooms after a spring rainstorm, was Gary Gensler saying, hey, Ethereum might be a security now because it’s proof of work, or proof of stake, excuse me. This is, well, in addition to being predictable, is actually rather silly.

The reality is, in the Howe test, the oranges themselves were not securities. What was a security was the investment contract to be able to do orange plantation. So while it is possible, in fact, maybe even likely, that the SEC will be able to assert jurisdiction over staking regimes, where companies have you put cash or Ethereum into them and then they will give you a yield off of that, that seems to be something that they’re going to push for. That doesn’t mean even slightly that Ethereum as a token with real utility falls into that bucket. That said, it’s not going to stop them from arguing for it. So we kind of understand that.

Lastly, other than the fact sheet, we should talk about the merge because I had a theory last night that I think is worth understanding. As I’ve said before, I think that the justification for proof of stake, being that it uses less electricity, is really a paper tiger. At the end of the day, if Bitcoin went to 10x the amount of electricity consumption that it uses, it would still be more or less 1% of the power grid. Considering Bitcoin used the same amount of electricity last summer, when it was at 63000 as opposed to 20000, that means more or less even people who think there’s a linear correlation between value and electricity use, would have to agree that up to effectively 30 times this price or the full digital goal narrative, Bitcoin basically would represent 1% of electricity. Which if you do the math is not going to have any real impact on climate.

Now, when you take into account the fact that at least 50% of Bitcoin is renewable, the fact that it is used to stabilize renewables on the grid, the fact that there’s more and more going into things like flared gas, methane being dramatically more warming than carbon dioxide, there’s lots of reasons to believe that Bitcoin won’t do anything close to what the worst case assumptions are. But even the worst case assumptions don’t look that bad. So why did a theory move to proof of stake? In my mind, Vitalic is playing chess while everyone else is playing checkers. He knows that for Ethereum to achieve its value, as a use case, its value as the infrastructure for all financing activities, for all digital representation of assets, so if not all a significant amount of it, he needs to improve its throughput, he needs to improve the predictability of gas fees, he needs to improve the issue of congestion. In order to do that will require significant changes. Well, what’s better to allow for changes in a blockchain, having the votes on the blockchain be done by miners who are completely mercenary and move from one coin to another, or by owners who will stake that Ethereum? Well, the answer obviously is the incentives are aligned far better with owners.

So if I’m Vitalic, yeah, I may use the environment as in a justification, but the reality is he gets what he wants. He has an owner-controlled network now that people can rationally determine whether or not the decisions need to be made to achieve this vision can be done, because that will all directly impact the value of the coins that they’re planning on holding for the long term, not necessarily a miner who could sell at any time. So that’s my thought. We’ll see how it plays out. It looks like the market more or less agrees, as Ether is really trading the same as Bitcoin today as a risk asset, as risk assets are getting hit by what’s going on in the global macroeconomy.

One last note why are correlations so high? It is worth understanding that as investor confidence in crypto has been severely damaged by the events of the summer, a higher proportion of trading is being done by speculators, while speculators are more likely to be trading crypto the same way they’re trading risk assets. So that’s kind of important to watch. We will see if new money comes in at any point, but to get to an effective de-linking it will require more confidence, or at least a strong belief in either the Ethereum narrative of new infrastructure or the Bitcoin narrative of an alternative to fiat. Well, that’s enough for this week. I’ve kept you long already. Have a great weekend and be safe out there.

Leave a Reply