GM, this is your Daily Bolt briefing.
In today’s edition, we’re providing you with a complete report, including a discussion between two of the top traders in crypto on potential memecoin strategies for those interested in the intractices of the memecoin category, as opposed to blindly apeing into contracts.
If memecoins are not something that piques your interest, keep reading to gain insightful information on the changing macro environment, and if a 2021-esque scenario is en route for crypto.
Also; if you didn’t notice, we recently made two of our Project Breakdowns available for all Revelo Intel members to access, regardless of membership level. Previously, our Project Breakdowns and Timelines for Frax and Curve were released only for paying members; we have decided to make these reports accessible to all members!
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1000x - Meme Mania: Why You Should Pay Attention
In this episode of 1000x Podcast, Avi Felman and Jonah Van Bourg join to discuss bank failures, meme coin mania, BRC-20s, and more! Read our notes below to learn more.
Background
Avi Felman (Host) - Head of Digital Asset Trading at GoldenTree Asset Management
Jonah Van Bourg (Host) - Global Head of Trading at Cumberland
Are Bank Failures Priced In?
Avi Felman opens the episode by commenting on how despite two weeks passing since the last episode, the price of Bitcoin remained largely unchanged.
Avi Felman and Jonah Van Bourg recall a previous conversation they had in the last episode of 1000x about whether Bitcoin would hit 24k or 30k first. Avi Felman notes that it nearly touched $30k, narrowly avoiding being incorrect in their prediction.
Avi Felman highlights the significant events of the past two weeks, including the failure of First Republic, the aftermath of which caused stocks of PacWest and Western Alliance to collapse. He suggested Bitcoin might have received a short-term boost from these events, but expressed concern about the changing narrative around bank failures being good for Bitcoin.
Avi Felman theorizes that the main driver of Bitcoin's price action might have been the stimulus effect from the Federal Reserve System’s (FED) and Federal Deposit Insurance Corporation's (FDIC) decision to backstop all banks. He argues that every subsequent bank failure will have less of an impact as it's already priced into the market.
Jonah Van Bourg disagrees slightly, stating that while some bank failures might be priced in, the potential for complete absorption of regional banks by larger ones like JP Morgan and Bank of America hasn't been fully accounted for. He argues that this could result in more bailouts than are currently expected.
Avi Felman agrees but maintains that each bank failure provides less stimulus to the market unless a large number of banks fail at once. He emphasizes the importance of understanding why people are allocating to Bitcoin, suggesting that much of the allocation following Silicon Valley Bank’s (SVB) failure was due to stimulus and narrative, with the former playing a larger role.
Avi Felman suggests that if equity markets don't react like Bitcoin to future bank failures, it might be more prudent to fade Bitcoin rather than buy into it.
Jonah Van Bourg notes the specific dynamic that contributed to Bitcoin's boost in March when SVB went down, as Circle Financial held over $3 billion worth of deposits at Silicon Valley Bank. This caused $USDC holders to rotate out of their positions and into other cryptocurrencies. However, he notes that this impetus might not be present with other regional bank failures.
Jonah Van Bourg hints at a potential instability within the U.S. Treasury, implying that even the "biggest bank of all" could be at risk.
The Impact of a Potential US Default
Jonah Van Bourg asks Avi Felman about the potential impact of a technical default by the United States on the price of Bitcoin. He wonders what would happen if the U.S. temporarily stopped repaying bondholders.
Avi Felman responds that the price of Bitcoin in such a scenario would depend heavily on gold. He speculates that the headlines generated by this event could push Bitcoin past $30,000, possibly even to $35,000.
Avi Felman mentions a previous tweet where he predicted Bitcoin reaching $35,000 if the U.S. defaulted. He received feedback that his prediction wasn't bullish enough, which he jokingly responded to by saying Bitcoin would reach all-time highs. However, he clarified that he believes Bitcoin will cap out at around $30,000 to $36,000 unless the U.S. defaults.
Avi Felman suggests that if the debt ceiling issue leads to a short-term dip in risk markets and is quickly resolved, Bitcoin could potentially reach $40,000 or more. For Bitcoin to reach all-time highs, he believes the S&P 500 needs to go up, creating a "narrative juice" that, combined with a quick turnaround in the markets, could lead to significant gains in Bitcoin.
Jonah Van Bourg finds it interesting to discuss an asset that could potentially double in price in a short time. He speculates that if the U.S. defaulted, Bitcoin could test $70,000 to $80,000 as people move money out of unstable fiat currencies and into crypto.
Jonah Van Bourg describes a U.S. default as a potential "seminal event in financial history" and a complete restructuring of the way we view and manage money. He suggests that people might shift from holding fiat or T-bills to cryptocurrencies to avoid the risk associated with a U.S. default.
Avi Felman disagrees with Jonah Van Bourg's bullish view, expressing skepticism about the feasibility of Bitcoin reaching $70,000. He questions where the buying pressure would come from to drive Bitcoin to that level, even in the event of a U.S. default.
Avi Felman argues that retail investors wouldn't be the main buyers in such a scenario. He suggests that Bitcoin would need to break through $35,000 to $40,000 to re-attract retail investors, who may not be as willing to invest as they were during the Covid pandemic.
Avi Felman believes that high-net-worth individuals could drive Bitcoin to $35,000, but he doesn't think institutions would be able to make investment decisions quickly enough in response to a U.S. default. He also argues that all market participant groups would need to be "firing on all cylinders" for Bitcoin to reach $70,000.
Despite his reservations, Felman states that he is bullish on Bitcoin and sees $35,000 to $40,000 as a reasonable target in the event of a U.S. default, though he would reassess the situation at that point.
Repeating 2021’s Perfect Storm
Avi Felman talks about the special circumstances of 2021, including lockdowns and stimulus checks, that contributed to the significant growth of cryptocurrency. He questions whether such circumstances could occur again, leading to another substantial crypto surge.
Jonah Van Bourg responds that while history may not repeat itself, it often rhymes, suggesting that different catalysts may drive similar growth in the future. He suggests the increasing amount of time younger generations spend online, coupled with the seamless experience of online value exchange, may stimulate the growth of crypto.
Avi Felman agrees with Jonah's perspective and added two more factors that could serve as tailwinds for crypto. First, the ongoing wealth transfer from older generations (Boomers) to younger ones could bring more money into digital assets. Second, he points out the increasing adoption of crypto in regions like South America, which could drive growth as these areas become wealthier.
Avi Felman also proposes a more far-fetched idea. He suggests that ongoing inflation might be countered by increased productivity due to AI advancements, leading to structural deflation and a subsequent tech bull market. In the longer term, automation-induced job loss could make Universal Basic Income (UBI) a practical necessity, creating an environment potentially beneficial for crypto.
Jonah Van Bourg asks how one could differentiate themselves in a UBI world, to which Avi responds that the key would be to invest wisely.
Meme Mania: Why You Should Pay Attention
Jonah Van Bourg suggests that meme coins could be seen as a digitally native, more exciting version of buying a lottery ticket. He talks about the potential market capitalization of meme coins if the global spending on lottery tickets transitioned to it. He notes that in the US, $74 billion was spent on lottery tickets the previous year according to Google, which Avi Felman agrees was a staggering number.
Avi Felman points out that this amount represented about 5% of the total crypto market cap, noting that this wasn't even accounting for the potential increase in market capitalization from that investment.
Jonah Van Bourg elaborates that this could lead to a perfect storm, with wealth transfer to younger generations and a shift towards digitally native activities driving growth in meme coins.
Avi Felman agrees, stating that he hadn't realized the total amount spent on lottery tickets and that it made sense as crypto could be seen as a "massive casino". He also mentions the rapid increase in the market cap of the meme coin, Pepe.
Jonah compared the fluctuating value of $PEPE to the price of a square mile of real estate on the Las Vegas strip, suggesting some of this value trickles down to the Ethereum network and contributes to the high gas prices.
Avi Felman notes a significant increase in meme coin activity, largely from retail investors, and states that institutions pay attention to this as it can signal market trends. He presents a debate about whether the capital inflow into $PEPE was a sign of market health or a potential blowoff indicator. One side argues that meme coins draw liquidity away from Bitcoin and Ethereum, causing a market crash, while the other side views it as an isolated run.
Jonah Van Bourg shares his traditional finance perspective viewing this as a new use case emerging, akin to an online lottery. He compares the meme coins to commodity markets, where turning waste products into useful ones can create significant wealth. He proposes that the same could happen with these types of ERC-20 tokens.
Avi Felman agrees, mentioning that institutions might have to get comfortable speculating on these types of assets. However, he expresses concern over justifying losses to limited partners (LPs) if investments in these coins failed.
Both Avi Felman and Jonah Van Bourgagree on the idea of these investments serving as "institutional lottery tickets" or call options, potentially making sense in a portfolio context.
Avi Felman notes that investing in every Memecoin launched in the last year would have resulted in significant returns, with a $10,000 initial investment ballooning to a million, despite it being a difficult year for cryptocurrencies.
Avi Felman points out the variable market caps of these Memecoins, some reaching as high as $1.5 billion. He suggests that there could be a strategy developed around investing in Memecoins, but he doesn't advise people to put their money into Memecoins without a strategy.
Jonah Van Bourg poses a question to Felman about the feasibility of launching a Memecoin Index Fund, wondering if it would be a full-time job for a few individuals to manage it.
Avi Felman thinks it could be a good idea for an enterprising individual with technical abilities. He suggests using AI to screen new smart contracts for red flags, such as restricting selling, contract upgradability, and the ability to mint additional tokens. He says this could help identify optimal Memecoins to invest in.
Avi Felman also suggests that after a couple of months of work, one could have a good system for picking up Memecoins and running it as a strategy. He believes people are already doing this, and a lot of initial volume on these coins likely comes from this approach.
Another strategy Avi Felman proposes is creating a Memecoin specifically designed to attract bot liquidity. He suggests reverse-engineering the bots to identify what they look for in a Memecoin and then launching a coin with those parameters.
Jonah Van Bourg mentions that the smartest bot people are focused on sandwich trading and MEV (Miner Extractable Value). Avi Felman agrees and notes that it's not about how good you are, but the table you play at.
Deflationary ETH and Blockspace Fee Generation
Jonah Van Bourg mentions that the gas levels for Ethereum are consistently averaging 50 to 150 gwei, despite the expectation of them being 16 gwei as neutral gas level.
Jonah Van Bourg also mentions that the gas deflationary concept appears to be resilient, given the persistent activity and the presence of kernels of an investment thesis within it. He emphasizes that the Ethereum being burned as a result of this activity is irreversible, thus should be taken seriously.
Jonah Van Bourg poses a question to Avi Felman, wondering whether we should get used to higher blockchain activity, what it means for the price, supply, and demand of block space, and if there's an investment thesis there.
Avi Felman responds by highlighting the importance of EIP-1559 for Ethereum, which has attracted significant institutional capital to the space. He also mentions the interest and questions he received at a conference filled with institutional allocators.
Avi Felman points out that Ethereum is generating substantial 'revenue' through its fee burn, amounting to an estimated $5 billion a year. He notes that this is happening during a bear market and suggested that increased activity could lead to more people buying Ethereum.
Avi Felman also mentions that Ethereum's deflationary nature is being seriously considered by many allocators. He states that this could be bearish for other platforms like Solana as, if Layer-1s don't generate and burn fees like Ethereum, they might be less attractive to investors.
Avi Felman also makes a comparison between Ethereum and a hypothetical platform with lower fees but equal activity, suggesting that investors might still prefer Ethereum due to its current popularity and fee-generation capability.
Avi Felman compares Ethereum to Manhattan, stating that it's expensive for a reason, as everyone wants to be there. He also mentions that the perception of crypto is now changing, with it being seen as revenue-generating and 'real', especially with the proof-of-stake model that rewards asset owners.
BTC Miner Revenue and BRC-20s
Avi Felman states that in Bitcoin, despite its growing activity, all fees are paid to a third-party entity, the miners, rather than to the holders of Bitcoin. He argues that this creates a negative dynamic because the more activity there is on Bitcoin, the more supply of Bitcoin will likely hit the market.
Jonah Van Bourg adds that the increased activity on Bitcoin also deteriorates the user experience. He cites a recent example of Binance halting withdrawals due to excessive usage and traffic on the Bitcoin network.
Jonah Van Bourg contrasts this with Ethereum, where stakeholders are aligned because they stake their Ethereum and earn rewards. While he concedes that the security of the Bitcoin network may be more robust, he views its usability as flawed.
Avi Felman and Jonah Van Bourg discuss whether they should be worried about Bitcoin. While Bitcoin has been performing well this year, they question whether the rising transaction fees and increased miner activity might affect its dominance in the crypto market.
Avi Felman suggests that the high transaction fees could be very bullish for miners. He speculates that miner revenues this quarter could exceed projections, which could lead to a price pop if the market has yet to realize this.
Jonah Van Bourg questions whether the explosion of transactions on Bitcoin, a Layer-1 network not built to work like Ethereum, could deteriorate its user experience and affect its dominance. He expects the frenzy around Bitcoin NFTs to die down and for Bitcoin to remain a usable network.
Avi Felman disagrees, suggesting that a tech solution rather than a die-out solution will likely be found for the issues with Bitcoin. He believes that Bitcoin is seeing the sparks of an organic development community, which he expects to grow over the next few months as people flock to where they can make money.
Avi Felman describes BRC-20 as similar to NFTs on Bitcoin, not technically equivalent to an ERC-20, which is a standard for tokens on the Ethereum blockchain. He also explains that BRC-20 tokens represent numerous identical NFTs, making them fungible. They are displayed on marketplaces in various quantities, like hundreds or thousands, similar to how NFT collections are listed on platforms like OpenSea.
Avi Felman mentions that while there's no exchange for them yet, someone is currently working on building an Automated Market Maker (AMM) for swapping BRC-20 tokens.
Jonah Van Bourg concludes with some advice for crypto traders, saying they should expect to fail but ensure they don't "die" to catch the next success. He emphasizes the importance of weathering difficult financial periods and maintaining staying power to reap asymmetric rewards.
Avi Felman teases their next podcast guest, who he describes as one of the most successful traders in American history and someone who has likely never been on a podcast before.
Very insightful!