ChrisF | Starholder
There's the bull and there's the bear and there's a secret, more complex third thing.
This third thing is sometimes called crabbing, other times called a healthy pullback (which is usually followed by the statement that it's a necessary setup for a bull resuming), but I am going to call it an interregnum so that I can cram all sorts of non-crypto related analogies into this essay.
An interregnum is a gap between two well-defined periods. It's origin and primary use is political. The term's meaning in Latin is between two reigns, and it's not hard to imagine a period of instability between two reigns. In fact you don't have to imagine, the transition between Trump and Biden was an interregnum, and we are still sorting that mess out today.
Let's set some ground rules before continuing here. I am not a macro guy or a market technician. I am an idea guy who understands systems, can make connections between things, and just a generalist participating broadly across crypto who spends a lot of time online. Psychology is more interesting to me than price targets. Deciphering complexity is more interesting to me than finding hundred baggers. I'm not your quant. I'm the humanities guy who knows your jargon.
The interregnum we are in is not between market cycles. We are in a bull (as sluggish and unsatisfying as that may be to you). The interregnum we are in is between retail getting rich and retail getting rich again. Retail got rich in 2013, 2017, and 2021, so everyone assumes we are knocking on heaven's door and that retail will get rich again soon. Only it's not happening, and people are climbing the walls waiting for the miracle to return.
Let's dive in.
If you don't understand this concept in the year of our Lord 2024, you really should and it is doubly true if you are in crypto. Crypto doesn't need you, crypto needs liquidity. This isn't unique to crypto either, it is becoming the way of the world. Let's start with politics. On one side of the aisle, the Democrats have made sure to use every recent financial crisis to concentrate single family home ownership in the hands of corporations while nanny stating regulations around meaningless issues like ticketing fees. Don't worry, they use heart emoji's in tweets to show they care. On the other side of the aisle, Republicans made it very clear that it was alright to die of covid as long as the economy kept going. Don't like politics? Fine, let's turn to Silicon Valley which is pouring billions and billions into GPUs so that AI can remove as many people from the productivity loop as possible. Don't worry here either, you'll have so many cool virtual toys to create with while you're not drawing a paycheck.
We are entering a post-Marxist world where the means of production has no politics because it has no workers. At least that's the dream. Get the workers out of the way and replace them with AI and automation. Whether in the digital or the physical, the trendline is tilting heavily towards capital having the upper hand in all aspects of life. If you think I am exaggerating, take a closer look at political discourse around Palestine. Zoom in to what is happening on university campuses in America. Our capitalist diploma factories are making it very clear that money is the only acceptable form of speech as disgruntled donors topple some administrations, while cowering the rest into calling the cops on students who think differently than the donor class.
Enough radical ranting, to exist is to be complicit and if you are in crypto, you are doing your part to bring about capital as labor. All hail the protocol...until it stops making us rich.
Which speaking of, why aren't the protocols making us rich?
Before I was a generalist scenester in crypto, I worked in telecom as a founder of a wireless company. Our world was governed by the need to scale. More users meant better pricing, which meant improved margins which we then plowed back into product bundles and marketing to attract more users because scaling never ends for the little guy.
Our active subscriber count was a simple mathematical formula. How many people did we put on network in a given month minus how many people left us that month. The delta was called net adds. The percentage of people leaving was called churn. Churn percentage tends to go down over time. It goes down for two reasons. First, if someone is going to leave you it's usually within the first few months of being a customer. The more older customers on network, the more stable the base becomes. Second, hopefully the service keeps getting better (stickier) as the company matures.
The weird thing is that even as churn goes down over time, it still works against you because the size of your user base keeps (hopefully) getting bigger. Lose 5% of users at a base of 300,000 and that's 15,000 people. At 900,000 people, a 3.33% churn is 30,000 people.
What this means is that as you scale, even pushing down churn isn't enough. You can reduce your churn rate by 50% and sales and marketing still needs to double new monthly adds from 15k to 30k just to keep your business from moving backwards.
That's the law of big numbers and it's a son of a bitch.
Crypto loves number go up. Poof has called all the narratives that emerge when number goes up Green Candle Disease because it stops people from thinking rationally. Here's something to consider...what if number going up actually hurts new wealth creation or less controversially, benefits entrenched wealth more than it helps create wealth?
A simple personal example:
My costs basis on ETH is sub $500. I did most of my buying in 2020, in fact I cannot remember the last time I purchased Ethereum from one of the three exchanges my jurisdiction allows US dollars onto crypto rails from. Sometimes ETH looks attractive to me and then I price out how much ETH I would get back for my aircraft carrier backed American dollars, and then I don't pull the trigger because ETH is worth over 6x more then when I bought it. That's irrational thinking until we look into some second order effects of ETH's swelling market cap on my behavior.
Some of the ETH I purchased in 2020 went into buying NFTs. I picked up my first NFT in the summer of 2020. Most of you know of me as an NFT guy because I got pretty damn active over the next couple years. I wasn't a collector prior to 2020 and am not sure I'd call myself one now except that there's 800 plus NFTs sitting in my wallet which can only be called a collection. So why did I buy so many digital objects?
NFTs became a levered play on top of ETH. Most of my buys were low cost, many came from minting. I was a participant who enjoyed trend spotting, had confidence in my taste and through my association with FlamingoDAO was very piped into emerging theory and opportunities around the space. I was also very online, having stepped away from my role as a company founder. I enjoyed being a participant and was good at showing up and acting. Many NFTs that I minted for 0.1-0.5 ETH went on to have 10-20x multiples and many of those yielded free NFTs which also ran up in value.
Stack my low cost basis on ETH on top of NFTs, and there were cases where I saw a 60-120x return on a 2020 US dollar. Now being in the US, I don't get to keep all of that. Some of that has to pay taxes and being a New Yorker, boy do I pay taxes. My tax rate on short term cap gains is around 45% and I learned the hard way not to hold NFTs I planned on flipping until they reached long term status.
I did not sell all my NFTs. In fact I really appreciate and enjoy my collection, but I sold a lot during that time. Some of the proceeds went into buying more NFTs and some I stacked as ETH or deployed elsewhere. One thing I rarely did was sell ETH to pay my taxes. Instead, that came out of my dollar account. Now my irrational behavior to not purchase ETH after 2020 starts to look a lot more rational. In effect, I was buying ETH by paying taxes on ETH gains with dollars. My money was no longer coming into the system, instead I was paying taxes outside crypto on working capital within the system.
The thing is my working capital bucket stopped working as hard as it had been because we went from bull to bear and the incentive to take risk evaporated. There was a moment in time where retail got rich and when that went up in smoke, I adjusted my behavior accordingly.
I was buying ETH when the market its market cap was $25 billion. I was deploying it like crazy when its market cap surged to over $500 billion. I was still paying taxes on that activity out of pocket when it had pulled back to $150 billion. Now that it's back up to $390 billion, I am far more cautious and reluctant to deploy because it is far harder to find 60-120x return opportunities just by being a participant. Also, I'm tired of paying taxes like that. There's just less incentive to go out of pocket to cover my gains in order to keep a growing working stack.
That's a personal story, but it's also another example of the law of big numbers. I was once a very liquid entity on mainnet, now it's structural very difficult to be that liquid. Imagine someone coming in off the street in 2024 and replicating my ride?
To see someone get the same order of magnitude return as I experienced, ETH not only needs to go to $18,000, but NFTs (or another asset class) would need to operate in an environment where deployment of 1 ETH into that category would return $360,000 (a 20x). Just extend that out of a second, and realize someone in my shoes would also be paying $162k in short term cap gains on the realization of that play.
Can you think of many people in retail subsidizing that tax hit out of pocket to increase their stack? Do you think someone in retail would broadly expose themselves across dozens of simultaneous plays with that potential tax liability in dollars knowing the underlying value of ETH could crash?
You can rapidly recycle ETH when the unit sizes and value of everything is in three to five figure ranges, but when that scales up into five and six figure ranges, that behavior collapses down into a small mercenary class of specialists. First off, mass retail doesn't have that capital to degen. Secondly, the risk factor is off the charts. Only a small group of people have the ability to scale into a professionalized level of risk management as independent actors.
There's a reason Solana and Solana memecoins popped off while ETH didn't. It was within reach for retail, both on a cost basis and the stakes were not catastrophic if you failed.
So I will say it again. The law of big numbers is a son of a bitch.
I spent more time on big numbers than I wanted, but it's important that people understand how things change when scale comes into play.
It's easy to talk about how the lack of ICOs and regulatory clampdowns have crippled airdrops because that's an obvious cause and effect. We used to publicly TGE tokens at pennies and they ran to tens or hundreds per unit. We used to give people free tokens just for using a protocol. We don't now, so people don't spend money they were never given.
No shit...but that form of fundraising is moving to VCs and privates partially because the increase in overall industry market cap is pricing new entrants out of simply being here, and the ones who are cannot work like prior generations of noobs. Projects can't count on retail like they used to, while institutional is a bit more present. Higher stakes leads to concentrated decision making with smaller numbers of trusted parties. This is growing up and a second order effect of number going up.
Of course we were going to talk about the Crisis of the Third Century and how its hero retired to grow cabbages in Croatia once he felt like shit was back under control. I think about Rome everyday and would not put the word interregnum in an article title without giving a shoutout to Diocletian.
The Crisis of the Third Century was a fascinating period in Roman history. It was also a mess where in a 50 year period, there were 26 claimants to the title of Emperor. In short, shitty leadership relied heavily on military control to hold power - paying more and more money to the army, mercenaries and buying off hostile barbarians to the point the economy collapsed and all hell broke loose. Toss in a healthy dose of plague and you ended up with the empire fracturing into three. During this period any effective army in the field would get all cocky, proclaim their general the new emperor and many of those generals went along for the ride rather than risk losing their power base. This wreaked havoc on attempts to restore what was a functional administrative, trade and building system that formed the bedrock of civic Rome.
Rome never had a formal leadership succession practice because it was always pretending it was a republic or idealizing a return to being a republic. Crypto treats decentralization the same way, as an ideal that is a spectrum of practices running from VC chains, to 3 of 5 multis, to foundations coordinating among a core contributor model to reach roadmap consensus. In all of that landscape, anyone can jump up and say I am emperor now and this L2 is my state, and that's actually the intent and design of the space.
The thing about our scaling ecosystem is that it fragments liquidity. When markets fall below a critical mass of users, reciprocal trade routes, and regenerative use of capital, they become beholden to special interests who can wield the most effective power. In our case, that becomes VCs and mercenary airdrop farmers.
Yes, I am saying that our current scaling roadmap while longterm optimistic and a good thing, also resembles the Crisis of the Third Century. It is a time of ineffective war lords and capital ready to act as sword labor. Guess who gets hurt most during this period? Retail. No mom and pop is getting rich when the army can commandeer the materials they need to make a living.
The Bronze Age Collapse is another historical example of what I am getting at. Prior to it, the Mediterranean was a hub of activity with the Phoenician city states of Tyre, Sidon and Biblos wiring up the entire coastline in an effective trade route that moved goods between Persia, Egypt and Greece. Then the climate changed and Greece got its socks rocked, watching its population bottom out and cities go dark. The Phoenicians felt this deeply as an entire class of merchants, craftspeople, timber harvesters and other export oriented communities took it on the chin because they lost their buy side. Disconnect markets and the effects reverberate.
L2, L3s, rollups, LSTs, and yadda yadda yaddas all denominate in the coin of the realm, ETH. Fragmentation isn't the only problem. The other issue is there's a mismatch between the second order effects of ETH's market cap and the need for these chains to create value in order to attract new users. Said another way, the B2B settlement chain is smothering its children because it takes a lot of new inflows to create new wealth in ETH, meanwhile the only thing L2s are solving is gas cost and throughput. They aren't creating wealth because ETH is holding opportunity down.
There's a difference between colonizing new lands on terra nova and opening up digital physics. In the first, there's huge swaths of resources which can be extracted from the land and exchanged into mature functioning markets that are hungry for additional inputs and willing to pay hard currency for it. In the second, there's only the digital replication of existing protocols at cheaper costs with higher TPS. We aren't getting anything new from L2s yet, we are getting the deflationary effects of globalization just on the blockchain.
What is happening is that L2s are not onboarding new users at a sufficient rate, so their survival is then tied to hiring mercenary capital to perform the same jobs they did elsewhere, just on this new chain for as long as the incentives are there. And that last part is telling...because there's not sufficient levels of regenerative capital at work on these chains, the mercenaries have the L2s over a barrel. Pay us or we leave. Smart protocols see this and know this, so they start getting cagey in their reward design. Tokens become points. TVL gets uncapped, diluting how those points are spread around. Protocols know these mercenaries are going to bail, so deliver less than promised by rejiggering point pools. Low trust environments kill trade which dries up liquidity which causes debasement.
It's not hard to see parallels between the state of crypto today and the Crisis of the Third Century, but there is reason for optimism. Cheaper transaction costs and higher throughputs are going to create new types of protocols which cannot exist on mainnet or other L1s. Sometimes building it so they come requires disjointed periods. We are in a positive interregnum here, it's just no country for retail to get rich in.
This is a tricky subject to talk about because the information curve is both popularly flat and perhaps as wide as it has ever been. I ask for some latitude here (you've already given me a ton, but I need more for this section).
What is the information curve? It's the rate and breadth that novel ideas become distributed enough that markets can act on those ideas with widespread participation.
Part of the reason the last bull market went so hard was because a lot of people got way out on the information curve, deploying capital into novel ideas and primitives that were not held up to any rigor prior to people aping in. Once that capital was at work, people schooled themselves up, learning defi, staking, liquidity pools, NFTs, play2earn and dozens of other new concepts at the same time because they were incentivized to do so.
The thing was the market moved so quickly that it was extremely difficult to learn and then challenge all these new patterns because they were all operating at the same time and often in concert with each other as composable blocks. Also the numbers kept going up and retail was getting rich. It's only after some of these blew up that people doubled down and leveled up their knowledge. There's only been one other time in my life when I learned as much in such a short period of time and that was while living at a world class research institute studying 16+ hours a day.
Why did we do all that work? Because the incentives were there. Retail could get rich.
It also didn't work. Many of these concepts were vaporware, ponzis or just plan stupid. In hindsight and in isolation, it would have been easy to see through them. The thing is they were all going on at the same time and many were interdependent. Furthermore, crypto is structurally designed to act as a value creation trampoline. As long as the inflows are there, everything pushes higher and the inflows were insane. The signal to noise ratio was off the charts. The net result was that we let our money ride, learning along the way because leveling up across the information curve was both an offensive and defensive necessity to creating and protecting capital.
We have:
A big number problem with many crypto tokens. L1s are not going to pump like they used to.
Fragmentation of liquidity across too many ecosystems to get markets moving.
Institutional sitting on the sidelines of deeper crypto participation, buying the L1 tokens but not participating in ecosystem protocols
A change in token distribution mechanics to reserve TGEs mostly for privates and teams. ICOs and airdrops are out, capital is labor and tokens are the rewards.
What's the incentive for retail to climb the information curve? It's there for the truly committed or interested, but as an act of casual gig work? Not so much.
This leads to front running as the preferred pursuit of retail. Ordinals and memecoins are a good example of this behavior. Retail doesn't want to put work into understanding a ZK solver LST depin network providing AVS security to optimistic rollups where AI autonomous agents can manage intent based actions for delegated wallets, because a project that ridiculous is only going to issue tokens out if retail locks $30k of capital on the promise of points.
Instead, retail will just inscribe graffiti onto a chain in the hopes they catch lightning in a bottle or at the very least can snipe their friends who weren't online the minute that opportunity opens up.
The thing is if everyone in retail is relying on the 2021 information curve continuing to yield alpha as it gets deployed over and over again on each new L2, then its not alpha. It is simply a race to the bottom or a game of hot potato passed to the next bigger fool, but who is that bigger fool? We don't have enough noobs to make that work, so shitty behavior between "community" members who all know each other just weakens the social fabric of marketplaces and leads to liquidity slowing down.
Meanwhile, there's mountains of new things to learn about in the space. The information curve, especially when considering the intermingling of AI and crypto has never been higher.
One of the solutions to Rome's problems was to sever the mess in the west and just focus in on the east. The Byzantines were able to extend Rome's run another thousand years while the west drifted into the Dark Ages.
Another reason the last bull went so hard was that we saw trickle down economics at work. Institutional put money into lending opps on CEXs, those exchanges went into stablecoin ponzis, project founders for those projects put that into defi and everyone who got token rich in defi then made trophy buys of NFTs opening a wildly large Overton window for culture to accrue value onchain.
Think that's happening again?
I mean maybe we'll see the same level of foolishness when the bull is rampaging, but it won't be the same exact foolishness our flat information curvers are hoping for. For now, it looks like institutional participation is hanging around at the L1 levels, buying up ETH and BTC while avoiding most of the novel innovation we are seeing onchain today, instead preferring to follow BlackRock's push for tokenizing all assets and upgrading the rails of the global settlement layer to crypto. Some of that will of course trickle down into our broader ecosystem, but much of it will be partitioned into products and protocols that they build for their needs. Wall Street has shown it can repeatedly be idiots about things, but they generally prefer to do that with counterparties that adhere to their norms of conduct and culture. Do Kwon, SBF, 3AC, Barry and Celsius likely taught them a lesson that their next time onchain really needs to be run from inside the house as much as possible.
Culturally, retail has never been as disconnected from real capital as it is right now, and I do not expect that to change for the next go around. Simply put, foot soldiers are not the cannon fodder the Street calls for. Once again, it's capital.
I mean I would love to call the interregnum off and return to the wild style of the last bull, but you'll have to settle for the close of this article.
The secret, more complex third thing sitting between the bull and the bear is boredom. It's asking yourself whether you want to climb the walls, toss yourself into the well of memecoin dopamine or simply be like Bartleby the Scrivener and prefer not to participate until you see the conditions open up again for retail to be rich.
This isn't an all in choice, you can do all three and lord knows I flip flop between all of these postures. There's no telling when conditions are going to change so the little guy can just get out there and haul in fish after fish. Instead, you just need to keep casting the rod, keep an eye on the sea and not get too greedy while the fish aren't biting. The thing to do in interregnums is to educate yourself, use the downtime to keep an open mind to possibilities and be aware of the environment you find yourself operating in.
What is clear is that the tech looks extremely promising, protocols and practices are maturing, and market caps are rebounding off their lows. The key thing is to understand where we are. The world is constantly adapting. Hopefully this article has opened your mind to ways in which the next opportunity won't look exactly like the last one, and you can start looking for ways to play tomorrow.
I actually once nearly quit telecom because there wasn't any new opportunities opening up for us little guys. I was climbing the walls, and ready to get back to consumer internet because we were in stasis. A couple short years later, a wedge appeared that allowed us to level up and we never looked back. It really sometimes is as simple as waiting out an interregnum and then striking once conditions fit your strengths.
