An Unfortunate Situation for Bitcoin
Most investment debates consist of people talking about different time horizons, and thus, they often talk past each other because both are technically right. Take the gold versus Bitcoin debate. Bitcoin lovers tend to say that Bitcoin is the best investment because it has outperformed gold over the past 10 years by a wide margin.
Source: TradingView BTC and GLD returns over the past 10 years
Gold investors tend to say that gold is the best investment and have recently been stomping on Bitcoin’s grave, as gold has outperformed Bitcoin significantly over the past year (with similar stories for silver and copper).
Source: TradingView BTC and GLD returns over the past 1 year
Meanwhile, over the past 5 years, gold and Bitcoin have had nearly identical returns. Gold tends to do nothing for long periods of time, then skyrocket higher when central banks and momentum chasers buy. Bitcoin tends to have violent moves higher, and then big crashes down, but ultimately still moves higher.
Source: TradingView BTC and GLD returns over the past 5 years
So you can win or lose just about any argument involving Bitcoin and gold, depending on your investment time horizon.
That said, there’s no denying the recent strength of gold (and silver) versus Bitcoin lately. In some ways, it’s kind of funny (or sad). The biggest firms in the crypto industry spent the past 10 years catering to macro investors instead of real fundamental investors, only for those macro investors to say, “nah, we’ll just buy gold, silver, and copper instead.” We’ve long been advocating for the industry to switch gears. There is over $600 trillion worth of stocks, bonds, and real estate, and the buyer base of these assets is a much stickier group of investors. There are a LOT of digital assets that look more like bonds and stocks, issued by companies that generate revenue and perform token buybacks, yet the market leaders have, for some reason, decided to ignore this sub-sector of tokens. Maybe Bitcoin’s recent poor performance versus precious metals will be enough for large brokers, exchanges, asset managers, and other crypto leaders to recognize that their attempt to turn crypto into an all-encompassing macro trading vehicle has failed. Instead, they may focus on educating the $600 trillion worth of investors who buy cash-flow-producing assets. It’s not too late for the industry to start focusing on the quasi-equity tokens that house cash-flow-producing tech businesses (like the tokens of various DePIN, CeFi, DeFi, and token launchpad companies).
Then again, if you just change the goalposts, Bitcoin is still king. So it’s more likely that nothing will change.
The Case for Asset Differentiation
The good years for crypto investing seem like ages ago. Back in 2020 and 2021, it seemed like there was a new narrative/sector/use case and a new type of token every month, and positive returns came from many corners of the market. While blockchain’s growth engine has never been stronger (on the heels of Washington legislation, the growth of stablecoins, DeFi, and RWA tokenization), the investment environment has never been worse.
One sign of a healthy market is dispersion and weak inter-market correlations. You want healthcare and defense stocks to move differently from tech and AI stocks. You also want emerging market stocks to move somewhat independently from developed market stocks. Dispersion is generally viewed as a good thing.
2020 and 2021 are largely remembered as “broad market rallies,” but that wasn’t actually the case. It was rare to see the whole market moving up and down together. More often than not, one sector was up while another sector was down. Gaming would rally while DeFi fell. DeFi would rally as Dino-L1 tokens fell. Layer-1s (L1s) would rally while Web3 fell. A diversified portfolio of crypto assets actually smoothed out returns and often lowered overall portfolio beta and correlations. Liquidity came and went according to interest and demand, but returns were mixed. And this was very encouraging. The massive inflows into crypto hedge funds in 2020 and 2021 made sense due to the growing investable universe and differentiated return sets.
Fast forward to today, and the returns of all crypto-wrapped assets look identical. Since the flash crash on October 10th, downside returns across sectors have looked indistinguishable. It doesn’t matter what you own, or how the token accrues economic value, or what the trajectory of the project is…the returns are largely the same. And this is very discouraging.
Source: Arca internal calculations and CoinGecko API of a representative sample of crypto assets
This table looks a little more encouraging during times of market prosperity. The “good” tokens tend to outperform the “bad” tokens. But a healthy market would actually look the opposite. You want good tokens to outperform in bad times, not just in good times. Here’s the same table from the April 7th lows to the September 15th top.
Source: Arca internal calculations and CoinGecko API of a representative sample of crypto assets
Interestingly, when crypto was in its infancy, market participants tried very hard to differentiate between the types of crypto assets. For instance, here’s something I wrote in 2020, where I labeled crypto assets in 4 ways:
At the time, this was somewhat unique, but a lot of investors were intrigued. It mattered that crypto assets were evolving from just Bitcoin to smart-contract protocols, to asset-backed stablecoins, to quasi-equity pass-through securities. Researching the various areas of growth was a big form of alpha, and investors wanted to understand the different valuation techniques required to value different types of assets. Most crypto investors didn’t even know when jobless claims came out, or when an FOMC meeting was taking place, and rarely took any cues from macro data.
Post the crash of 2022, these different types of assets still exist. Nothing really changed. But there was a big change in terms of how this industry was marketed. The gatekeepers decided Bitcoin and stablecoins were all that mattered. The media decided that TRUMP token and other memecoins were all they wanted to write about. And over the past few years, not only has Bitcoin outperformed most other crypto assets, but many investors have forgotten these other asset types (and sectors) even exist. There was nothing about the underlying companies’ and protocols' business models that became more correlated, but the assets themselves sure did as investors fled and market makers dominated price action.
Which is why last week’s article from Matt Levine at Bloomberg was so surprising and welcomed. In just 4 short paragraphs, Levine accurately described the differences and nuances between various tokens. It gave me some hope that this type of analysis could still be done.
The leading crypto exchanges, asset managers, market makers, OTC desks, and pricing services still call everything that isn't Bitcoin an "altcoin" and seem to only write macro research that lumps all of "crypto" together as one giant asset. Did you know that Coinbase, for example, appears to have a very small research team, led by one primary research analyst (David Duong), whose work is largely focused on macro research? Nothing against Mr. Duong – his analysis is excellent. But who comes to Coinbase looking for macro analysis? Imagine if the leading ETF providers and exchanges only wrote generically about ETFs, saying things like “ETFs are down today!" or "ETFs responded negatively to the inflation data." They’d be laughed out of existence. Not all ETFs are the same just because they use the same wrapper, and those who sell and market ETFs understand this. What is inside the ETF matters most, and investors seem to have no problem differentiating between ETFs intelligently, largely because the industry leaders help their customers understand this.
Similarly, a token is just a wrapper. What is inside the token matters, as Matt Levine eloquently describes. The type of token matters. The sector matters. The attributes (inflation or amortization) matter.
Perhaps Levine isn’t the only one who understands this. But he is doing a better job explaining this industry than those who actually profit from it.
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