Why I'm Super Bearish on Ethereum: Part One

$ETH Mar 01, 2021

Beyond the fact that the Dubai VC firm snubbed Ethereum, its also worth noting that they invested in two cryptocurrencies that are positioned as competing ecosystems (Polkadot has many transplants from the Ethereum community by virtue of its installation of Parity developers).

URL = https://www.parity.io/tag/polkadot/

Ethereum Transaction Fees are Out of Control

Below is a screenshot of an interactive chart that shows the exponentially increasing transaction fee


In the screenshot above, we can see that the average transaction fee peaked at nearly $40 per transaction.

Keep in mind, this is the average transaction that we're talking about (gas fees were more than likely in excess of >$1,000 for extensive DeFI and DEX operations).

Ethereum Futures Trade Exacerbates the Situation Going On There

As we all know, Etheruem futures launched on the CME earlier this month.

And while that may have seemed bullish at the time, it actually is another bearish factor at this point because there is now a credible means of shorting Ethereum (that's in direct reach of a bunch of hungry institutional wolves that don't care if they leave your mother homeless off of their short)

For those interested in taking a look at open interest, volume, etc., here's the link to the CME's site  

Ether Futures Quotes - CME Group
Find information for Ether Futures Quotes provided by CME Group. View Quotes

Below is a quick look at the market data from the last day of trade (February 26th, 2021)

Grayscale Ethereum Trust Was Trading at a Huge Discount For a Little While

This screenshot was taken from ycharts on February 27th, 2021 (yesterday).

At that point, the NAV was trading a -5.19% discount:

It does appear that things have cooled down a bit since then - as the NAV's discount has shrunk down to ~|1%|

Below is a look at how the NAV for Ethereum has fluctuated over the past few days

As we can see, from February 19th, 2021 to February 25th, it actually fell considerably (16% swing in the negative direction).

To put this in perspective, Litecoin is currently enjoyable a +1700% premium over the NAV (which actually means that its moved up by almost 200-300% over the past couple of days or so)

Recent Communications by Grayscale Have Put Ethereum in Question as Well

Its no secret that Grayscale is a significant financier of Ethereum by virtue of their Ethereum trust as well as their numerous investments in the Ethereum ecosystem (in countless capacities).

Specifically, Digital Currency Group (Grayscale's parent) is invested in pillars of the Ethereum ecosystem like 'Etherscan' (Block Explorer), 'Cryptokitties', 'Dune Analytics', 'Dapper Labs', and 'Protocol Labs'.

link = https://dcg.co/portfolio/

However, lately its been sending mixed messages on social media about the future prospects of the cryptocurrency.

This is evidenced in part by a recent tweet posted by the 'Grayscale' Twitter account

The link to the write-up  that "outlines important considerations" to take into account before considering an investment in Ethereum can found at this link: https://grayscale.co/insights/valuing-ethereum-2021/

Unfortunately, Grayscale mandates that you fork over your first and last name as well as your financial status (accredited investor or not) on top of an e-mail contact before viewing the .pdf, but if you're reading this piece, you're in luck as the author already went through this hassle to get the direct link to the report:

The actual report is published here = https://grayscale.co/wp-content/uploads/2021/02/VALUING_ETHEREUM.pdf

'Valuing Ethereum'

The report starts with a neutral tone, promising to give prosepective investors a comprehensive overview of Ethereum as both a technology and potential addition to the portfolio.

The report opens with the following musing:

"It's helpful to take a step back and consider Bitcoin's value proposition: the promise of a global, verifiable accounting system. This accounting system, supported and secured by the most powerful computing network in the world, allows users to track value with a high degree of confidence"

The report then contrasts this description of Bitcoin with the following excerpt on Ethereum:

"Ethereum similarly facilitates verification, but of a wider set of logic and information. In other words, Ethereum's robust network ensures that applications run according to the logic that is encoded, without the need for third parties or without the possibility of interference. Ethereum creates an environment of trust, which is historically a preprequisite for prosperous trade."

Isolating the above statement, one might leave with the impression that Ethereum is a conveniently equipped 'sidekick' to Bitcoin, augmenting its properties with a different, yet equally useful set of characteristics that also derive benefits from the common foundation of blockchain technology.

'Why Can't Bitcoin Be Made to Do the Same?'

The report aptly preempts the inherent rhetorical question this alignment creates, which is:

If Ethereum is premised on the same technology as Bitcoin, why was it launched as a wholly separate project vs. making the equivalent changes to the Bitcoin protocol to expand its functionality to include all of the characteristics Ethereum currently possesses?

Since the inception of other "altcoins", this question has served as the ultimate existential litmus test for competing / supplementary project launches in this space.

This is made evident by the existence of terms like 'altcoin', which semantically (but subtly) implies that the project is an "alternate" to the established, unanimously crowned king of the space - Bitcoin.

Grayscale's Response

The report defends this proposition by stating:

"[Is] Ethereum...better than Bitcoin? Not necessarily - they specialize along different frontiers and make tradeoffs accordingly. Bitcoin is hardened and relatively inflexible, instilling confidence that its accounting system won't change arbitrarily. Ethereum is adaptive and flexible, cultivating an environment of innovation and iteration."

Parsing Out the Bullshit for the Reader

As mentioned above, the parent company of Grayscale / Genesis have substantial investments in the Ethereum ecosystem, so their juxtaposition of Ethereum next to Bitcoin is bound to be a bit rosier than what reality tells us.

Why its Important to Parse Out the Bullshit

  • Because it helps them out, but hurts you.
  • Grayscale is several billion dollars + many years deep into their investment in the Ethereum ecosystem.
  • There is no reason to believe that they wouldn't have included the rosy statement we isolated above in this report regardless of the current state of the chain.

Last Word: Breaking the Cult-Like Conditioning of the Blockchain Space

[Speaking as an author now]: Over time, there are countless individuals that I have spoken to in the blockchain space that seem to take offense to some of my characterizations of various blockchain protocols.

Initially, I found this to be a weird quirk - but now, at this point, I regard it as a critical indicator that an investor has been influenced and convinced to hold beliefs about the technology and investment in general designed to prevent them from questioning the core thesis of their investment due to:

  1. Warped / perverted depiction of investing as an activity that only reaps rewards for those that are "true believers" in the "revolution"
  2. The idea that any information they come across that makes them question their investment must have been curated with an ulterior motive rooted in nefarious intent (that ultimately works against the investor's ends)
  3. A false belief that the project is run by geniuses / extraordinary individuals or a team of world-renown experts whose competence is unquestionable. Many projects position their team in this manner in their promotional / marketing content to give investors the impression that the project's success is "inevitable"
  4. A belief (rooted in fallacy), that investors are either "right" or "wrong", which serves as the foundation for the (often) complementary fallacy that since one has already "committed" to a project by placing an investment in it, it is "too late" to change course or re-consider their portfolio allocation.
  5. Existential dread that any new realizations that question the legitimacy of the projects they've invested may lead to an ultimate conclusion that the entire space / blockchain technology itself is "bullshit" / "a scam" (this is not true)
  6. Cognitive dissonance / embarrassment / denial (or a refusal to accept) that one could have been tricked, deceived, or victimized by the project they invested in. For some, this concept is a threat to their personal self-image / self-esteem. This often entrenches investors in the matrix until its too late since they are unable to embrace the fact that its possible to be a highly intelligent individual and also be an individual that was misled by carefully crafted, disingenuous information that imbued a false sense of confidence in the projects they invested in.
  7. One of the core facets of just about any blockchain project you'll see these days is the "community". Unfortunately, this facet of the project ecosystem has been frequently leveraged to establish personal relationships with folks in the blockchain space to win their friendship and/or trust with the sole intent of making the investment feel more "personal" (as if they're giving money to a 'friend')
  8. Projects also frequently overstate their importance and potential impact in an attempt to convince end users that their investment may also serve some socially righteous / altruistic purpose in addition to reaping profit. This tactic is particularly potent since it leads investors to believe that they may be failing the world / society / (some righteous cause) by closing their position in whatever project they're invested in.

There are undoubtedly countless additional psychologically manipulative tactics employed by various projects in the blockchain space in addition to self-contrived psychologies that imprison cryptocurrency investors, so the list above is by no means meant to be exhaustive.

However, it should be comprehensive (and hopefully relatable) for readers that can identify a poor investment decision they've made at any point since their initial foray into the blockchain sphere.

Back On-Track: Dissecting the Inaccuracies in Grayscale's Juxtaposition of Ethereum Next to Bitcoin

To refresh us, the specific quote we're dissecting is re-published below:

"[Is] Ethereum...better than Bitcoin? Not necessarily - they specialize along different frontiers and make tradeoffs accordingly. Bitcoin is hardened and relatively inflexible, instilling confidence that its accounting system won't change arbitrarily. Ethereum is adaptive and flexible, cultivating an environment of innovation and iteration."

Bitcoin is not 'hardened', nor is it 'inflexible'. In fact, one of the characteristics of the project that Satoshi Nakamoto touted in his initial e-mail to the Metzdowd mailing list introducing Bitcoin. Specifically, he stated that the, 'The network itself requires minimal structure' to emphasize that it was built to be flexible by design. This is also evidenced via the existence of 'op codes', which affords users an infinite number of configurations to augment the management of their funds.

Ethereum's best known innovation - smart contracts - have been both a gift and a curse for end users in the crypto space since the project's inception. As it relates to the 'curse' part, many of the issues surrounding the construction of smart contracts stem from the fact that they are immutable by design. As a result, smart contract compromise / exploitation is an ordinary, frequently occurring event that end users have been forced to accept as an inevitable drawback of using Ethereum

Saying that the protocol cultivates an "environment of innovation and iteration" is outright lazy. Pure fluff (did they have a minimum word count they needed to meet?)

The report unfortunately goes on to reiterate many of the false narratives about blockchain (Bitcoin, in particular), that have been spread as a means of shifting the general public's expectations for how they should be used.

Specifically, it states:

"Etheruem and Bitcoin enjoy a symbiotic relationship, drawing liquidity, mindshare, and value from the outside world. Bitcoin is the preferred store of value in the digital ecosystem, whereas Ethereum has emerged as the leading financial infrastructure, settling over $12 billion of daily transactions."

Its worth noting that, at the time of writing, BItcoin has consistently settled over $25 billion worth of transactions daily since the beginning of this year (2021):

source = https://bitinfocharts.com/comparison/bitcoin-sentinusd.html

Thus, the idea that Ethereum has emerged as the "leading financial infrastructure", is highly questionable.

Evaluating Ether as 'Money'

Curiously, the report provides credible arguments against considering Ethereum to be 'money' in a traditional sense (ignoring the irony here that these projects are classified as 'cryptocurrencies')

The figure above (from the report) shows Ethereum's valuation as a percentage of the 5 different assets / indices selected for comparison (BTC Value, '10% of Gold's Value', 'Global Gold Value', 'Global M1 Money', and 'Global M2 Money').

This section of the report punctuates its postulations with the following observation:

"Ether's use as collateral within the decentralized finance ecosystem continues to broaden. However, an uptick in the use of stablecoins (digital currencies pegged primarily to USD) and Bitcoin as collateral on Ethereum, may be challenging Ether's position as the ecosystem's preferred collateral" [this is a curious observation by GBTC! typically this space likes to steer clear of any revelations that may remind investors of the menacing, uncertain regulatory future for USDT and its cousins in the cryptocurrency sphere]

Growth of Stablecoins and WBTC on Ethereum

Grayscale did us the favor of illustrating this growth over the past two years (dating back to Nov. 2018) via the following figure:

One quick look at the above figure is all that's needed to see that the growth of USDT has exploded exponentially in comparison to the other two synthetic derivative assets (WBTC and USDC).

Curiously, it does appear that USDC has experienced a considerable uptick in issuances over the past year or so.

The management of this asset is publicly tied to Grayscale since its parent company (Digital Currency Group) was one of Coinbase exchange's original seed investors and USDC was launched as a joint venture by Coinbase and Circle.

The Value of Ethereum is Not Equivalent to its Value as an Ecosystem

The report notes that 'Ether' (name for an individual unit of Ethereum) is technically not necessary to fulfill its mandated purpose within the Ethereum ecosystem (payment for 'gas' needed to complete the computational execution of a requested transaction).

Specifically, it states, "Some analysis has noted that it may not be necessary to pay fees in Ether, but rather fees could be paid in any digital currency of one's choosing."

More Soon

Going to put the brakes on this for the time being to give you all a second to digest what's going on here with Ethereum.

There are honestly a million more reasons for why I'm bullish on Ethereum; but guess that this will go down as part one.



Happy to serve and help wherever I'm needed in the blockchain space. #Education #EthicalContent #BringingLibretotheForefront

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