On August 28, Followin had a conversation with three big names on Space, titled "Will the interest rate rise or fall? What should I buy next to get rich?"
Space gave a wonderful discussion on topics such as opportunities in the BTC ecosystem, market trends after the interest rate cut cycle, and crypto market investment methodology. The following content comes from Space and is organized by Followin.
The article has been heavily edited. You can listen to the Space conversation record: https://x.com/BTCdayu/status/1828753830277984413
Host: Followin Chinese (@followin_io_zh)
Guests:
Lao Bai, Investment & Research Partner ABCDE (@Wuhuoqiu)
Shu Tong, Head of Investment Research at 7updao (@cheng_shutong)
Dayu, Crypto Investment Researcher (@BTCdayu)
Moderator: In your recent article, you mentioned that the narrative of the BTC ecosystem has a process, first asset issuance, then Layer2 expansion, and now staking. What do you think of the development process of the BTC ecosystem?
Walter White:
This is a simple replica of the path that Ethereum took.
In 2017, Ethereum ICO issued coins in 5 minutes, and it became an asset issuance platform. After DeFi Summer, there were requirements for Ethereum performance, and side chains and Layer2 appeared. Now, staking has turned ETH into a more in-demand token.
The issuance of assets on Bitcoin has been around for a long time. The earliest was colored coins. People tried to issue some assets on Bitcoin, or other more scalable functions. Vitalik had many suggestions for colored coins, but they were not adopted. In a fit of anger, he created Ethereum.
Satoshi Nakamoto designed Bitcoin as electronic cash, which later developed into electronic gold. In 2017, USDT was transferred through the Bitcoin network. In 2021 and 2022, no one used USDT transfers based on the Bitcoin network.
Everyone has a common concern about the Bitcoin network. If it is to become something that can last for a hundred years and change the world and production relations, it must have a sustainable and secure economic model, which is what Satoshi Nakamoto said, that there should be a lot of transactions on the chain by 2030. The problem now is that the electronic cash narrative has switched to electronic gold, and we don’t see too much demand for transactions on the chain. There is no demand for transactions on the chain, but the mining output has been halved every four years, so you can’t expect the price of Bitcoin to double in four years. In short, we need a large number of transactions on the chain to maintain the security of Bitcoin (so that future miners are willing to mine).
When Bitcoin had 4M of isolated witness space, it could be played and operated, and Ordinals and BRC20 came out. It stimulated on-chain transactions through on-chain assets.
The initial results were very good. At the end of last year, the miner fee income was about 200 to 300 bitcoins per day, but now it has become a few tenths of a bitcoin. We dare not say that this attempt has failed, but it is true that the on-chain asset track of Bitcoin has now fallen into a more difficult moment.
(In space, Lao Bai did not elaborate on the second path of Bitcoin expansion. In the X tweet, Lao Bai mentioned:
As the technology stack of the expansion plan is too complicated, even more complicated than the assets, it is hard to say who will come out on top in the end. We can only say that each has its own advantages and disadvantages, and we will leave it to time and the market. It is not impossible to say that all of them will be falsified in the end. After all, the main narrative of BTC's current "electronic gold" does not actually require expansion. Expansion is more for the service of "on-chain assets". If the on-chain asset route does not take off, expansion will naturally lose its meaning. )
Now, everyone can only focus on electronic gold itself. The third way is to give interest to Bitcoin itself and give it more application scenarios. This is what Papillon does. Including solv, Lombard, etc. They allow you to use your Bitcoin to earn a certain amount of income in a relatively safe environment.
Daewoo:
Now, except for Bitcoin, all other crypto are empty coins. The future wealth opportunities or major trends are likely to revolve around Bitcoin, but these projects in the market are divided into several categories. Some are still very low-level, just a gimmick, such as making a second layer of Bitcoin, but its purpose is still to issue a coin to sell to me. I am not very interested in this kind of thing now.
It can have a good empowerment for Bitcoin itself, and can bring real value to the world. It would be best if it can go beyond the circle and change lives. The time span can be longer, five or even ten years. Are there any projects that have explored this aspect?
LaoBai:
This question is difficult to answer.
After Ethereum POW switched to POS, it completely became an "application-based chain". It needs to find a large number of applications, itself as a smart contract platform, and ETH as gas. Ethereum is taking such an "oil route". It must rely on more heavy industries to use it in large quantities, so that it will be valuable.
Bitcoin is now seen as digital gold, which is a value storage route. How should digital gold be empowered? There have been some discussions in the industry before, such as streaming payment, where you can pay while reading or watching videos. But this thing can't really play the role of Bitcoin. It is not a rigid demand, a bit like using Bitcoin or Lightning Network technology, which is like using a hammer to find a nail.
In fact, if we force Bitcoin to be empowered in terms of applications, it will never surpass Ethereum. Its programmability and scalability must be less than or equal to Ethereum.
Therefore, there is no need to do so much on Bitcoin and consider what kind of changes to make to the world from an application perspective, or what kind of Web 3 applications to apply.
Without applications, we can only go back to how to make the idea of digital gold accepted by more people, make gold earn interest, and make gold be used as collateral to provide security or value for other things. This may be the only thing I can think of on the road of digital gold.
The biggest question is, if this is the case, why can't this be done on Ethereum, which is faster, safer, and more convenient. I have always been stuck on this issue.
Therefore, we missed ORDI, which is now a Layer2 with a valuation of hundreds of millions. I talked about it when it was 15 million. After the discussion, I thought, isn't this just an EVM? What's the point? This may also be a kind of prejudice, I think.
Daewoo:
Sometimes when people in the crypto discuss the value of something, they suddenly find that everyone is silent.
Followin: Will the business logic of Babylon staking work? Will there be new projects that can absorb TVL just by the expectation of issuing coins?
LaoBai:
Papillon's technology moat is quite deep, and people can pledge their bitcoins to it in a relatively trustless and safe manner. At present, it has no direct competitors, and its story is quite sexy.
As for its business model, it can be understood as Eigenlayer. In the future, if an application wants to build a new chain, it can use Eigenlayer or Babylon's Bitcoin to protect the security of the new chain.
In the LST/LRT area, EigenLayer has Etherfi, Renzo, Puffer, etc., and Babylon also has Solv, Lombard, Lorenzo, etc. They compete for the entrance of BTC into Babylon from the user side. (Supplement: Users give BTC to these protocols, and these protocols deposit BTC into Babylon on behalf of users. Users can get more benefits in addition to the Babylon staking income, such as project governance token airdrops, and even use staking certificates and other methods to cultivate more income.)
However, business depends on demand, and in the early stages, it may be a serious shortage. Currently, there are only 1,000 bitcoins, and in the future, there may be tens of thousands of BTC as security guarantees. But how many chains will choose to use Babylon's services?
Just like you can choose to use opstack to quickly and conveniently build a layer2, your security is directly guaranteed by Ethereum, without the need for Eigenlayer and Babylon.
The demand side is currently insufficient, it’s just that everyone finds this narrative more sexy.
Followin: Are there any time points or signs that can be observed for the prosperity of the BTC ecosystem, or the explosion point of the Babylon project?
LaoBai:
The opening of the 1,000 BTC quota last week was the first stage. The team said that the mainnet will be launched in October, and the staking restrictions will most likely be lifted by then, which is the second stage. The third stage is to see what the ecosystem will look like, but there is no specific time point to judge at present.
If you look at the Eigenlayer homepage, it shows that there are more than a dozen AVS running, but there is no particularly well-known and powerful application chain project. Only one prototype Eigen DA is relatively well-known. Babylon will lag behind in this area (more complicated). It is likely to wait until the next round of bull and bear markets, so there is no rush.
Followin: Does the rise of the BTC staking narrative require simultaneous expansion?
LaoBai:
This belongs to the third stage, so I said that we should be able to see it in the next round of bull and bear markets, but in this round of bull and bear markets, there is a high probability that we will see a false little prosperity.
Even though the application of Babylon has not taken off, the projects around Babylon will issue coins first, such as Lombard airdrop , which is valued at hundreds of millions, or Babylon airdrop, which is valued at billions. Their airdrop expectations are sufficient and can last for several months. Even if the demand for Babylon is insufficient and the security costs are not high, airdrops alone can maintain everyone's expectations.
If tens of thousands or even more BTC enter Babylon through Lombard, the actual APR may be only 0.1%, but with Lombard and Babylon airdrops, the APR may soar to 10%. I believe BTC holders are very willing to do this.
You should know that Lombard will mint something called LBTC, which is definitely more secure than WBTC. When tens of thousands or even more LBTC begin to circulate on multiple chains, everyone will find that there is a small hope for this round of bull and bear markets. That is, we will see the emergence of a WBTC competitor, which may take several years to truly surpass WBTC in the next round of bull and bear markets. This in itself is a great revitalization of Bitcoin assets.
Back to the original point, these booms are still of no help to the sustainability and security of Bitcoin itself in theory. I am still worried about how Bitcoin will support these miners and maintain the computing power decades later.
Of course, this time around, maybe we shouldn’t worry about these things for now. We should first think of ways to circulate Bitcoin and replace the centralized product WBTC.
Followin: Is the second half of the bull market coming? Will the market rise or fall next?
Bookkeeper:
What do you think about the future market? I tend to understand the market from the perspective of liquidity. Because in the next six months, or three months, I don’t see any clear expected events that can serve as a clear reference for the crypto.
In fact, many crypto investors may not have an accurate understanding of liquidity. In this round of bull market, many people regard this ETF as a source of funds, or regard the macro expectation of interest rate cuts as a source of funds.
If ETFs are the source of funds, then who is buying ETFs? If we look at the macro, I don’t think it is very appropriate. Cryptocurrency is a relatively risky asset. Only when liquidity is very abundant will a lot of funds flow in. But in this cycle, I don’t see a very strong improvement in global liquidity. In terms of the macro, I will only regard it as an expectation. I will assume that market sentiment is more positive, but it is not a source of funds at present.
I am now more concerned about the transfer of existing funds between various major asset classes. Capital is rotating between sectors, which is also very obvious in the crypto industry. I am looking forward to the funds hyping AI represented by Nvidia to enter the crypto market.
In my opinion, the financial market is playing a "price-performance game". When a certain sector becomes expensive, funds will naturally go to speculate on the next undervalued sector.
I can’t think of any other sector that is as imaginative as AI, including potential returns that can be compared with AI, after the hype of AI in the US stock market is over. I think it is a very natural process for funds to spread from AI to blockchain.
I think the process of capital transfer will start in the second half of 2024. Looking at the US stock cycle alone, basically after two years of speculation, capital will flee. Nvidia has been hyped for about 600 to 700 days now, and AI has not been very new since its inception. Nvidia's current PE of 60 times can be said to be very expensive.
I think there is a basis for existing funds to support the rise, but we still have to wait for clear signals, and the above logic needs further verification.
The signal I want to see is that although Nvidia is adjusting or trading sideways, Bitcoin is relatively strong, at least for a period of time. Then combine macro liquidity expectations and cycles to understand the market.
At present, the sentiment is relatively optimistic in terms of liquidity expectations. On the one hand, Powell is expected to be dovish. On the other hand, the global macro liquidity level index of various countries combined has exceeded the high point in March 22. However, it is still at a low level.
But I think it doesn’t matter, it can still bring a relatively good expectation. And the expectation of improved liquidity will enter the cryptocurrency market faster.
If we understand this market from a cyclical perspective, Bitcoin has been trading sideways for more than 150 days. Historically, such a long period of sideways trading is the end of consolidation. Whether it goes up or down in the future, there will generally be a lot of room for growth.
If we look at the halving cycle, the market will basically start to accelerate 150 days after the high point before and after the halving, and it has now reached the critical point.
In general, first of all, I think there will be a process of stock capital transfer from US dollar assets, from AI to Bitcoin. Secondly, combined with the macro market expectations and market cycles, I tend to be cautiously optimistic, but I am still waiting for a clear signal that the funds hyped by AI will spread to Bitcoin. And observe the technical aspects, sentiment, etc.
Followin: Can Altcoin still be bought? Are the strategies of the last bull market no longer applicable?
Bookkeeper:
There are indeed many different points in this round of bull market. Many people feel that they cannot make money. The root cause is that the growth level of crypto asset prices cannot match the overall liquidity. To put it bluntly, the price of Bitcoin has risen, but there is no money in the market. Previously, the global liquidity level was high, Bitcoin rose sharply, and VC coins sucked blood, which led to the current situation.
The bad side is that many sectors have not grown, and the altcoin season with thousands of coins rising together is gone. The good side is that market expectations are more advanced, and many sectors will be one step ahead of the market. They will not wait for the price of Bitcoin to go up before trading, but will follow the rise of Bitcoin, and some strong sectors will emerge. In a market with insufficient funds, sector rotation will also be particularly obvious.
How to find an actionable section? I think it should at least meet the following characteristics:
The ceiling is high enough and the bubble can capture investors' imagination.
There is a value difference compared to the current price.
It is best to have fundamentals. Some innovative tracks can be without fundamentals. The financial and capital markets themselves encourage innovation and have added value and rewards for innovation.
Whether the sector assets are scarce, if an exchange lists a lot of coins from a certain sector, the funds will definitely be divided and diverted during the subsequent speculation.
I am more optimistic about two sectors, one is the Bitcoin ecosystem, and the other is the real cash inflow, fundamentals, and tokens are unlocked, and the circulation is almost distributed. Now the concepts and trends in the market are not hyped up, so we can only return to the basics and land projects with fundamentals and good revenue, such as AAVE.
LaoBai: Do you think AI funds may come to the crypto? Are they looking for Web 3+AI targets, or mainstream currencies like Bitcoin and Ethereum?
Bookkeeper:
I think I prefer Bitcoin. I think Wall Street people don't like Altcoin very much. Indeed, this ecological currency does not have much fundamental and business value income. For large funds, Altcoin may not invest much.
Dayu: There are two risks in the macroeconomic area. What do you think? First, if Nvidia stops rising and US tech stocks collapse, will the crypto collapse? Second, we are talking about economic recession.
Bookkeeper:
This is an objective fact. The US stock market will naturally squeeze the liquidity of the crypto market, which is definitely not good. But from my observation, the trend of AI has not been fully told, and there are still some derivative narratives to tell. For example, the funds that hype Nvidia, I don’t think they have completed the entire AI hype cycle, formed profits, and can flee. They will not easily extinguish the story when there is still a story to tell, especially when the US dollar is facing an asset shortage. I think staying in the AI sector is in line with the tendency of funds to stay.
Then regarding recession, I think the market is digesting the interest rate cut during this period, and there is a possibility of greater risks.
Looking back, the expectation of interest rate cuts began in February and March, and the price of Bitcoin has been flat during this period. Now many people are saying that the price of Bitcoin will fall after the interest rate cut. For me, I cannot understand it because the price did not rise before or after the interest rate cut.
Followin: 24 years, how should we invest?
Daewoo:
I am currently pessimistic about the second half of the year or the future.
In fact, every wave of big money-making market is difficult to predict or concoct by humans. Just like we made 10 predictions for 24 years in 23 years, the failure rate may be very high.
Looking back at this year, from January to March, I can sum it up in three words: "rushing forward", that is, people who rush forward without thinking will make a lot of money. Because at that time, there was a lot of FOM, halving, interest rate cuts, ETFs, and various favorable factors.
From April to August, it can be summarized in three words: "lie flat". After April, I operated less and less. Generally speaking, it is worse than not operating at all.
I think there may be opportunities in the next few months. One is the projects in the Bitcoin ecosystem. Everyone recognizes that Papillon is the first dragon, and there will be a second dragon. Solv and others are also engaged in staking. Solv may issue coins first, and Papillon may be later. Papillon’s first phase opened 1,000 bitcoins for staking, which is too volatile. If it is opened later, you can try it.
As for the market, my view is similar to Shu Tong's, and I still expect it to rise overall. Even if there is another big crash, it will still rise, it's just a matter of how to buy the dips.
When buy the dips, I may focus on two targets at present. One is Bitcoin. My idea is to buy at 60,000 or more than 50,000. If it really drops to more than 40,000, I can buy a large position. Another one is AAVE, if it is below 100, I can also buy it. Everyone should have a consensus that it is particularly difficult to find valuable projects in the crypto. In the end, everyone will slowly return to some projects that can last a long time and create value. The annual revenue is good. MKR and AAVE are twins, and you can also pay attention to them together.
I will talk about some operational ideas, or review.
1. Capital is king.
An investment guru said that when investment reaches a certain level, the competition is about who has more cash when blood is flowing. Another saying is, I hope I can outperform most people when the market is particularly bad. When the market is average, I may also be average. When the market is particularly good (when the market is FOMO), I hope to underperform everyone. Taken together, the principal is king.
2. Evolution must be fast.
The narrative in the crypto changes too fast, super fast. Two weeks ago, everyone said this coin would at least increase 1,000 times, and two weeks later, everyone said it was worthless. When it was rising, everyone was right, and when it was falling, everyone was wrong. The key is that 99% of the crypto is empty, and when it fell, everyone began to face reality. When it was rising, you thought it was garbage, but you didn't dare to say it, because people would say it was garbage, so why didn't you make money? You are just jealous.
Let’s not talk about copycats. The status of ETH three months ago and ETH today is also very different in everyone’s mind. Three months ago, it was Vitalik, but now everyone is saying that people should play less with young models and write more code.
3. Run early.
The only valuable currency we have to choose is Bitcoin, which you can take away like a family heirloom. The others are all virtual coins.
I think air coins are worth playing with, including VC coins. There are always some points on the road to zero that can be played with. Why play with them? There is no other way. If you only play with Bitcoin in the crypto, ordinary people will not be able to turn things around.
How to run early? I think there is some logic. The principal should be stable. Don't lose all the profits when it rises and falls. What should I do if I get stuck? My experience and thinking this year is that I will choose to sell it most of the time. When you are struggling to decide whether to sell, you usually have to sell. There are many opportunities in the crypto. If you don't sell, you can't participate in the next opportunity. Every investment is an independent operation without emotion.
4. Opportunity cost.
There is a situation where someone bought 3000U of Bitcoin, and then sold it. Later, Bitcoin broke through 20,000. There will be a psychological pattern: I sold it at 3000 and bought it at 20,000. Am I not an idiot?
I think that every operation is independent, making money or losing money independently.
Everything in the crypto has opportunity costs. Find an operating method that suits your personality. There are many opportunities and there will always be opportunities.
