Money 2.0 Stuff: Price Discovery Is Immoral



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  • How much should you care about the price of Ether?
  • Should crypto investors go short?

The price of everything

How much should you care about the price of Ether?

Well, for the vast majority of people, that probably depends on whether you actually own ETH, or whether you intend to own ETH, or whether you’re short ETH, or whether you’re invested in a direct competitor to ETH.

But what if, say, you happen to be an Ethereum Core Developer?

There is an unwritten, but widely accepted, rule in the Ethereum community that price talk is taboo: ‘BUIDL, not HODL’ so the saying goes. And I’m pretty sympathetic to the inspiration behind this otherwise cringe-worthy, purposely-misspelled mantra. The market madness of 2017 led many to forget why we’re actually here in the first place — and, just to be clear, it’s not so that everyone and their brother-in-law can get hilariously rich.

But balance is key. And like the crypto market, this ‘BUIDL not HODL’ halcyon cry has perhaps over extended itself: originally intended to spur productivity, in many ways it has only served to further cloud judgment.

In the context of ‘cryptoeconomics’, price is fundamentally important because the security of a network is directly proportional to miner revenue. If block rewards are worth a lot of money, miners will spend a lot of money trying to claim them. The more money they spend, the more expensive it is for an adversary to gain the majority share of computational power required to start attacking the network.

Price also has some important second order effects. If projects have some exposure to ETH, an appreciation in value gives them more runway and resources to expand operations: think of it as a ‘reflexive bubble’. In a rather crude sense, appreciation of ETH also acts as a signaling mechanism to would-be entrepreneurs that Ethereum is a legitimate candidate to host their applications.

But I understand the moral tension at play. Any appreciation will also directly enrich (arguably) non-productive speculators, and that outcome is hardly inspiring for those dedicating their lives to building censorship-resistant infrastructure.

Is there a suitable middle ground? Yes. Spankchain’s Ameen Soleimani captures it succinctly as follows:

It’s important for those working in the space not to waste time getting sucked into daily price fluctuations. It’s also important to optimize for the long term security of the Ethereum platform by making ether as valuable as possible. The two are not the same.

Sounds about right.

But wait. How exactly can Core Devs optimize for ETH value appreciation?

There are a couple obvious solutions:

First , set a competitive monetary policy: low inflation naturally adds to ETH’s ‘Store of Value’ properties. I say ‘low inflation’ rather than ‘zero inflation’ because I’m still skeptical as to whether any network can sustain miner/validator incentives solely through transaction fee revenue.

Second , encourage applications to support ETH as their native currency, thereby driving demand for ETH via utility. I’m similarly skeptical as to whether this is sustainable, especially in the context of a disinflationary monetary policy. Stablecoin support will undoubtedly provide users with the best experience.

And then there are some less obvious solutions, courtesy of Ameen:

First , fork competing protocols, like Substrate, making it easy to plug a chain into Ethereum. This process wouldn’t be straightforward but, if successful, should help detract from the value proposition of challengers.

Second , have Core Developers be explicit that they are optimizing for price. This will be controversial, and may lead to some trouble with folks at the SEC, but it is definitely a powerful signaling mechanism and has so far proven to be a successful strategy among the Tron & Friends crowd.

Third , continue to drive scaling development, permitting the network to process more transactions, and, as a result (under a certain set of conditions), increase dividends for ETH owners once the network transitions to Proof of Stake.

2017 was the year of HODL. 2018 was the year of BUIDL. Let 2019 be the year of VALUE OPTIMIZATION[L].

The Great Fund Structure Debate of 2019

“Funds have silently transformed from hedge funds into venture funds as their liquid portfolios shrank in value, making a very high percentage of AUM illiquid,” notes Multicoin Capital’s Kyle Samani.

And so began The Great Fund Structure Debate of 2019.

Placeholder’s Chris Burniske was quick to jump in with the following hot take:

To be clear, it’s a good thing for crypto that more people are structuring as VCs than HFs, as the incentives are better geared for long term value creation. I don’t see how an investor that profits from going long & short (many HFs) can later claim to sincerely support a cryptonetwork over many years, as a VC should .”

Joel Monegro, Placeholder’s co-founder, then published an article carefully dissecting the various ways that hedge funds and venture funds differentiate themselves.

Chris and Joel’s arguments are fair — “long-term investors can be helpful ‘placeholders’ in the early development of a cryptonetwork.”

But they’re also missing some important points.

First off – their binary approach seems misplaced in the multi-faceted world of crypto. We’re talking about paradigm-shifting technology here, ladies and gentlemen, so why not embrace a paradigm shift in fund structure?

Pray, forget about Limited Partner agreements and US law for a second.

If you’re holding coins and tokens that are trading on secondary markets, it seems like a lost opportunity to not take advantage when they exceed their fair valuations. You can bury your head in the sand and continue to scream ‘optimization of long-term value’ from the rooftops, but Mr. Market won’t hear you.

Let’s remember that, ultimately, despite the endless virtue signaling, venture capitalists are not responsible for the creation of new businesses and networks and services and all the other things you can create. They are responsible to their LPs, who expect them to maximize returns over the course of a fund’s lifetime.

Of course, VCs already know this, and, traditionally, have decided that they best way to maximize returns is to take a long-term approach. But traditionally, VCs haven’t had assets in their portfolios that fluctuate double digit percentages on a daily basis. If you’re not embracing this liquidity, then you’re probably not doing your LPs justice.

Second – the notion that entrepreneurs will distrust investors who have shown a propensity to go both long and short doesn’t give entrepreneurs the credit they deserve.

There are very few entrepreneurs that have the opportunity to turn down capital. If Fund X, who have publicly disclosed they shorted Project Y, are generous enough to offer Project Z some money at seed or Series A, then Project Z is probably going to do everything in their power to take it. They certainly should.

There are also very few entrepreneurs that would take Fund X’s short positions (if, of course, they were successful) as anything but a signal that Fund X is capable of recognizing when projects are meaningfully overvalued. Having that kind of fund on your team is useful as they can help you avoid those same mistakes and grow in a sustainable fashion that actually justifies high valuations.

And if Fund X does decide it’s had enough and starts selling, or even shorting, before the typical 4-7 fund period ends, that action should not be perceived as ‘value destructive’. Rather, Fund X is catalyzing price discovery, which, in the medium-long term, should help the project avoid the vicious peaks and troughs that have come to define inefficient markets.

So for all you aspiring fund managers out there – sell and short your hearts out. Or don’t. But rest assured: good guys finish last.