As Prices Crash, Don’t Trust the News

People who are new to markets or don’t spend a lot of time interacting with them usually assume a simple causality where news dictates price, as in “bad news came out, so the price went down.” But spend enough time around markets, and you’ll realize that the opposite could also happen, especially in shorter time frames. There, it’s just as likely that price dictates news.

For a simple example of this phenomenon, consider the oil bubble and crash right before the financial crisis. During the bubble phase, when the price of crude climbed from $60 to $150, there was a constant stream of news articles on “peak oil” — the belief that we were nearing max global production. But when the price crashed all the way down to $30, mentions of that topic almost entirely disappeared. Here’s a chart of google searches during that period vs. the price of oil.

How do we know that it was price dictating news? Because actual oil production during that period barely changed.

This tail-wagging-the-dog phenomenon has been present in crypto markets from day one. There was no shortage of bullish news in December, and there is no shortage of bearish analysis now. Since price determines news, then the great crypto winter of 2018 necessitates a strong dose of bad news. Since Ethereum has fallen harder than Bitcoin, then it generates even more negative news flow than it’s older sibling. The more ETH falls, the worst the news and analysis gets. First it was a shitcoin headed to sub double digits, and now it’s so economically flawed that it’s going zero.

The latter hit-piece on Techcrunch is so egregiously flawed that I can’t help but respond. You can tell that it’s the kind of thing written by someone who has an ax to grind from it’s very first sentence, because it predicts an impossible outcome:

Here’s a prediction. ETH — the asset, not the Ethereum Network itself — will go to zero.

On any public blockchain, the value of the native token is a key component of its security. If the value of ETH goes to zero, then the Ethereum platform becomes exposed to all array of attack, the least hostile of which would be an endless stream of spam transactions.

Now, I’m guessing the author would argue that this wouldn’t be a problem, because in his fictitious universe, not a single miner would accept ETH to process transactions anymore, so all these spam transactions would just linger in the mempool. But if that were to happen, then there would be no Ethereum blockchain anymore. Instead, there would be thousands of independent forks, each using an ERC-20 token as it’s native coin, and each being also vulnerable to spam attacks, because the value of a single token on its own chain is always lower than the value of all tokens and a native coin on a single chain.

So, just knowing that this author claims “Ethereum ends up succeeding wildly but ETH becomes worthless” tells me he doesn’t know what he’s talking about. It’s the equivalent of someone predicting that house prices are going to soar, but you’ll be able to rent one for free.

When price determines news, extreme opinions spread like wildfire, aided by the fact that everyone is too distracted by what they see on their quote screen to realize when an analysis is full of unsubstantiated assumptions. Peak oil, for example, assumed that demand can’t ever go down and supply can’t ever go up. The financial crisis and the fracking boom made a fool out of anyone that believed either.

Jeremy Rubin’s entire argument is predicated on the assumption that in the future, all dApp users and all Ethereum miners will only want to pay for transaction fees using a token, leaving no other source of demand for ETH. This is a wild and unsubstantiated assumption, and there are many scenarios where it wouldn’t be true.

For one, any user who is bullish on the tokens they are using would much rather pay gas in ETH. Why? Because nobody likes to spend currency they think will go up in value. So long as a user believes that their tokens will appreciate in value more than ETH (something that virtually every single ICO participant who sent in ETH in exchange for a new token must have believed) then they will prefer to pay fees in ETH.

More importantly, why would the miners prefer to get paid in tokens? Put yourself in their shoes for a moment. They are spending hard earned fiat on hardware and electricity to earn a profit. As payment, they can either collect one cryptocoin — which happens to be the second most liquid digital asset in the world and traded at every major exchange — or dozens of different tokens, every single one of which is by definition less liquid than ETH, many of which don’t trade in every country, and most of which cannot be traded directly for fiat. Remember, the power company won’t let you pay the electric bill with a shitcoin.

Rubin addresses this argument (previously made by Vlad Zamfir) then dismisses it by claiming the process of cashing out countless tokens is no different than doing it for a single coin. But that’s like saying a coffee shop that accepts only dollars does the same amount of work as one that accepts dollars, euros, cans of beans, Bitcoins, purple crayons and sneakers signed by Kanye. The accounting alone would be a total fucking nightmare. This is why we don’t live in a barter economy anymore. It’s always easier to have everyone transact to one currency.

When it comes to markets, liquidity trumps almost everything. That’s why the vast majority of fiat currency trades around the world are done to just a few reserve ones, and why right now, in back alleys in Tehran and Buenos Aires, people are trying to trade their local money for dollars. That in turn explains how the US Dollar has managed to retain its value despite a decade-long campaign by the Fed to destroy it.

Being a reserve currency is extremely valuable, and ETH is the reserve currency of all ERC-20 tokens, a fact obvious to anyone who’s participated in an ICO on that platform. But Jeremy Rubin must not know what an ICO is. If he did, he would realize that his argument has already failed. It’s impossible to have a world where ERC-20 tokens are in demand and ETH is worthless, because to get to that point, every project would have sold their token to buy ETH.

Lastly, this farcical argument also assumes that the only natural demand for ETH is to pay the gas fee for transacting a token. This is a common argument made by Bitcoin maximalists, who’ve perhaps seen one too many Highlander movies, and love to remind the rest of us that when it comes to a purely digital stores of value or mediums of exchange, “there can be only one.”

This is an unsubstantiated argument, and it also ignores the many uses of the Ethereum blockchain that cost gas but have nothing to do with an ERC-20 token. When I teach my hands-on blockchain training course, I walk all my students through the process of purchasing an ERC-721 token. How, pray tell, does one buy a Cryptokittie and not use ETH to pay the gas fee? I’ve never actually bought one, but I’m assuming you can’t just send the miner your cat’s tail.

Beyond non-fungible tokens, you would also have to use ETH to pay for gas if you wanted to use Ethereum to circumvent government censors, store a hash of your digitally executed document or have your permissioned blockchain reconcile to a public one.

I have no idea who Jeremy Rubin is, nor do I really care. What I do know is that he’s not really out to make a compelling argument. I knew that about him before I even read his post, because its title has the word “inevitable” in it. If there’s one lesson we’ve learned over and over on this brand new frontier, it’s that nothing is inevitable.

To state otherwise is to be ignorant of the many unknowns and unknowables before us, which is why the kind of person that would make such an argument is at best a fool and at worst a provocateur, exploiting the current wave of negative sentiment to get a faulty point across.

Ethereum might very well go to zero someday, or it might flippen and go to the moon. But as it bounces around trying to find it’s way, we should be careful about which ideas we consider because they are humble and coherent, and which ones are just a consequence of price driven frenzy, and are best ignored (I’m looking at you, Vitalik).