Bitcoin reaches another all time high

Plus Congress lives down to expectations and you can't put a price on karma

In this issue:

  • Bitcoin reaches another all time high

  • Congress lives down to expectations

  • You can’t put a price on karma

  • Mayors love Bitcoin


Bitcoin reaches another all time high

On Monday morning (or depending on your perspective, Sunday night) the Bitcoin price shot up around ~4.5% from ~$63k/BTC to ~$66k/BTC over the course of a few hours. Over the course of the rest of the day the price strolled leisurely up past the previous all time high. At time of writing price is ~$67.6k/BTC. Markets being what they are I assume the next major price threshold will be at $69,420/BTC.

When people ask me why the price of Bitcoin has moved up (or down) I like to quip that it was because there were more buyers than sellers (or vice versa) — but that’s not strictly true. A lot of sudden price movements in crypto are actually driven by leverage, where traders borrow money from the exchanges they are trading on to take outsized positions beyond what they could actually afford themselves.

Leverage driven price movements tend to be sudden (because leverage multiplies the size of a trade) but also fragile (because exchanges force leveraged traders to sell to pay back their loans). Leverage basically amplifies the market signal of traders with short time horizons and paper hands.

So it is interesting that the price movement this week did not come with a surge in leverage - it was lead by low-leverage spot markets rather than the high-leverage markets for options or futures.1 In other words, the price wasn’t pushed up by traders making high risk/high reward wagers on short term movements. It moved because someone(s) went out and bought all the Bitcoin that were available for sale:


Congress lives down to expectations

We talked a number of times this summer about the Treasury department’s attempt to sneak a badly formed crypto tax provision into Biden’s infrastructure bill, the endless series of debates that followed about various amendments to improve the language and how ultimately none of that debate mattered at all because retiring Senator Shelby of Alabama (R) blocked every amendment to the bill as part of an unrelated negotiation around military spending. Democracy!

In theory the House could also have passed amendments to repair the overly broad language but, no, obviously not. That was never going to happen. On Friday the finalized bill passed the House and Senate un-amended and now awaits President Biden’s signature to become law. The new crypto provisions become active in 2024 so crypto lobbyists have two years to pass additional legislation or challenge the constitutionality of the law in the courts. After that anyone who buys an NFT without collecting the seller’s social security number will have committed a felony.

A strange subtext of this whole debate is that the law proposes a brand new class of tax reporting requirements at a time when the IRS is already struggling to audit the tax responsibilities that exist today:

The new provisions create reporting requirements that are simultaneously impossible to comply with and impossible to enforce.

That’s pretty dumb, even for Congress.


You can’t put a price on karma

Disclosure: I worked at Reddit from late 2017 to mid 2019 as a Director of Product for the machine learning teams that owned ranking, search and discovery. Crypto explorations were just beginning when I was there but I did not work on them and don’t have any inside knowledge of the project and how it evolved.

Reddit is a unique social network in that rather than being a singular monolithic social network like Twitter or Facebook it is actually an archipelago of smaller social networks gathered around particular topics or types of content. Each of these communities is distinct but historically they have all been powered by the same engine: Reddit karma, the imaginary internet points users get when someone upvotes their comment or submission.

Karma is intrinsically worthless and doesn’t really exist and yet users seem to place a very high value on it, so it is a natural fit for crypto. Since last year Reddit has been expanding a trial program called "Community Points" intended to bring the karma experience to the blockchain. Users who participate in eligible communities2 are given ERC-20 tokens representing a stake in the community they contributed to.

Like karma, community points (CPs) don’t actually do anything — but unlike karma they can be transferred, which means they can be bought and sold. The idea is that communities decide what (if anything) to do with their tokens and users decide what (if any) value to assign them. The hope is that users who contribute meaningfully to a community will be rewarded not just with status (i.e. karma) but with something of durable economic value. It’s a nice thought!

The project got a bit of attention this week when a new engineer joining Reddit named Rahul Kothari posted a thread to Twitter about how community points would onboard 500m new monthly users to Reddit. I’m guessing that statistic is both why the thread went viral and why he decided to delete it — or more likely was asked to. The last monthly user number Reddit released was 430m.

I’m assuming the statistic is literally accurate but implying Reddit will funnel that many users onto web3 is pretty laughably misleading. Reddit’s userbase is heavily bimodal — there is a small cluster of highly committed, exceptionally engaged users and a long tail of tourists who wash up onto the shores of Reddit from various search engines and leave without ever noticing where they were. Most of the people who visit Reddit every month have no idea what a Reddit is and don’t care.3

Obviously onboarding a few dozen million highly engaged users would still be a big deal for web3 — but even within that smaller scope I’m still skeptical. Karma is a delicate and counter-intuitive motivation system. I don’t think updating it for the crypto era will be as simple as karma-but-on-a-blockchain.

For one thing, why a blockchain at all? Why not just make existing karma transferrable? Blockchains are expensive and complicated techniques to enforce scarcity and eliminate central power — but community points are not meant to be scarce and the creation of new CPs will always be centrally controlled by Reddit. Demanding a blockchain for Reddit karma is like demanding Chuck E. Cheese coins be counterfeit-proof. Expensive and pointless.

Even more existentially if CPs succeed in turning karma-farming into a legitimate revenue stream it will fundamentally alter the landscape of Reddit. Intrinsic and extrinsic motivations are profoundly different and they do not mix.

Moderators who are happy to pour hours into their communities out of love would likely be insulted to learn the actual economic value their time has created. Content creators who were proud to compete for status may be less excited if transferable points makes the competition feel pay-to-win. Users may not be as interested in content they believe was commercial instead of sincere.

If CPs become valuable the problems only get worse. Imagine high-frequency karma traders front-running legitimate users by reposting their content and using a network of bots to give the copy greater visibility so they can claim all the rewards for themselves. Imagine how upvote and downvote etiquette changes if you are giving or taking away someone’s actual money. Imagine vote brigading.

The problem is that if the only thing you can do with community points is sell them they are effectively trying to be money. Karma is not money and was never meant to be money, so forcing it into service as money is unlikely to succeed. We talked last week about Reddit’s recent job listing for an NFT engineer — I actually think that is a much more promising approach. NFTs can be both sentimental and valuable without attempting to be money in a way that tokenized karma cannot.

Don’t make digital arcade tokens. Make digital arcade prizes.


Other things happening right now:

1

Actually to be precise it was lead by the Ethereum market, which hit its own all time highs late last week. Ethereum’s movement was also lead primarily by the spot markets.

2

At the moment the eligible communities are r/CryptoCurrency and r/FortNiteBR.

3

This isn’t a knock on Reddit, by the way - the highly committed users produce high quality content that gets visibility on search engines and legitimately earns the traffic. But it is a reality of their business that not all users are created equal.

4

To be fair, it’s actually not clear that any of the other Mayors are allowed to either.