Other than that not much else is different

Plus as a joke, Dogecoin is funny. As a currency, it's a joke.

In this issue:

  • Other than that not much else is different

  • Much Doge, very alarm

  • Wtf is an Alchemix? (reader submitted)


Other than that not much else is different

Coinbase’s much anticipated IPO happened on Wednesday. The reference price Coinbase shopped around was $250/share, the price opened at $381/share it rose as high as $420/share before falling and ultimately ending the day at $338/share. No doubt it was an entertaining day for Coinbase’s employees and early investors! For the rest of us it was a little anticlimactic.

The IPO didn’t actually seem to have that significant an effect on the broader cryptocurrency market, at least not immediately. Bitcoin went down slightly but stayed above previous all time highs. Ethereum rose ~6% over the day. The broader crypto market stayed within the noise.

Some people tried to tie the Coinbase IPO and the lift in Ethereum together:

I personally don’t buy it. Stocks clear on a T+2 schedule, which means that people who sold COIN at open will have money to buy Ethereum by Friday, not today. Employee equity at tech startups is usually also restricted by a "lockup period" for ~six months or so after the IPO, to protect the stock price from the stampede of early employees eager to spend their newfound liquidity. So whatever happened in the market yesterday might have been in response to the Coinbase IPO, but it wasn’t a result of it.

Don’t get me wrong, I sincerely believe the Coinbase IPO was a materially significant event in the history of crypto. But it will still be a while before we know what that significance actually is. It’s too soon to draw meaningful conclusions.


Much Doge, very alarm

The price of Dogecoin doubled overnight this week, from ~$0.07/DOGE to a new all time high of ~$0.14/DOGE, making it the 10th largest cryptocurrency by marketcap just ahead of Chainlink and just behind Litecoin.

We first talked about Dogecoin back in January when it rose unexpectedly to ~$0.05/DOGE largely by acquiring leftover momentum from the Gamestonks saga. In February we talked about how Dogecoin really isn’t built to handle this level of value. There is only one active developer working on Dogecoin and very few full nodes holding up the network. As a joke, it is quite funny. As a currency, it is a joke - and maybe not a funny one.

Here is Nic Carter talking about the transition from joke to speculative instrument:

Dogecoin is like the corpse in Weekend at Bernie’s lurching around the party: propelled by outside enthusiasm but still fundamentally dead.

One way to think about this is to consider Dogecoin’s security. Dogecoin mining collapsed entirely a few years ago, so as a last ditch effort to save the network the developers at the time converted it to "merge-mining" with Litecoin. That basically means that Litecoin miners can mine Dogecoin for free at the same time, which allows Dogecoin to free-ride off of the security of Litecoin. At ~$0.15/coin the marketcap for Dogecoin will overtake the marketcap for Litecoin and Doge will be worth more than the network that is securing it.

On the other hand, here is a counterpoint from Guy Fieri:


Wtf is an Alchemix?

“Have you heard of Alchemix.fi? I have tried to understand it from just reading what they do but it's so many layers of abstraction that I really don't get it.” - BB

I can give a rough explanation! Honestly it mostly seems like a Rube Goldberg machine.

To a first approximation everything in DeFi boils down to someone getting paid to loan someone else money so they can do something (hopefully) profitable with it.

A simple and early example is a collateralized loan: borrowers deposit ETH as collateral and receive stablecoin loans in exchange. You can think of this as borrowers paying lenders a premium for the ability to spend their ETH before they sell it. That lets them delay capital gains tax and stay fully invested in ETH - but there is a catch. The ETH borrowers deposit as collateral always needs to be worth more than the outstanding balance of their loan - if the price of ETH drops too far their collateral will be sold to cover the debt. In effect adding debt to their ETH investment converts their spot position into a margin long.

There are two downsides to this set up. One is that if the price falls borrowers might be liquidated and lose their ETH. Another is while their ETH is locked up as collateral in a loan, you can’t lend it to someone else - so the real cost of a collateralized loan is the interest you pay plus the opportunity cost of the interest you could have been paid. As we've talked about before the cryptocurrency market has an insatiable appetite for leverage, so interest rates in general are very high and loans are very expensive.

Alchemix is an attempt to solve both problems at once by putting the collateral to work. Loan collateral deposited into an Alchemix "vault" is automatically loaned out to other DeFi products and the interest it earns is used to pay down the debt. Since the collateral (DAI) and the loan (alUSD) are both stablecoins pegged to the same currency their prices should rise and fall together - i.e. the collateral should always be enough to cover the loan and should never need to be liquidated.

So you give $10 to Alchemix and they give your $5 worth of Alchemix IOUs. They take your $10 and invest it for you paying you some of the interest they earn (in more IOUs) and keeping the rest for themselves (in money). I’m not sure I see the point?

Using a stablecoin as collateral means there are no tax advantages to taking out a loan instead of selling because there are no capital gains taxes to avoid. It also means that you can’t use these loans to get leverage - in fact you basically un-leverage yourself by 2x since your $10 of capital only nets you $5 in buying power. That eliminates the risks of margin-call but it also eliminates the advantages of being margin-long - using this kind of loan to trade will reduce your gains rather than magnify them.

AFAICT an Alchemix loan amounts to paying them to invest your money for you but with extra steps. That’s fine as far as it goes - paying a smart contract to automatically seek out the highest paying place to loan your capital is called yield farming and it’s a perfectly valid service. But there are a lot of yield farming platforms in DeFi and I didn’t see anything that distinguishes Alchemix from other strategies in that regard. From their documentation it looks like they are just a layer built on top of another yield farming platform called yearn.finance and taking a 10% cut.

Its not clear to me why you aren’t better off just investing in yearn directly.


Other things happening now:

  • Here is Nik Bhatia making the case that Fiduciary advisors now have a legal responsibility to help their clients get a stake in Bitcoin. I personally think that’s a bit premature but it does raise an interesting question. If Bitcoin succeeds there will eventually come a day when not owning Bitcoin becomes the risky, irresponsible investment - but we will probably only recognize that day in hindsight. Scary time to be responsible for someone else’s money.

  • In the last 15 years Microstrategy generated ~$747M in net income from selling enterprise business intelligence software. In the last 4-5 months Microstrategy has accumulated ~$3.58B in gains from their Bitcoin position. Meanwhile HSBC has banned its customers from trading in Microstrategy stock. I’m guessing they probably also aren’t supporting the Coinbase IPO?

  • Bitcoin is the fastest asset ever to reach $1 trillion market cap: