Networks, Narratives, & Noise
July 1, 2021
Welcome to the M31 Capital Investor Newsletter! We use this platform to share monthly updates on the industry, our views on the broader market, important crypto-native metrics, as well as to highlight specific cryptoassets and decentralized finance (DeFi) protocols we find interesting.
For those reading who are new to M31 Capital, we are a global alternative investment firm focused exclusively on digital assets backed by cryptography and blockchain technology. This new asset class, pioneered by Bitcoin, is beginning to change the way humans coordinate economic activity at a global scale and holds the potential to create trillions of dollars of value in the process. M31 Capital exists to promote this paradigm shift and to capture the unique, cryptoasset-specific investment opportunities for our investors along the way.
We at M31 Capital have staked our careers and our reputations on the success of this technology. As always, we thank you for putting your trust in us and for your support of this new asset class. Please feel free to reach out to our Investor Relations team with any questions, ideas, feedback, or just to say hi: contact@m31.capital.
Nathan Montone
Chief Executive Officer
M31 Capital Management, LLC
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June Performance
Market highlights and rationale from a selection of the most interesting assets in the industry:
(NOTE: M31 Capital may or may not hold positions in the following tokens)
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P A R T N E R H I G H L I G H T S
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Networks, Narratives, & Noise
In the early days of the Weimar collapse, many believed they were getting hilariously rich as the rate of money printing pushed up the price of hard assets like stocks and real estate in Papiermark terms. Others with no experience investing poured into the stock market en masse.
Adam Fergusson, author of When Money Dies, summarized:
"As for any victims of inflation, it was the natural reaction to assume not so much that their money was falling in value as that the goods which it bought were becoming more expensive. It reflected the point of view of those who believe the sun revolve with the moon around the earth."
Both as an attempt to outpace their rising cost of living (primarily healthcare, education & rent...), and because #NumberGoUp, an entire country FOMO-ed into speculative assets thinking fundamentals no longer mattered and whatever the German word for "stonks" is, only go up.
Any of this sounding familiar...?
Loosening Grip
Inflation unmoors price from value, increasing the disjoint between Capital and Labor, and making it impossible to rationally calculate comparative value. While it still takes the same amount of time, manpower and resources to build a house, it takes *nothing* to print the dollars needed to buy it.
What could go wrong?
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Pop Quiz Hypothetical:
Q: How much should a house cost in a world of infinity dollars?
A: Something approximating infinity dollars.
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As novice first timers FOMO into the market and all value investing fundamentals get thrown out the window, investing becomes a game of narratives.
In this environment of meme stonks, dog coins, GameStop, AMC, Robinhood Retail, Davey Day Traders, and outright degenerate gambling... it's narratives all the way down.
A direct (and predictable) consequence of Central Bank intervention. Thank you Chairman Powell.
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The Face of the Pleb Revolution
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I've said it for years: if you give someone a money printer... they're going to print money. It's a tale as old as fiat money itself, only this time it's getting broadcast on TikTok.
It's why this chart shouldn't surprise you:
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The Fed is executing a textbook currency collapse.
Just Say No!
At least one country, however, refuses to fall victim to the peer pressure of the Fed's MMT addiction: El Salvador.
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El Salvador is the first country in history to make BTC official legal tender!
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This isn't a gimmick either: President Bukele is a true Bitcoiner with a strong understanding of the necessity of a non-debasable monetary standard as well as the inevitable prosperity sound money can bring his citizens.
Most interesting were his points that:
- #1: El Salvador ALREADY uses a currency whose supply it can't control... the U.S. Dollar. They understand that every time the U.S. prints $1 Trillion out of thin air and hands it to their Private Sector buddies at United Airlines, the purchasing power and savings of every El Salvadorian declines.
- #2: When asked whether the banks will be angry, President Bukele said, "70% of our people don't have a bank account or access to basic financial services. So, banks may be upset, but they are not taking care of 70% of our people".
Can you feel the power dynamic shifting...?
They're not alone. Many other countries are in that exact same boat, and almost immediately Paraguay, Brazil, Argentina, and Panama are all expressing interest and proposing legislation to do the same. What a time.
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Signal vs. Noise
El Salvador adopting BTC as its currency may be the single most monumental development in Bitcoin's history. From "magic internet money" to "globally recognized legal tender of a sovereign nation state" in one decade... we've come a long way since the Cypherpunk Manifesto.
And what happened to BTC's price? Crash.
Instead of focusing on what a transformational milestone achievement this was, people instead couldn't look away from the China narrative (which I can't believe I'm writing this yet again):
China banned Bitcoin. Again.
For whatever reason, this was the final straw for miners. Tired of having their livelihood held hostage to the mercurial "will-they-won't-they" whims of the CCP, 50% of Bitcoin miners went offline in a matter of days and flocked to more politically stable pastures.
The Bitcoin network remained entirely unaffected and continued processing transactions with no interruption or downtime, producing block after block without a problem.
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Unfuckwithable
This is extraordinarily impressive. Bitcoin’s resiliency was put to its strongest test yet and passed with flying colors. I doubt we’re likely to see such a sharp dropoff in hashrate over such a short period of time possibly ever again.
Short Term: What happened to the price?
- Chinese miners sold balance sheet BTC to cover the high costs of moving their equipment out of the country
Long Term: What happened to the network?
- BTC mining became immediately more profitable for all other miners around the world
- Chinese miners shipped their equipment to more politically stable countries like the U.S.
- Bitcoin mining immediately became more environmentally friendly as China’s heavily coal-powered facilities went offline
I estimate about 70% of the lost hashrate will return the coming months, with about 50% of it coming back online in the U.S., most of which will be powered by renewables. Win-Win-Win.
And zooming out, this is one less existential threat to Bitcoin. China threw practically everything they have at BTC over the last few months, and Year-to-Date BTC's price is *checks notes*: +25%…
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Institutions Are Tripling Down
Not to mention, in the wake of Q2’s bloodbath, venture fund Andreesen Horowitz rushed to raise a $2.2 Billion fund dedicated entirely to crypto. Their 3rd crypto fund, in fact.
This is the largest VC fund ever raised for a specific vertical, and that vertical is crypto. Venture firms are long term capital, so they don't raise vertical-specific funds unless they see at least a 10x return over at least a 10 year bull run.
The sheer size of the fund ensures crypto devs aren't going to run out of money anytime soon. a16z could write a $1m check every week for the next 42 years... the future is bright for crypto.
Probably Nothing...
Finally, for those of you scoffing at the Weimar comparison because "tHiS Is aMeRiCa! Hyperinflation will never happen here!", I leave you with this chart:
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TL;DR
Looking past the sensational headlines, it's clear that decentralized digital assets are making undeniable progress: BTC is now legal tender, it has proven resilient under the most adversarial conditions, countries are starting to catch on to this, institutions are doubling & tripling down, tens of billions of dollars are pouring into the space, fundamentals have never been stronger, and the core thesis is still firmly in tact.
In the words of legendary investor Paul Tudor Jones:
“Bitcoin is math. And math has been around for thousands of years. Two plus two is going to equal four and it will for the next 2,000 years. I like the idea of investing in something that’s reliable, consistent, honest, and a hundred percent certain.”
Focus on the signal. The rest is noise.
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N A R R A T I V E F O C U S
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America: The OG Bitcoin
The China ban highlights irreconcilable differences between the values of the East and West. China is authoritarian. They will never voluntarily support open source systems they cannot control.
Hence their ban on Google, Twitter, Facebook, Bitcoin, Bitcoin (again), and Bitcoin (yet again). I see it's going well for them:
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The U.S., on the other hand, is embracing Chinese miners. Politicians in Texas, Wyoming, Kentucky, Tennessee, and Florida are welcoming them with open arms!
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This is the game theory scenario I predicted in our April newsletter. I wrote that the U.S. would double down on anything China bans in a chess-like political Queens Gambit Declined.
But beyond that, Bitcoin also better maps to American values: Freedom, individualism, decentralization, private property rights, etc. None of which are particularly high priority for the Communist Party.
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'The Founding Fathers didn't set up a government based on trust. They could have designed a government based on trust in our ability to govern fairly but they knew that power corrupts so they invented checks and balances. That was genius.”
– Senator Arnold Vinick, The West Wing
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Free Speech
1st Amendment: "Congress shall make no law abridging the freedom of speech, or of the press". Bitcoin's code is simply text protected under freedom of the press. No different than the alphabet used to write the constitution itself. Bitcoin transactions are censorship-resistant.
Right to Bear Arms
2nd Amendment: "The right of the people to keep and bear Arms, shall not be infringed." Bitcoin is a tool to protect against financial tyranny, just as the Founding Fathers saw muskets as a tool to protect against political tyranny.
Private Property Rights
4th Amendment: "The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated." Strong private property rights are requisite for a stable society and BTC is the ultimate form of private property. Bitcoin paper wallets and brain wallets are highly seizure-resistant.
Democratic Rule
A 51% majority is needed to approve changes to the Bitcoin network. This is technological democracy in action.
Checks & Balances
The democratic checks and balances system of Bitcoin mimics the democratic balance of political power in the U.S. Nodes enforce rules that miners follow, miners follow the rules to mine tokens with the most economic value. Users create economic value by using/hodling/spending the token.
Federation
The Bitcoin network's node decentralization and America's federated statehood are both designed to place limits on the power of a centralized authority.
We the People
Bitcoin is a bottom-up revolution of the people, by the people, for the people. A 21st century American Revolution with full nodes for pitchforks.
We hodl these truths to be self-evident, that all men are created equal in the eyes of permissionless, open source software.
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"The great conflict over our megapolitical future is only just beginning. On the dimension of technology, the conflict has two poles: AI and crypto.
AI could theoretically make it possible to centrally control an entire economy. It is no coincidence that AI is the favorite technology of the Communist Party of China.
Strong cryptography, at the other pole, holds out the prospect of a decentralized and individualized world.
If AI is communist, crypto is libertarian."
- Peter Thiel (forward to The Sovereign Individual), 2020 |
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Conclusion
While Thiel's quote may be a bit reductionist, there's truth in it: if America really wants to live up to its "Big L" liberal values (individualism, free speech, private property, equality, etc.), AND win the upcoming currency cold war with China, it would do well to support Bitcoin in a meaningful way.
In a sense, the new American Dream is the old American Dream: Freedom, privacy, independence - and Bitcoin can play an important role in that. I'm looking forward to our representatives in the U.S. coming to this realization.
In the meantime: we're wishing everyone a happy Independence Day... in the most literal sense of the term!
If you are interested in investing with M31 Capital, visit this page to access our subscription materials. You can also always reach our Investor Relations team at: contact@m31.capital
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PROTOCOL HIGHLIGHT
In our ongoing effort to be a value-add educational resource for our investors, we include a section in each newsletter highlighting an interesting or important part of the crypto ecosystem
AMLT (AMLT)
The major hurdle for DeFi right now is compliance. Institutions are champing at the bit to get involved with low fee, high yield DeFi protocols, but quickly run into legal hurdles.
In order to trade on Uniswap, institutions need to know that the person on the other side of their trade is not laundering money, for example.
AMLT is a token project backed by Coinfirm that provides transparent, anti-money laundering services to DEXs (decentralized exchanges) like Uniswap through a decentralized consensus mechanism.
Without introducing a centralized intermediary, the protocol provides this service through their AMLT Oracle - a smart contract solution for AML compliance of the burgeoning DeFi scene, without DEXs having to sacrifice decentralization.
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Compliant DeFi
The next frontier for crypto mass adoption will be compliant DeFi protocols. The early signs can be seen with AAVE's institutional pools and the recent entrance of investment giants Point72 and Millennium into the DeFi space.
As this thesis plays out, AMLT is well-positioned to be the key decentralized infrastructure provider allowing users to trade freely through a censorship-resistant permissionless mechanism that still stands with the ethos of DeFi.
If you know of any DeFi projects interested in using AMLT’s oracle, feel free to respond directly to this email!
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If you want to start working at a Web3 project today, take a look at M31 Capital's Jobs Board to see opportunities at some of our token investments.
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What We're Reading
A selection of our favorite articles this month:
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U P C O M I N G E V E N T S
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The M31 Capital team will be speaking at and attending a number of upcoming conferences and events. Please reach out if you are interested in connecting, or better yet - meet us there:
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