0xResearch | Friday, June 6th

This episode of 0xResearch navigates the complex interplay of macroeconomic shifts, crypto market structure, and the evolving strategies of key players, offering critical insights for investors assessing fiscal dominance, stablecoin valuations, and the future of decentralized protocols.

Macro Market Outlook: Fiscal Dominance and Political Impacts

• Felix from Forward Guidance initiated the discussion by emphasizing the increasing importance of fiscal policy over monetary policy in driving markets. He argued that persistent government spending and high fiscal deficits are deeply ingrained dynamics, unlikely to change regardless of political rhetoric. This underpins his bullish stance on monetary hedges like Bitcoin, gold, and US equities, while remaining bearish on fixed-rate assets like treasury bonds.
• Fiscal Dominance: This refers to a situation where a country's fiscal policy (government spending and taxation) becomes the primary driver of the economy, potentially overshadowing or even dictating monetary policy (central bank actions like interest rate changes). Felix believes we are moving closer to this state.
• Felix stated, "no matter, you know, how much you bang the drum about fiscal austerity and all these things, there's midterms that need to be won...taxes that need to be cut."
• The conversation touched upon the perceived "Trump exhaustion," where marginal headlines about tariffs have diminishing market impact. Felix noted that markets tend to price in anticipated changes, and repeated headlines lose their shock value. He cautioned against overweighting the idea that "Trump always chickens out" regarding aggressive policies.
• Regarding the Trump-Elon Musk "breakup," Felix acknowledged it as a potential risk for tech-centric policy but believes the powerful undercurrents of fiscal impulse and passive market flows are likely to overshadow such political infighting. He pointed to the resilience of markets due to factors like fixed-rate mortgages insulating consumers and continuous buybacks.
• Speaker Analysis: Felix, with his macro expertise from Forward Guidance, consistently steered the conversation towards the structural impact of fiscal policy, suggesting these are more powerful long-term drivers than transient political headlines or traditional monetary policy signals.
• Actionable Insight: Investors should monitor fiscal trends and government spending patterns closely, as these are presented as more significant drivers for asset performance than central bank announcements alone, particularly for inflation hedges.

The Macro Impact of AI Investment

• Ryan Cashflows Connor introduced a significant counterpoint, arguing that the massive AI capital expenditure (capex) spend is a primary reason the economy has defied recession predictions despite high interest rates. He highlighted that the largest tech companies, generating enormous free cash flow, are investing heavily in AI infrastructure like data centers, which stimulates job growth and economic activity.
• AI Capex: This refers to capital expenditures, or significant investments, made by companies in artificial intelligence technologies, infrastructure (like data centers and GPUs), and research.
• Ryan Cashflows Connor observed, "you have this like weird um you actually have this weird trend now in U3 unemployment that it just doesn't look like it does historically... I'm willing to say that that's all the animal spirits coming from uh AI investment."
• Felix acknowledged the validity of AI capex impact, agreeing it's a huge chunk of the current economic resilience, alongside what he termed "incorrect analysis" of how interest rate hikes affect an economy where corporate and household debt is termed out at low fixed rates.
• Strategic Implication: The surge in AI-related capex by mega-cap tech companies is a powerful economic force. Crypto AI investors should consider how this broad AI investment wave might indirectly support or compete with decentralized AI projects for resources and talent, and how it alters traditional economic cycle predictions.

Circle's IPO and the Stablecoin Market Structure

• The discussion shifted to Circle's recent IPO, with its stock price showing significant volatility (hitting $118 during the recording). Felix attributed this to the limited options for public market exposure to the crypto sector, especially stablecoins, rather than immediate valuation concerns.
• Ryan Cashflows Connor emphasized that the performance of assets like Circle and Bitcoin ETFs (IBIT) is heavily influenced by market structure. Hedge funds and Registered Investment Advisors (RIAs) seek familiar crypto exposure, and Circle offers a "pure play" on stablecoins, which are increasingly understood and valued by traditional finance.
• RIA (Registered Investment Advisor): A financial advisor or firm that is registered with the Securities and Exchange Commission (SEC) or a state securities regulator and provides investment advice to clients for a fee.
• Strategic Implication: The success of Circle's IPO highlights strong institutional demand for regulated, pure-play crypto assets. This suggests significant potential for future crypto-related public offerings and ETFs, particularly for assets like Solana if an ETF materializes.

Stablecoin Economics: The Genius Act and Net Interest Margin (NIM)

• Felix raised a critical question regarding the "Genius Act" (the specifics of which were not detailed in the podcast, creating a knowledge gap) and its potential prohibition of interest payments on stablecoins. If issuers like Circle retain 100% of the Net Interest Margin (NIM) – the profit earned from the difference between interest income generated by reserves and interest paid out (if any) – it would be highly profitable for them but could deter adoption by traditional money market fund users accustomed to earning yield.
• Net Interest Margin (NIM): For stablecoin issuers, this is the difference between the interest earned on the reserve assets backing the stablecoins and any interest paid out to stablecoin holders. A high NIM indicates greater profitability from reserves.
• James Kristoff expressed skepticism about Circle's long-term standalone success if large traditional finance (TradFi) players like JP Morgan enter the stablecoin market, potentially offering yield-bearing products and compressing Circle's NIM. He questioned the current valuation if one is bullish on stablecoins primarily for their NIM accrual.
• Actionable Insight: Investors must closely track regulatory developments like the "Genius Act." The outcome will significantly impact stablecoin issuer profitability and adoption pathways, determining whether value accrues primarily to issuers or if it can be shared with users, influencing competitive dynamics.

Token Structures and Protocol Governance: The Morpho Example

• The conversation highlighted Morpho Labs' decision to become a wholly-owned subsidiary of the Morpho Association, aiming to eliminate perceived conflicts between equity value and token holder incentives. Westy from the 0xResearch data team praised this as a positive step towards better alignment and transparency, contrasting it with the common, often conflicting, "Foundation/Labs" equity structure alongside a token.
• Westy noted Felipe from Theia's talk on how liquid token markets are broken, partly due to equity vs. token mismatches and lack of clarity on value accrual.
• Felix agreed, emphasizing the need to move away from the expectation that protocols should distribute all fees as dividends to token/equity holders, especially for early-stage growth companies. He advocated for reinvestment if internal rates of return are higher, a standard practice in TradFi growth companies. "This notion of the expectation of giving out all the fees to equity owners and not reinvesting it into the company is just way too far to the other side of the extreme."
• Strategic Implication: Morpho's restructuring could set a new precedent. Investors should favor protocols demonstrating clear alignment between token value and protocol success, moving away from opaque dual structures where value capture for token holders is uncertain.

Pump.fun ICO: Transparency and Revenue Share Concerns

• The discussion touched on the rumored Pump.fun ICO, potentially raising $1 billion, with concerns about transparency and how revenue would be shared with token holders. James Kristoff highlighted community frustration with opaque structures where a large portion of revenue might go to the team/VCs without clear reinvestment in the protocol.
• The current rumor mentioned was that 25% of Pump.fun revenues would go to the token.
• Westy and Danny emphasized the irony of an industry built on transparency still struggling with opaque team fundraises and revenue allocations. They called for greater clarity on how raised capital would be used.
• Actionable Insight: The Pump.fun situation exemplifies a critical due diligence point: investors must demand clarity on tokenomics and revenue sharing before investing. The lack of transparency in how ICO funds are used remains a significant risk.

L1 Valuations vs. Application Layer Profitability

• James Kristoff questioned the crypto market's obsession with valuing tokens based on near-term cash flows, especially for early-stage ventures akin to OpenAI, where such metrics are less relevant. He pointed out that historically, high cash-flow tokens (e.g., SushiSwap in 2020-21) haven't always sustained their value based on those projections.
• Westy countered that while current revenue (rev) might not be the best short-term predictor, protocols are ultimately optimizing for future revenue, which is how blockchains capture value (users paying to use the chain). He argued that many Layer 1 (L1) blockchains – the foundational blockchain infrastructure like Ethereum or Solana – are currently overvalued if assessed on long-term, sustainable fee generation, as margins are likely to compress.
• L1 (Layer 1 Blockchain): The base-level blockchain protocol (e.g., Bitcoin, Ethereum, Solana) that forms the underlying infrastructure for a crypto network.
• Westy stated, "L1's are very low margin business in the long run... I think L1's are like for the most part overvalued unless they have an enshrined application and that application is generating revenue."
• Strategic Consideration: Investors should differentiate between the speculative value of L1 tokens and the potential cash-flow generation of applications built on them. The long-term sustainability of L1 revenue models, especially with fee compression, is a key research area.

Treasury Strategies and Market Risks: MicroStrategy and its Clones

• Ian from Kyros Research raised questions about the blowup risk of companies like MicroStrategy and newer "copycat" vehicles (e.g., Metaplanet) that issue debt to buy Bitcoin. James Kristoff explained that MicroStrategy primarily uses convertible bonds – debt that can be converted into equity.
• Convertible Bond (Convert): A type of debt security that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value.
• James clarified that a "blowup" forcing MicroStrategy to sell all its Bitcoin is unlikely. More probable scenarios involve refinancing debt if equity conversion isn't favorable. The real risk, he argued, is not a forced sale but a reduction in their buying pressure if their ability to raise further debt is constrained. "What's a situation that causes him to buy less Bitcoin and that effect on markets... you don't need to sell something for the market to collapse. You can also just buy less."
• Westy added that these treasury companies have become significant idiosyncratic buyers of Bitcoin, and a slowdown in their purchases could negatively impact price.
• Actionable Insight: While a catastrophic forced liquidation by Bitcoin treasury companies seems low-risk, a slowdown in their accumulation due to changing debt market conditions or investor appetite for their specific vehicles could remove a significant source of buy-side pressure for Bitcoin. This is a subtle but important market dynamic to monitor.

Bitcoin ETF Flows and RIA Adoption

• The discussion referenced data from Eric Balchunas (Bloomberg ETF analyst) showing a surge in Registered Investment Advisor (RIA) adoption of Bitcoin ETFs. RIAs have become the number one holder category, indicating broadening mainstream financial advisor engagement.
• This led to a brief debate on the "death of bonds" narrative. James Kristoff argued for the continued utility of bonds for specific purposes like duration matching for pensioners, differentiating between long-duration government bonds and shorter-term corporate paper. Ryan Cashflows Connor humorously countered with the superior returns of Bitcoin.
• Strategic Implication: Increasing RIA adoption of Bitcoin ETFs signals a deepening institutionalization of Bitcoin. This trend is likely to provide sustained, albeit potentially delta-neutral, inflows into the asset class, distinct from the more directional buying of treasury companies.

Ethereum's Strategic Pivot and Community Concerns

• The panel discussed Ethereum's recent organizational changes, including Dankrad Feist taking a more prominent leadership role in research and development, focusing on scaling L1, blobs, and UX improvements. Westy viewed this positively, particularly Dankrad's involvement.
• However, Ryan Cashflows Connor expressed skepticism, stating it's "still all talk" until tangible results like faster product shipment and scaling are delivered. He highlighted a historical disconnect where Ethereum's decision-making was, according to EF insiders, more centralized than perceived, and is now purportedly moving towards more decentralized input.
• A key criticism raised was the perceived lack of focus on revenue generation for the ETH token itself. Ryan Cashflows Connor noted, "they did not once mention the word revenue, which is a problem and is the fundamental reason why the ETH token is lower is because its revenue has fallen 95% from peak."
• Actionable Insight: Ethereum's restructuring is a critical development. Researchers should monitor if these changes translate into faster execution on scaling and UX, and whether the Foundation addresses concerns about direct value accrual to the ETH token, which has been a persistent market criticism.

Solana's Market Position and Memecoin Ecosystem

• Boach mentioned selling his Solana, citing underperformance relative to other L1s he believes might offer better medium-to-long-term returns. Westy and Ryan Cashflows Connor discussed the sentiment that the "Solana game" might feel saturated for Degen capital, which is always seeking the "new game."
• Ryan Cashflows Connor pushed back, arguing that new capital (professional, institutional) entering crypto due to regulatory clarity might favor established incumbents like Solana due to network effects and liquidity, contrasting with Degen capital's hunt for novelty.
• The discussion touched on Pump.fun's dominance in the memecoin launchpad space on Solana. Westy questioned the sustainability of its cash flows and market share, as the "meta always changes." The panel debated whether Pump.fun's model, reliant on continuous attention and new token launches, could be disrupted by competitors or shifting user behavior.
• Strategic Consideration: Solana's ability to retain Degen interest while also attracting more stable, institutional capital is key. For AI investors, the vibrancy of its application ecosystem, including memecoin platforms, can be an indicator of network health and user engagement, but also highlights the volatility of attention-driven markets.

Believe.xyz and Niche Launchpads for "Internet Capital Markets"

• The panel discussed Believe.xyz, a platform focused on "Internet Capital Markets" (ICM), essentially tokenizing early-stage startups. Ryan Cashflows Connor noted its unique go-to-market strategy focusing on the supply side (specific token issuers).
• While acknowledging Believe's initial momentum had slowed, Ryan argued that its niche focus means it doesn't necessarily need to "own the moment" like broader crypto apps. "If you win an interesting token issuer where all of a sudden your app is relevant."
• The consensus was that while the V1 of ICM (e.g., Jellycoin) was "inherently scammy," Believe (V2) represents a more professionalized effort. However, execution speed and attracting quality projects remain critical.
• Emerging Trend: The concept of tokenizing early-stage, real-world businesses (ICM) is an emerging area. Crypto AI researchers could explore how AI startups might leverage such platforms for funding and community building, and the unique tokenomic challenges this presents.

Centralized Exchange Landscape: Gemini IPO and Kraken's Strength

• The news of Gemini filing for an IPO was met with strong skepticism from James Kristoff, who described it as "probably the worst run exchange" with a "horrible experience," citing issues around the Genesis Earn program and low trading volumes (reportedly 10% of Coinbase's, with dismal altcoin liquidity).
• In contrast, Kraken received positive commentary for its customer service, crypto-OG ethos, and product flexibility. Ian from Kyros Research noted that older wallets seem to prefer Kraken, and Ryan Cashflows Connor highlighted Kraken's pragmatic approach, including potential moves into on-chain equities trading.
• Strategic Implication: The CEX landscape continues to evolve. While Coinbase remains a dominant force, user experience, regulatory navigation, and innovation (like Kraken's potential equity trading) will determine long-term winners. Gemini's IPO will test market appetite for exchanges with perceived operational and reputational challenges.

Conclusion: Navigating Shifting Tides in Macro and Micro Crypto Structures

The episode highlights a crypto market increasingly influenced by overarching fiscal policies and a growing demand for transparent, value-accruing token structures. Investors and researchers must critically assess protocol revenue models and the impact of macroeconomic trends, prioritizing assets with clear utility and those well-positioned within the evolving regulatory and market landscape.