Why the Degen Movement is Bad for Web3
A little over a year ago I had a friend ask me to build him a Dollar Cost Average model to help him figure out how much to invest each day. He had a list of tokens that he wanted to DCA into and they were broken out into buckets: Blue Chips (BTC, ETH), Mid-Tier (SOL, ADA, MATIC), and Degen (DOGE, SHIB), and each token had a “daily risk value” that he had acquired via paid subscription of some PhD trader genius who was “selling the secrets of success”. He had a fixed daily budget and wanted a formula that said if the “daily risk value” of X token is within this range, then allocate Y dollars of budget to that token. It struck me as odd that he would self-classify something he was consciously investing in with such scrutiny as “degenerate”. Like a Freudian slip, the underlying intent of the action was revealed. This was gambling, dressed up like investing with a DCA model, a PhD risk metric, and a sophisticated trading exchange. But if he knew it was degenerate, why dress is up as something else?
I will leave that rhetorical question for the psychologists to debate. We all know people who justify their sports bets and lottery ticket numbers with some contrived pattern based on an ultra small sample size and cognitive dissonance. There is a reason why casinos never lose and programs like Gambler’s Anonymous exist.
(side note - if you are ever paying someone for inside info on market alpha, token picks or “daily risk values”, STOP immediately. If this person was truly beating the market they would have ZERO incentive to make a few extra thousand dollars a month selling tips to newbs. There are plenty of gurus out there offering thought leadership for free.)
Owing to the proliferation of wallstreetbets, meme stocks, YOLO investing, and Loss Porn, the Degen movement in web3/Crypto has transmogrified from scam into sort of a badge of honor to wear. I don’t think it is particularly healthy or useful, so I want to break down a few things:
What is the Degen Movement?
Degen in NFT-land
Trading is Not Cool
The Only Bull Case for Degen
Why the Degen Movement is Bad for web3
What is the Degen Movement?
I have discussed previously about how the carnival atmosphere of Crypto was seeping into TradFi in the form of excessive valuations, but others might argue the reverse: TradFi itself is a carnival and it was simply the overflow of cash that seeped into Crypto with degenerate ambitions. Regardless of origins, there is clearly a Venn diagram of TradFi and DeFi, with some Degen overlap.
The Reddit sub forum wallstreetbets prides itself on having “12.9m degenerates” (their term for member), and romanticizes things like buying out of the money options expiring within a week. Basically they are promoting the idea of placing extremely risky bets that have very low probability of winning, but if they do, they can earn 100x returns. The probability behind the strategy is not dissimilar to a Venture Capitalist, who will place 100 bets, knowing that 99 might go to 0, but the one that goes to 1000x will pay for the rest of the portfolio. The only difference is that the underlying asset on a VC bet is a private startup frantically trying to build or scale a product over many years, whereas an out of the money option is a bet that a stock will move drastically in one direction over a very short period of time. VCs can influence a startup’s success by offering advice, free marketing, and recruitment, whereas a “wall street bet” is subject to all of the externalities of the free market.
During the Gamestop short squeeze of early 2021, wallstreetbets came into mainstream news. The market was at an all time high and wouldn’t peak for another year, and it had been 9 months since the COVID trough of March 2020. Energy and confidence was high. Robinhood was gaining millions of users and preparing to IPO. Half of America was fresh off of their second stimulus check. Over a few weeks span, ETH spiked from its peak of $500 to $1500 (on its way to almost $5000), and BTC spiked from its peak of $20k to $40k (on its way to almost $70k). NFT sales, after totaling a mere $100M in 2020, spiked to $1B in Q1 2021 alone (on their way to a preposterous $25B by year end). The common theme among all these realities was that it was retail (not institutional) investment, driving the trend.
With all this money flowing into the ecosystem from non-traditional and often first time investors, the expectations were distorted. “Stonks only go up” was a popular meme. People investing in BTC at $20k were discovering all the stories about the people who had been holding since the beginning and had created amazing wealth. Tales of BTC reaching a price of $1M were on CNBC. There was no historical down period or Crypto Winter that they had experienced. Terms like HODL and Diamond Hands were thrown around but no one understood the harsh reality of what they really meant. It was a time and place where literally everything was mooning, and there was no apparent downside risk. Just put your money in and watch it double, or triple, or 100x..
Now, there was also a contingent of people who were watching this happen and thinking it was the dumbest shit they had ever seen. Right or wrong, the overlap of people who thought Crypto was overpriced and yet also continued to pump Zoom, Peloton, and DraftKings stocks is probably pretty high. This is the type of holier-than-thou TradFi rhetoric I warned against in Everything is a Valuation. A market is a market is a market, but the downside risk is usually commensurate with the absurdity of the pump. True Crypto OGs know this, and take the 85% retracements in stride. Everyone new to the space exhibited their Paper Hands, and sold at the first sign of distress (losing themselves a collective $1T in the process).
So now the term Degen is conflated with those that HODL, but what it really describes is those that continually buy into the space hoping for another moon. Said another way, if you are ballsy enough to take on this massively risky asset (aka bet or gamble), then you are somehow “cool” or at least part of a culturally significant group that is taking on TradFi establishment. It went from a self-patronizing tongue-in-cheek TradFi aphorism to a badge of honor and DeFi statement of work.
Degen in NFT-land
One of my hobbies is hopping into Twitter Spaces that are discussing NFTs and titled things like DEGEN TUESDAY, and listen in until there is a moment in which I can request the stage and ask the panelists what they are trying to achieve in the space. The answer boils down to three things: to make money, form community, and support artists (anecdotally, in that order). None of these Twitter Spaces are ever discussing the technical aspects of web3, nor the infrastructure required to make DeFi a reality. They are always hyper focused on a specific NFT drop, discussing which project has the most hype, who is spreading FUD on which project, and which project has the highest risk of being rugged.
(side note - it is funny how these terms have become so ubiquitous that they enter the lexicon with alternate usage. If someone is on a bad connection in a Twitter Space and their audio is breaking up they will say, “am I rugging right now?””. It’s cute and shows how deeply entrenched the culture is.)
Everyone in NFT-land is extremely knowledgeable about up to the minute happenings, which is impressive because there is SO much going on. As a subset of web3, it seems like it would be a full time job to keep up with every NFT drop. And because determining which drops are going to moon and which ones are going to rug is based entirely on network effects, the only KPI that matters is hype. That is probably why for the people running Twitter Spaces, making TikTok and YouTube videos, it IS their full time job. There is a whole microclimate around NFTs that are a microcosm of the greater Crypto market. Like the PhD selling my friend “daily risk values”, the ones making money aren’t necessarily trading/investing, they are the market makers, or rather content creators, hyping the hype and FUDing the FUD. In other words, stirring the pot. I don’t think they see it this way. I think they genuinely have love for the space and are excited about the future of the technology. However, these NFT-influencers tend to either be attractive females, or PhDs, and the content is effectually advertising. Too often I see an attractive female AND a PhD joining forces to shill a specific NFT collection and thousands of Degens line up to purchase them.
Why is everyone addicted to purchasing NFTs? Because of the possibility for outsized returns. They are collectibles, they are trading cards, they are passports, they are library cards, and they are digital rights to a piece of artwork. The problem is, these things have no inherent value except in the eye of the beholder. And the eye of the beholder is not actually valuing it based on their own criteria, but rather what they believe someone else is going to value it at later on. To quote the economist John Maynard Keynes, “successful investing is anticipating the anticipation of others”. Which collection of cartoon JPEGs are going to have the highest value next week, or next year? Whichever ones have influencers that decide to promote them at that time. Good luck predicting that. For a space that is based off “digital scarcity”, there is a ridiculous amount of supply being minted. What is the difference between a Moonbird which go for about 9 ETH and a CryptoPunk which go for about 70 ETH? Nothing, except the mythical culture that has been created behind them. That is the alpha that everyone is seeking. It is similar to the way that an equities analyst will look at a financial statement and come to a determination that the market is undervaluing an asset and then purchase shares. They are making an investment with the expectation that the asset will do things and the market will increase its valuation accordingly. The Degens in NFT-land are analyzing the community, artwork, vibe, and in some rare instances use cases, and come to a determination that this thing will be “the next Bored Ape Yacht Club” or similar.
(One small issue - this market is easily manipulated. Two people could collude to sell NFTs back and forth to each other across multiple wallet addresses to make it appear that there is big money demand. A sucker comes in and buys the top and poof, the all the demand disappears and the unsuspecting buyer is left holding the bag.)
In any event, these people know what they are doing. They are classifying themselves as Degens, "aping in" to projects with the hope that, with enough hype, there will be someone they can sell to later at a higher price. Once it’s out of their hands, they have made their profit, and new the bag holder, who is a fellow member of the community, is left with the problem of finding someone else to sell it to.
The essence of the Degen ideology is digital hot potato, which is ironically the antithesis of community.
Which leads to the fact that..
Trading is Not Cool
The difference between trading and investing is the frequency of the transaction. Traders are looking to get in and get out quick, exploit small arbitrage situations, generally without much attachment to the underlying security. Investment is buying and holding, having a long-term thesis on why this asset will appreciate.
Everyone wants to be Traders because there is a “coolness” factor associated with the ability to generate money out of thin air. The reason why trading is not cool though, is because there is a winner and loser on each side of every trade. This is a little bit of a humanitarian take, but why would you want to do that to your fellow humans? Obviously Capitalism is a free market where competition is king, but that competition is supposed to be in the form of creating the best product and price for the consumer. The operative word there being “creating”.
The purpose of investing is to give money to an entity so that said entity can use that money as leverage to generate more money, which they will then share back with the investor. Trading offers no such value to society. The purpose of trading is to make money for oneself, which of course has value to oneself, but is actually a net negative on society. The underlying business does not get the money, you are playing against the fellow participants instead of harmonizing with them, and the real winners are the exchanges who take a cut of each trade.
(side note - one of the purposes of DeFi is to remove these middle men so that the system is not enriching someone for something an automated protocol could do. It removes the "tax” of market participation.)
In web3, where there is an inverted monetization structure that starts with community, trading against fellow participants seems a little.. TradFi-ey.. Of course everyone wants the value of their assets to go up, with the ultimate purpose of using those assets to buy goods and services. But when you put all of your money in, and then take all of your money out, literally pumping and dumping, you are left with only a few winners, and an asset that drops 95% in value. Market participants have learned to cope with that reality, but.. it’s not ideal.
The Only Bull Case for Degen
There is one good thing about the Degen movement: it generates community. It creates an identity around a common interest which is putting money in weird things and hoping it makes you rich. After all, that’s what everyone is searching for. It’s just a great contradiction to not only the ethos of web3, but to the actual mechanics of it. In a space where many of the world’s greatest developers are building the financial rails that will enable greater global participation in financial markets, and generate new and interesting ways of capital formation, the majority of participants are looking to exploit this by trading. There are no shortcuts in life, and generational wealth is not something that you can ape into. Well, you can, but it comes at the expense of others, as well as the system you extracted it from. That is not sustainable. This is why the Crypto market has bear cycles that go through 95% dips, and the S&P 500 even at its worst (usually) doesn’t drop more than 30%. That’s the only metric you need to know to understand which market has a higher ratio of Investors to Traders. If more people invested in Crypto, instead of trading, ie aped in and HODL’ed with Diamond Hands, the ecosystem would flourish as demand outpaces supply, and everyone would win.
Herein lies the interesting use case for the Degens: buy and hold. That’s literally it. Buy degenerately and hold degenerately. Buying at $20k and selling at $40k is a cool 2x, but the majority of people are putting in $50 and cashing out at $100. (actually the majority of people are buying in at $100 and cashing out at $5)
What does that accomplish? Find something with product market fit, put your money in, and wait 5, 10, 15 years. Do you have that kind of conviction? Warren Buffet does. Degens have enough conviction to mercilessly pump money into the system, often losing all of it. What if you mercilessly pumped money into the system, and then forgot about it, or better yet locked it up?
There are investment vehicles in Crypto built specifically for this such as HEX, which gives you bonuses for locking up your tokens, and penalizes those who end their stakes early. This is also how 401k’s incentivize people to hold in TradFi. The problem with NFTs is that they are so culture oriented, proliferating off the vibe of a particular time and space, there is no way to know what is going to be “cool” in 15 years.
The only bull case for Degens is to take turn their fervor and passion about getting rich and push it to a longer time scale.
Why the Degen Movement is Bad for web3
Hopefully I have already articulated this in the preceding paragraphs, but I will drill the point in here. Crypto, as a subset of web3 is already viewed as a carnival. It is looked upon as TradFi for kids, a gambling platform, and rightfully so. The ecosystem has not shown otherwise as is visible in the price charts. You simply don’t get wild price swings without massive selloffs.
The Degen movement is built off of the “get rich quick at any cost” mentality. It is self-deprecating, and prides itself for being “dumb as apes” and “smooth brained”. The monetary losses are worn as a badge of honor, as if they are gladiators going into battle and taking mere flesh wounds, but have survived to give it another go. They are shooting for the “moon”, without acknowledging that cashing out their mad gains is a dagger to the hearts of their brethren in battle.
Web3 is currently being built whether anyone likes it or not. As more protocols proliferate, the lifeblood (cryptocurrencies) will become more than toys. There will eventually be entire societies that function completely in the digital realm, and for those, the conversion rate of whatever particular asset they use into fiat may not matter that much. However, for the vast majority, for the long, foreseeable future, there is going to be the need to have both on-chain and off-chain assets. That means that conversion rate is going to matter.
Will we get to a place where the Crypto price charts resemble the S&P on steroids and not the teeth of a hacksaw? What comes first, the chicken or the egg? Do Degens suddenly grow Diamond Hands and smooth out the Crypto price charts and attract more TradFi money into the space as a true investment vehicle spurring mass adoption of web3? Or, is there a killer protocol that is created that attracts a ton of users regardless of cost and the prices become a function of true supply and demand? Your guess is as good as mine. Call me on my Space Yacht in 2037 and we can talk about it.