CLOBs and the Rotation Trade

One of the promises of crypto is to tokenize everything.

In the future, everything will have a value assigned to it via a CLOB (central limit order book). Markets will replace networks. Capitalism will reach its theoretical apex, offering a settled price for all things.

On the one hand, this can bring enormous value unlocks. How much value is in the world that cannot be realized? Not just with unknown values but with unknown collateralization methods.

We have grown to assume that most things we buy are sunk costs and offer no ongoing market value (other than real estate). CLOBs change that and in turn explode global GDP.

This is what most people focus on — the growth. This is the equivalent of 2007 social networks explaining how big the internet could be when we are all connected. All the exchange, all the value, all the previously hidden pieces of life are now going to be unlocked.

For the most part, this happened. The internet and web 2.0 created more wealth than most other innovations in the previous 30 years.

There is a nuance to all this — the monetary value created by web 2.0 was mostly captured by the founders, early employees and capital investors. Sure, stock holders benefitted by making 1000% gains in the last 10 years on the Nasdaq but compared to what early employees/investors own it’s a tiny fraction.

100%/year annualized sounds like a huge home run compared to the broad market returns but sounds pretty bad when compared to 1,000%/year annualized.

We have been conditioned to simply shrug our shoulders and say “that’s just how it is” and “be happy that you’re getting 100%/year.” The collective machine of financial advisors and investments banks NEED us to have that attitude. Keep your eyes on how much worse you could be doing, they say. Don’t look at how much better others are doing — they took bigger risks.

What CLOBs and the “tokenization of everything” is doing is changing the way people view their chances of making big returns. 2021 changed the investing world forever.

In 2017–2018, the idea that there were whales getting really rich wasn’t as big of an issue in my opinion. It was similar to the FB example — people were making so much on BTC and ETH (and others) that it didn’t really matter that the early adopters, founders and investors were making 10x more.

There were also less legit options to rotate into. ETH was a wild west protocol whose sole function was to buy ICOs. There were no DeFi apps, no games, no decentralized exchanges (unless you count IDEX and EtherDelta, which did negligible volume). The idea of rotation was mostly punting ICOs and whatever shitty coins had liquidity on Bittrex.

This time, however, the stuff that’s being traded is very legit. The tech is better. The developers are smarter. The ecosystem has changed considerably. It is very possible that many of the assets being built today could grow into world changing technologies.

As an investor, this means that rotating from an investment that has already had a large move to the upside and into one that has yet to move can compound wealth in blistering fashion.

Just like a VC rotates their 100x on some Layer1 into 20 new investments, retail investors can rotate their ETH gains into 10 new Layer1 bets.

It’s not that they could do this. It’s that they are doing this.

Liquidity aside, why would anyone in their right mind be investing in Bitcoin when they could just as easily invest in something 50x smaller? It will take hundreds of billions of dollars for BTC to double in price. For a smaller project, it might take 30 million dollars to double in price.

People will tell you all day how much riskier it is but is that really true? Is it really that much riskier? Can’t you do the research and the necessary diligence to mitigate a lot of that risk? Risk is a factor of edge more than general frameworks.

Being early to anything offers disproportionate upside. With CLOBs and new projects being released each day, money will continue to rotate from the mature winners into the up and comers.

Most capital in crypto is mercenary capital. The only pockets that are not come from people who have already made more than they can possibly need. What both pools have in common is that once they enter the cryptosphere, they rarely leave.

Combine this with a global gini coefficient that continues to climb and you have a perfect storm of incentives. Inequality is nice to talk about at cocktail parties but has real, driving effects on most people.

And when people see the opportunity to make money in a world with skyrocketing inequality, they will drop everything to do it.

The tokenization of everything is not just about unlocking new value. It’s about creating a constant supply of projects people can be early investors in.

As more projects are built and more “real world assets” are put into the metaverse, capital will continue to flow from the assets that offer limited upside and into the projects than can go big.

This is a different beast than the stock market because the upside is so much bigger and so much faster. Comparing this phenomenon to selling index funds + buying IPOs does not even come close when you see the amount of energy and numbers involved.

The greatest trade of 2022 will be the rotation trade. It will be selling the mature investments and piling into the new investments, just like it was in 2021. It will be dominated by VCs, private investors and whales which will incite the anger of the masses.

CLOBs are making everything an early stage investment. VCs and whales will put out Tweetstorm fueled gaslighting to convince you that their current 100x is the next 100x and you shouldn’t do exactly what they do and go find new early investments. They will tell you to hold forever while they go invest in new projects. “You’ll get 100% returns and you’ll be happy.”

There is no better opportunity than becoming a rotatoooor. Optimize your taxes accordingly. Build your community now.

In a world with this much inequality and this much comparison to others, I don’t think there is any incentive stronger than making fast money.

The rotation trader will be crypto’s 2022 person of the year.

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Carter Thomas

Carter Thomas

It was all a dream

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