Mechanism Capital Partner Criticizes Bullish ETH Arguments as "Financially Illiterate"

In a recent social media post, Andrew Kang, a partner at Mechanism Capital, strongly criticized the late-stage Ethereum bull market arguments presented by a prominent financial analyst. Kang labeled these arguments as "stupid" and described them as some of the most severe cases of financial illiteracy he has encountered recently. Let's delve into Kang's point-by-point refutation of these bullish ETH claims.

Stablecoin and RWA Adoption

Kang acknowledges that Ethereum network upgrades have enhanced trading efficiency. However, he points out that stablecoin activities and tokenization are not exclusive to Ethereum, as they are also migrating to alternative blockchain networks. He emphasizes that tokenizing low-liquidity assets generates minimal fees, citing an example where a $100 million bond traded biennially would only incur approximately $0.1 in fees.

The Flawed "Digital Oil" Analogy

The comparison of Ethereum to oil is dismissed by Kang as fallacious. He argues that oil, being a commodity, has maintained a relatively stable inflation-adjusted price range for a century. Therefore, viewing ETH as a commodity does not inherently support a bullish outlook.

Institutional Staking Theory

Kang challenges the notion that major financial institutions are incorporating ETH into their balance sheets, stating that no such plans have been publicly disclosed. He draws a parallel to the energy sector, explaining that banks don't stockpile gasoline due to ongoing energy consumption needs but rather purchase it as required when demand is low. Additionally, Kang notes that banks typically don't take equity positions in their asset custodians.

ETH vs. Financial Infrastructure Companies

The theory equating ETH's value to that of the entire financial infrastructure sector is dismissed by Kang as a fundamental misunderstanding of value accrual mechanisms.

Technical Analysis Perspective

From a technical standpoint, Kang observes that Ethereum has been oscillating within a multi-year range. He notes that it has recently approached the upper limit of this range without breaking through resistance, which he interprets as a bearish signal. While the long-term ETH/BTC chart shows range-bound oscillation, Kang points out a predominantly downward trend in recent years, with fundamentals failing to support valuation growth.

Kang attributes Ethereum's valuation primarily to a lack of financial knowledge, drawing a parallel to XRP. He argues that while this valuation isn't boundless, macro liquidity does provide some support for ETH's market capitalization. However, Kang concludes that without significant changes, ETH's performance is likely to remain underwhelming.