The Breakdown - 5 Reasons For Cautious Optimism In Crypto

Episode Date: April 2, 2020

The economic outlook is grim. The jobless claims keep piling up and even the most intransigent states are shutting down business. There isn’t - yet - a realistic plan - for returning to any sort of economic normalcy.  Yet in this bleak view, there are a handful of crypto indicators that suggest for cautious optimism. In this episode, @NLW discusses: The crypto community’s volatility resilience  A significant uptick in Stablecoin issuance  Proof that bitcoiners have been buying the dip  Evidence that new audiences are finding their way to bitcoin (and perhaps with a sound money narrative in mind)  Binance’s acquisition of CMC and the power of M&A signals

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Thursday, April 2nd, and today we are going to try to do something where we start with the bad and lead into the better, if not good. So today I want to talk about jobless claims because that is the important news vis-a-vis understanding the impact economically speaking of the coronavirus crisis in America. And then I want to segue, though, into something that is more homegrown crypto-related. So I want to look at five positive indicators for crypto going forward that look at the last few weeks and look at what might happen over the next quarter and try to have a slightly more

buoyant picture. Now, I don't want to be, as I've said, a number of times on this podcast, polyanish about just how serious everything is, which is why I want to start with these jobless claims. But I do think that in all the gloom and misery, there are some interesting indicators in the crypto industry specifically that should give us some cause for optimism. So let's talk about jobless claims first, and then let's get into those five positive indicators for the crypto industry. All right, so first jobless claims. Last week on Thursday, we got the report that in the previous week, 3.3 million people had filed jobless claims, which was a 4x increase over the previous high, which was from 1982. Now, this was devastating enough,

and as we went into this week's report, there were a number of different estimates going around. Wall Street, journal surveyed economists, and they came back with another 3.1 million. Morgan Stanley was betting on 4.5 million new claims. Goldman Sachs was saying something like more like 5.5 million new claims. Well, the real numbers topped all of that at almost 6.6 million new claims, which means that over the last two weeks, you've seen almost 10 million people file jobless claims. Now, on the one hand, this isn't surprising, right? We've basically forced huge swaths of the economy to shut down, really anyone who can't work from home or a very small number of essential services. So, again, on the one hand, this isn't unexpected. On the other, it still is a shocking number of

to actually think about the human toll of the economic fallout of this crisis. Now, you remember last week where I was getting very nervous and frustrated with the politicization of the crisis in the sense of creating a red versus blue health outcomes versus economic outcomes. My contention was that this was a ridiculous and farcical conflation of things, and trying to pin these two things together as though they were mutually exclusive outcomes was just lunacy. I do think that we've retreated a little bit away from that rhetoric this week, largely because the president has shifted his tone entirely

and is now talking seriously about 100 to 200,000 deaths, and in fact trying to shift the narrative to that being a potentially positive outcome, at least relative to the millions that could have died otherwise. Because of that, because of the extension of Trump's kind of 15-point rules and social distancing, at least through April, because you're starting to see states who have been long-term holdout such as Florida, start to impose stay-at-home rules, you don't have quite the same level of politicking around health versus the economy. However, now that we're away from that, I think that it's probably

the right time, if not a little late, to talk about figuring out the exit plan. Because right now there is no exit plan. There isn't a real process for how we get back to work. And what's becoming clear is that it's not going to be as simple as there's some normal on the other side, right? We have the benefit of watching other places around the world who have contained their crises now try to go back to work and see what's happening. And it's very different than the normal that we experienced before, right? There are strenuous temperature checks and containment procedures and testing procedures in countries all over the world. In China, you've seen extended shutdowns again. You've seen movie theaters had to be shut down last week.

So there's clearly fear of secondary outbreaks. And that's something that we need to be nervous about as well. So the reality is that we have to accept that there's no normal on the other side of this. We have to design not only for how we get back to something resembling a normal economy while also dealing with health outcomes. These are no longer things that you can talk about inextricably from one another. They are just part and parcel of the same experience. Now, there are templates for this. right? There are plenty of people out there who are showing what it looks like, or societies rather, showing what it looks like to contain this and start to get the workforce back in action. And the longer that we delay, the more devastating this economic toll is going to be.

The markets seem right now to me to not really be pricing in just how devastating this jobless rate is. And I think my guess is that that's because people are still holding out hope for this V-shaped recovery, where at some point we flip the lights back on and everything just happens. The problem is that that doesn't take into account the number of businesses that will just have to shudder on the meantime, right? Small businesses don't tend to have a huge amount of operating cash. It's not like they can just hang around. We've barely begun to deal with issues around mortgage and lending markets, which are going to create more and more pressure as well on just a variety of businesses, right? So there's all of these challenges, and they just

just get compounded the longer we go. And we have to, first and foremost, I think it's clear, deal with health issues. But we have to start designing for a future in which people, there is, basically, we're going to live in an liminal in-between state for a long time, where this thing is not fully contained, but it's contained enough, and we've got good enough procedures that some part of the population can go back to work and we can start to get things moving again. Until then, almost everything that we're seeing is just going to get worse. And until then, frankly, believe that the numbers that we see in markets aren't going to reflect the real pain that is actually being experienced. So really important to take this seriously, really important now that I think

hopefully we're through some of the politicization of this whole health versus economy on the one hand is over. We can maybe actually start to have the right type of conversation about how we deal with health while also getting the country back to work. That's the corona update for today. when you have 10 million people out of work in a country over a course of two weeks, I think it's significant enough to talk about in a podcast that is nominally about markets and crypto. But let's shurn our attention now to the actual crypto markets. And what I have noticed over the last few weeks as a few positive indicators.

All right, indicator one. What are positive indicators for the crypto markets? First is volatility. So I noticed last week that the S&P 500 had been, officially more volatile than Bitcoin the trailing month. So according to the Fed, the S&P's 30-day historic volatility was 200% compared to an average of 27% while Bitcoin was at 138% from an average of 65%. Now, I don't think that this is something that we should be cheering too much about. I think it's likely something temporary, but I do think that the

increased volatility in traditional markets is a pretty good recipe for crypto traders, at least, to be able to better understand and participate in those markets in a different way. Scott Melker, who's on the show a few weeks ago, said something similar. In a tweet from March 27th, he said, The benefit of trading equities used to be that a valuation was simple and somewhat formulaic. It's likely that there will be no earning season now, meaning that it's nearly impossible to know what a stock is presently worth. U.S. stock market, welcome to crypto.

No guidance, no earnings, no idea what companies are worth. We've talked previously on this podcast about just how difficult a time markets are having right now pricing anything. And, you know, as I've said that, and I'll say again, I think it's because until we have any semblance of understanding how to make health outcomes work and actually solve this issue, it's going to be very difficult to deal with economic issues as though they are somehow divorced from that. But either way, one positive indicator, at least for traders, at least for people in crypto, is that we're used to volatility in a very different. way, and certainly the regular markets, traditional markets, are going through that now. So that's number one. Second interesting positive indicator is that stable coin issuance is way up. On March 31st, coin metrics posted that there had been over $1.4 billion worth of Tether issued on Ethereum specifically since March 1st. Tether's total market cap is now over $6.4 billion. Hasu, who's an independent

research also wrote an article on CoinDesk about this as well, talking about why he's a lot. he thought that might be. Now, one of the answers is likely that crypto traders are moving from more risky assets in the crypto space to something that is comparatively less risk like Tether, right? So that's one. That's what you'd see traditionally in a market situation like this. But there's likely a bigger reason, which has to do with, again, the larger markets themselves. There is a huge demand for dollars all around the world right now. And getting dollars is actually quite difficult for people, right? This is why the Fed has set up these, uh, these, these swap lines with other countries where they're allowing central banks from other countries to actually

get access to U.S. Treasuries and U.S. cash because they're worried about that cash crisis around the world, right? Right now, the dollar is the asset around the world. It is the most significant asset around the world. And I think part of what you're seeing, and this is what Hasu argued as well, with the increased issuance of U.S. D-denominated stable coins, is that they're creating a mechanism for people who have or are from places that have a harder time accessing that cash actually have exposure to something like it. So I think it's a phenomenon that is bigger than just the crypto industry itself, but it's interesting to show how this part of the crypto industry, which is stable coins, is actually creating an avenue for people who are functioning in

traditional markets and in traditional lines to actually get exposure to the asset that they want, even if it's sort of a synthetic crypto version of it. Now, one additional note on this, Raoul Paul wrote an interesting note that he called the dollar standard crisis. And I'll read part of it just because I think it's powerful. He says, less available dollars in a world of a massive dollar shortage drives up the dollar creating a shortage both home and abroad. Money printing does not make the dollars available. They get stuck in the financial system and hoarded. Money for the banks, no money for the debtors. It can only mean a massive uncontrolled dollar rally. QE will not fix this. Swap lines will not fix this. A debt jubilee would fix this or multiple trillion

of dollars in write-downs and defaults. It is the dollar's strength that brings the world to its nadir just like the 1930s. It is the dollar system that is the really big problem. The dollar has eaten all of its competitors and now it is going to eat itself. This eventually breaks the dollar after a super spike as global central banks are forced to find alternatives. They're already working on digital currencies for exactly this. Now, Raoul has a particularly bleak view of this. Others disagree. I think his point is worth noting, though. And I think specifically I want to talk about the digital currencies aspect of this. So a number of people in the comments as he tweeted this out said, well, what do you mean by that? He has been really interested in this idea of a global

basket of currencies denominated digital currency, right? Like what he saw so interesting about Libra was not anything about Facebook per se, but about the idea of an alternative to the USD as the world's reserve standard because it would be denominated in a basket of currencies. That he thought, was the major disruption. So it's interesting to see that he sees this happening a little bit and is bringing it back into the conversation here. Now, right now, also, it seems like just everyone is focused on dollars and it's hard to ignore that fact. Yesterday, you heard Peter Zion on the podcast talk about why the dollar is poised to just be so strong for so long coming out of this. But there is some interesting counter indicators as well. Yesterday, news broke that the eight member states of the

Shanghai Cooperation Organization, which include China, Russia, and Pakistan, had decided to conduct bilateral trade and investment, as well as issue bonds, in local and national currencies instead of US dollars. So clearly you're seeing some pushback against trying to create different types of economic blocks. I would expect that as we see the fallout from this and just this was going to be a part of the next 10 years no matter what and with Corona just accelerating things. But I do think that you're going to see these regional blocks try to pull themselves away from the dollar, how successful that will be is going to be really hard to say. But long-winded way of connecting stable coin issuance and the growth in stable coin issuance to the demand for dollars as a positive

indicator for crypto, I think that when we talk about onboarding new people and getting people familiar with the tools of cryptocurrencies and getting them exposed to the ideas, the fact that there's such demand for dollars, whether digital or not, could be an on-ramp that, actually is relevant for this industry. So that's number two. Stablecoin issuance way up. All right. Number three, buying the dip. One of the things that a number of different people noticed, I'm thinking Hunter Horsley from Bitwise asset management, for example, is that even as the craziest action was happening in Bitcoin markets, right, Black Thursday from a couple weeks ago, it seemed like there were more buyers than sellers on Coinbase. Well, Coinbase followed up

and said that yes, that was true. So let's just read from there. exact statement. In the 48 hours during and immediately following the drop, we saw record-breaking numbers compared to our last 12-month averages. 5x increase in cash and crypto deposits totaling $1.3x increase in new user signups, 3x increase in trading users, 6x increase in total traded volume. But beyond just a rush, two things are clear. Customers of our retail brokerage were buyers during the drop, and Bitcoin was the clear favorite. Our customers typically buy 60% more than they sell, but during the crash, this jumped to 67%, taking advantage of market troughs and representing strong demand for crypto assets even during extreme volatility.

So what this means is that there was a thesis that the drop in the Bitcoin price reflected everyone who was in institutions, right? Everyone who had all of a sudden this huge cash crunch having to liquidate their positions in anything that they had, including, unfortunately, Bitcoin. And it wasn't necessarily a mark of conviction. It was just a economic reality. based on the particular type of drop that we were seeing in the wider markets. This seems to indicate that's the case because not only did those folks end up being the only sellers, right? We saw that the actual hodlers who are mostly focused on this industry come in to scoop up the remnants for cheap. And what's more, you saw even more people coming in,

which I think gets to our point number four. One thing I don't want to talk about in terms of positive indicators right now is this idea that this is going to cause hyperinflation, right? That the huge amount of money printing is going to cause an incredible amount of inflation, which is exactly what Bitcoin is made for. The reason that I don't want to talk about that is that it's a huge topic. It deserves its whole conversation that's not glib, right? That is serious, that thinks seriously about what the implications might be. If you want to learn about that, think more about that.

I highly recommend my podcast with Preston Pish, who's incredibly eloquent and thoughtful about exactly this, and we will talk about it even more, right? Because it is the overarching kind of narrative context. However, let's actually speak about Bitcoin narratives. At the beginning of the crisis, as things started to move in lockstep with the equities markets, a lot of people were out with their pitchforks around the safe haven narrative saying it was dead, saying it was over, saying it was whatever. But what's happened interestingly is that as the money printer go Burr machines have revved up, the original Chancellor on the brink of a second bailout narrative of Bitcoin has risen back to the top, that this is the one free market and the one undeascible

asset that's still out there in a world of things that are just being printed into infinity and into oblivion potentially. So that narrative has been surging back to the forefront. And I think what's relevant is understanding how it's impacting people who aren't just in our industry, right? there are indicators that there are people who are saying, okay, on the one hand, we've got unlimited money printing over here, and on the other hand, we have this asset, which keeps getting more and more scarce, with its having coming up right around the corner over here,

that drives interest. We've seen anecdotal evidence in terms of Google trends. We've seen that in terms of publications and what people are reading. We've seen that in this stat from Coinbase, 2x increase in new user signups. And we saw that with Cracken, who reported an 83% rise in signups and a 300% increase in verifications,

which means the people who actually go all the way through the KYC process to deposit Fiat in the wake of everything that's happened. There is clearly growing interest in this differentiated field even despite the price crash. So I think that that is a positive indicator that the narrative message of unlimited money supply growing and growing and whatever that might mean over here

versus this limited money supply over here. It's clearly causing. more people to look over at this industry and more blood, more people, more fiat. All of that is good net net for Bitcoin and for the crypto industry as a whole. So that's number four is the growth and interest in this sound money in a world of fiat everything. All right. Now here's the last one, and I'm sure some of you were wondering if I was going to talk about this today. Finance is set to acquire coin market cap, or I guess it actually has at this point. It closed on March 31st for a total somewhere between $300 and $400 million. Now that's mostly in equity and

B&B we're hearing, but regardless it's a huge total. It makes it one of the biggest acquisitions in crypto history. And I think that this is important for a few different reasons. Let's talk first, though, about Binance's motivations. One that stands out is traffic, right? Binance and Coinbase are in constant competition as well as every other exchange for traffic two exchanges to go get those new users to get their money onto the exchange and start trading. Well, coin market cap has significantly more traffic than Binance, right? It has something like 80% more traffic than Binance, which means it could be an incredible feeder for that site. A second possible motivation, although one I'm a little bit more skeptical of, has to do with

revenue. Coin market cap makes anywhere between $25 and $40 million a year based on your estimates and was probably making even more than that at the height of the ICO boom through advertising. It's one of the top thousand sites in the world, according to Alexa. So it's a, it's even if finance may not be that interested in the revenue in the short term, it certainly de-risks it as an investment. Although interestingly, it seems as though Binance might have some plans for its business model that take it away from advertising, in which case revenue was clearly not a motivation and it really was something different. But either way, at least in its current incarnation, I think revenue derricks the investment from from Binance's

perspective. A third possibility has to do with data, right? Coin Market Cap has sometimes been criticized for trafficking in data that isn't necessarily fully verified. Sites like OnChane FX and Nomics basically were built to improve the quality of data in crypto to avoid exchanges that engage in wash trading and stuff like that, whereas Coin Market Cap has kind of just let it all hang out there for anyone to see. But they've been doing that for a very long. time, right, since 2013. So there's a huge amount of historical data that Binance might find valuable. The last part and the one that's really interesting, though, is optics, right? Being seen to be this big force. And it seems like that's part of the goal here, right? In the block's follow-up article,

so the block broke this story at the beginning of the week and then it was confirmed just today. In their follow-up article, it seemed that someone close to CZ was saying that this wasn't about the revenue in the short term, it was about being able to act kind of countercyclically to the market and just do something big and have conviction and vision for the long term. So this gets me to why I think this is a positive indicator for crypto as a whole. This is a space that is young enough that it has to be built at least to some extent on belief, right? It thrives on people being passionate, engaged, willing to build towards uncertain futures. When we see activity drying up, when we see transactions drying up, and we see prices going down,

that contracts the amount of energy and passion and excitement people have for this industry. Whereas when you see big M&A activity, when you see active things happening, when you see millions of dollars changing hands, that gets more people to be involved. Now, of course, there is an amazing, powerful cohort of Hodlers of Last Resort for Bitcoin, specifically, who will ensure that it's pretty hard, I think, to kill this industry, or at least Bitcoin once and for all at any point. but to the extent that we're interested in just a growth and expansion of the actual Fiat coming into this space, I think big moves like this one are really, really valuable from an optics perspective.

So those are the five indicators that I think are positive right now for crypto. As I said, I don't want to be polyanish or overly reductive about the real economic pain out there, nor do I want to overstate how good a place crypto or Bitcoin even is in relative to the rest of the world. I personally think that it's likely that there's more economic pain in traditional markets. I'm worried about continued knock-on effects in things like real estate. I think that traditional markets could fall a lot further. And I think when that happens, there are maybe even more people who don't want to but have to sell some of their Bitcoin.

So I don't want to be glib about this. I also don't want to prescribe people just putting their money into Bitcoin. I think right now is a time when everyone is trying to do two things. First survive and then figure out how to thrive. And unfortunately, there's going to be a lot of people for whom Bitcoin falls into the Thrive category and they can't get there yet. So this is all my big caveats about how far I'm willing to go with how positive things are. But I do think that these are interesting counter-cyclical narratives and indicators that are worth having some optimism around and

some hope in. So that's the show for today, guys. I appreciate you hanging out. Let me know what you think at NLW on Twitter. I will be back tomorrow with another episode of the breakdown. Peace.