The Breakdown - Bitcoin at $21K: Bull Trap or Ooo Baby We're Back?

Episode Date: January 18, 2023

Bitcoin (and crypto more broadly) has been on a tear the last few days, but the question on everyone’s mind is: why? Is it a real, fundamentals-based movement? Does it reflect a changed macro setup for risk assets or just market structure and a short squeeze? Could it be a U.S. government conspiracy? (Tucker Carlson thinks so.) Is it, as so many fear, just one big bull trap? NLW breaks it down.  Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW - Join the most important conversation in crypto and Web3 at Consensus 2023, happening April 26–28 in Austin, Texas. Come and immerse yourself in all that Web3, crypto, blockchain and the metaverse have to offer. Use code BREAKDOWN to get 15% off your pass. Visit consensus.coindesk.com. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Swoon” by Falls. Image credit: Bet_Noire/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, January 17th, and today we are talking about Bitcoin back over 21,000. Is it a bulltrap or are we back? Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.

ly slash breakdown pod. All right, everyone, it was a long holiday weekend. I hope you had a great time. And whether you did or not, you will have hardly failed to notice that as those Friday long weekend spirits took hold, Bitcoin was relative to the last few months, especially, absolutely popping off. On Friday alone, Bitcoin moved from under 19,000 to over 20,000. And all in all, Bitcoin finished the weekend above 21,000 for the first time since November. That closed a week that saw more than 20% gains, with multiple days seeing increases of over 5%. The high was put in on Monday afternoon just shy of 21,500 after holding stable above 20,500 throughout the weekend. This means that the total crypto market cap is now above $1 trillion again.

And overall, for the month, Bitcoin is showing an optimistic 28% gain so far. What's more, Bitcoin has been rising for 13 straight days, which, according to data from Bloomberg, is one of its longest streaks since November 2013. According to bespoke investment group, Bitcoin is trading above its 50-day moving average as well as its 200-day moving average. Its 14-day relative strength index is at 91, which puts it pretty far into, quote, overbought territory. Volume has been up as well, over 150% of the average of the past 50 days.

So today what we're doing is trying to parse out what might be driving this price action. And there are, of course, as you would imagine, lots of different themes and explanations. Let's start as we so often do with the macro. Last week saw a veritable deluge of macro data points suggesting that the Federal Reserve might be done tightening sooner than previously anticipated. The CPI report last Thursday came in with a slightly deflationary headline print, showing the price basket had decreased by 0.1% throughout December. While inflation is still running at a much too hot 6.5% headline, and core CPI, which strips out food

and energy rose slightly, when all taken together, markets took away a picture of cooling inflation that will no longer justify an aggressive path of further rate hikes. Across other data, the most recent Purchasing Manager's Index or PMI reading showed broad decreases in economic activity for both services in manufacturing. Jobs data remained robust, but below the surface showed decreasing real wages. And while that data is a long way from catastrophic, it has definitely turned and shows all the hallmarks of a broad slowdown in the U.S. economy. In the backdrop of all of this, the U.S. Dollar Index hit a six-month low with the two-month

downward trend after seeing multi-decade highs throughout September and October. Given all this, it's not surprising that this rally is not limited to Bitcoin. The S&P 500 is up more than 4% so far in 2023, while the NASDAQ 100 is almost at 6% up. When it comes to Bitcoin, Tony Roth, the chief investment officer at Wilmington Trust Investment advisors said, we're seeing a risk on movement. Bitcoin at this point is the best-looking house in a relatively flawed neighborhood. There's a good chance Bitcoin will survive over time. James Butterfield, the head of research at digital asset management firm, Coin shares, said, quote, Bitcoin looks to have recoupled with macro data as investors shrug off the FTX

collapse. The most important macro data investors are focusing on is the weak services PMI and the trending down of employment and wage data. This coupled with downwards trends in inflation has led to improved confidence. Well, it comes at a time when valuations for Bitcoin are close to all-time lows. The prospect of looser monetary policy off the back of weaker macro data and low valuations is what has led this rally. Bradley Duke, the co-CEO at Crypto-ETP provider ETC group, said, quote, we see the main driver behind this 20% BTC hike over the past week as the fact that some macro fears are subsiding with positive economic data in the U.S., including lower inflation stats and strong growth numbers. In Europe, the EU released employment stats,

which were the lowest in 23 years, and China lifted many of the broader restrictions. That shift in sentiment was reflected in the Bitcoin futures market, with traders betting long four days in a row based on the long-short ratio. Now, one thing that's missing in a lot of the analysis around this so far is what happens if this broader market move continues. Jerome Powell and the Federal Reserve have said over and over again that they believe that they're going to need to keep rates elevated for a significant period of time. They've also started to shift pretty aggressively into a narrative where stock market exuberance could be one of the determining factors in what they do.

In other words, they see markets pricing in a pivot or a shift in Fed policy too early as one of the reasons that they might need to tighten even more. Effectively, in the same way that they think that they need labor market strength to cool off to actually allow inflation to unwind, they need stock markets to be depressed for a little while as well. Is it possible that stock market exuberance changes either the actual percentage rate hike that happens at the end of this month, or at least the discussion that happens coming out at the FOMC meeting? This is something I'm sure we'll be tracking a lot over the weeks to come before that meeting happens. Now, what about specific Bitcoin market drivers as a potential explanatory force?

Heading into last week, traders were positioned extremely bearishly. Markets analysis firm Coinelized showed a massive $500 million in shortly, liquidations from Friday to drive the final pushup over the weekend. Offshore derivatives exchange OkX saw almost half of these liquidations suggesting a return to leverage speculation. Bitcoin options pricing over the next six months has now flipped positive, with the 180-day put-call skew rising above zero for the first time since the start of 2021. The skew measures the price for bullish call options relative to bearish put options and has been a good measure of market consensus on forward pricing. Deribit, one of the largest crypto options trading venues, wrote in its

explainer, quote, this is a measure of market sentiment in flows, because it encapsulates what people are willing to pay to acquire an asymmetric payout on either the upward or downward direction of the market. As we mentioned before, among other signals, Bitcoin crossed the 200-day moving average for the first time since April of last year. And the sentiment wasn't just limited to offshore Bitcoin, but flowed to Bitcoin instruments on the CME or Chicago Mercantile Exchange as well. The front month futures contract, which is set to expire at the end of next week, gapped higher to hit a four-month high of 21,535, showing a premium to spot prices for the first time since November. In the past, a lot of crypto moves have been some combination of market structure and

macro, but there are still some other interesting, let's say, explanations flying around the Twitter sphere for what is driving this price action, and I think they're worth sharing. A more specific detail on the macro side has to do with the possibilities of the looming debt-sealing negotiation. After the White House declared that they would not give any grounded demands from Republicans earlier last week, Treasury Secretary Janet Yellen announced on Thursday that the U.S. government is projected to hit its debt limit this Thursday and that the Treasury would be enacting, quote, extraordinary measures to manage cash flow if Congress does not act. While these extraordinary measures do not necessarily represent an acute crisis, they do signal that we've reached the critical point on debt-sealing

issues. In her letter, Secretary Yellen said, while Treasury is not currently able to provide an estimate of how long extraordinary measures will enable us to continue to pay the government's obligations, it is unlikely that cash in extraordinary measures will be exhausted before early June. The standoff could last sometime longer, however, the U.S. government has never failed to raise the debt ceiling before, as choosing to do so would mean defaulting on government debt. Many in this digital asset space feel like nothing brings more focus on the digital hard money that is Bitcoin, quite like the prospect of an increase in the U.S. government's debt limit. Mark Connors, head of research at Canadian Digital Asset Manager 3 IQ, said, quote,

Looming large in our three-part thesis on digital asset adoption is the juxtaposition of a growing U.S. debt load set against a declining workforce that is aging out. If we don't let inflation cut our debt in real terms, and we cannot grow out of it, expect more of it. BTC is more correlated to debasement than inflation, so not surprised to see Bitcoin lift with the prospects of more debt. And at this point that Bitcoin is a hedge against debasement, not just inflation in a day-to-day or month-to-month sense, I think is a really important one. Greg Foss also writes, interest costs on federal debt will double this year. Say it with me, debt spiral, fiat debasement is 100% certain. Own Bitcoin. So to the extent that Bitcoin is looking for narratives

that go along with this rise that is either short-term macro or driven by market structure, that seems like one that's ready and waiting. Now, what about something closer to home? Another bit of Bitcoin-focused news from last week was that El Salvador has finally approved laws that would allow them to issue their Bitcoin-backed bonds, known as the volcano bonds. That bond issuance, of course, has some big questions around it, but the meme value is undeniable. This was driven home last week with the El Salvadoran contestant for Miss Universe donning a Bitcoin-themed outfit last Friday. Join CoinDesk's Consensus 20203, the most important conversation in crypto and Web3,

happening April 26th through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse. Immerse yourself in all that blockchain technology has to offer creators, builders, founders, brand leaders, entrepreneurs, and more. Use code breakdown to get 15% off your pass. Visit consensus.com or check the link in the show notes. Next up, it's never too early to start the halving narrative. The next halving in which the Bitcoin rewards that are paid out to miners is once again cut in half is due to arrive sometime between March and May in 2024. While every

cycle is unique, it's worth noting that ahead of the previous halving in May 2020, Bitcoin saw multiple strong uptrends in 2019 and early 2020 before joining the global meltdown of risk markets at the start of the pandemic. VJIR, the vice president of corporate development and international at Crypto Exchange, Luno, said, quote, there are signs this could be the beginning of a new cycle with Bitcoin as it typically does around 15 to 18 months before the having. Now, there have also certainly been some accusations of manipulation and beleaguered actors, let's call them, trying to make it all back in one trade as the meme goes. Custodia Bank CEO, Caitlin Long writes, don't forget, illiquid markets are easier for manipulators to manipulate than liquid markets. No clue if this rally is

sustainable, but be careful. Lots of leverage still to be liquidated based on publicly available info. And many people have incentives to pump prices short term. Rip your face off short covering rallies can be headfakes. Then again, John Sue says, I would accuse this price action on manipulation, but I don't know anyone with enough money to do that anymore. Speaking of a more dubious explanation for this Bitcoin rally, Fox News host Tucker Carlson even has a theory. His theory is that the FAA outages last week were the work of hackers who held the U.S. hostage and forced the U.S. government to buy Bitcoin to pay for the ransom. If you think I am kidding, I am not, and here is the clip where he discusses it.

I will leave it to speak for itself. Almost all ransoms like this are paid in Bitcoin. So if the U.S. government was buying huge amounts of Bitcoin in order to pay a ransom, Bitcoin prices would surge, of course. So the question is, has that happened? Oh, yes, it has happened. Since the nationwide ground stop last Thursday, the price of Bitcoin has shot up about 20%. Is that a coincidence?

We asked Pete Buttigieg to come on the show tonight to let us know. Unfortunately, he did not respond to our request, so we'll keep asking. Still, I think that by far the most common sentiment is that people are feeling like this is a bull trap. Zero X Fubar says this bull trap is deeply sophisticated. Check the charts, always green, check coins up only. check portfolio, more profits, luring me ever so cleverly into the trap. Even worse, I'm hearing that the 16 to 21K bull trap

was simply a warm-up for the real one, helpless to resist. Miles Dutcher says, my gut tells me there's a pullback coming, but that sentiment is now becoming consensus, and typically the market does the opposite of what the herd thinks. Now, some people try to dig into this psychology of this moment a little bit deeper. Cold-blooded Schiller writes,

FOMO edition thread. Everyone bought the bottom. I don't have enough spot. I've missed it. it too late now? What do I do? The move is so strong. I can't position. Do I just buy everything back here? The psychology is pretty crazy. Let's explore and calm you down. The move up has been very strong, but the reality of the situation is still not something to give you mass FOMO and panic you into making rash decisions. Great move, but some way off FOMO. When you look at those weekly charts,

you should be grounded in the fact that, yes, you miss this week, and yes, some people are up a lot, but in the grand scream of crypto and expectations for a full bull run, you're not even close to missing out. 2018 ran significant rallies that would have had you feeling largely the same, none of which were significant in switching the trajectory of Bitcoin at the time. They offered great money-making windows, fueled FOMO the bottom was in, and went on to fail. End quote. Still, many other folks had a lot simpler of an explanation. Simply put, to quote the crow, Eric Draven, it can't rain all the time.

And maybe to add a little bit of my own, even if it's still raining, a lot of folks over here are ready to get out their boots and start splashing around in the puddles. Loomdart tweets, companies selling clients Bitcoin and Eath for over a year straight during one of the worst macro corrections of all time and crypto survived. This is the macro you should care about. Trader Loma writes, if the last few days have taught you anything, it's that people aren't going to stop gambling. Exchange frauds and hedge funds not hedging aren't going to stop that forever. All it takes is a couple pumps and they're back at it. Bullish on human greed and impatience.

Finally, the blockchain associations Jake Trevinsky says, what if it's actually as simple as bid when the economist says crypto is dead. Now, whether or not 21K holds or if we go up or down, this week is going to be an interesting one. We've got Davos going on right now, the World Economic Forum, which is likely to provoke some big picture power shift discussion, as well as having its share of news. On the news front, for example, we already heard this morning about Circle announcing that USDC was moving to Big 4 Auditor Deloitte and going even harder on proof of reserves. There will, of course, be more on the macro front as well. It's earning season and banks are first, is going to give a lot more fodder for the speculation machine. What's more, Davos and the

WEF are happening in the cloud of expectation of a potential global recession. Of around 4,400 business leaders that were surveyed by PWC in October and November of last year, 73 predicted global growth to decline over the coming 12 months. This was the worst reading in 12 years. Another survey of chief economist that was released by the WEF found that two-thirds expected a worldwide recession in 23. So that will certainly color how we look at those earning reports as well. And then, of course, even though there is a little bit of a background of optimism in Bitcoin world, there will be more news from the crypto cleanup of 2022. Of course, you will notice that I have not mentioned GFY, excuse me, I mean GTX at all this episode. I'm sure I will have to discuss this new $25 million

fundraise from the people behind a failed hedge fund and a failed exchange. But for now, I will save that for the future. As I said right at the top, I hope you had a great long weekend, and I'm looking forward to hanging out with you for the rest of this one to come. Until tomorrow, be safe and take care of each other. Peace.