The Breakdown - Bitcoin Enthusiasm Returns: The Five Most Important Stories in Crypto This Week

Episode Date: February 10, 2024

Recorded live with Scott Melker on Feb 9. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Saturday, February 10th, and that means it's time for the weekly recap. 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, friends, back with another weekly recap. which is, of course, the episode that I record live with Scott Melker on Friday mornings.

This one is more fun than some of the ones we've had to go through in the past couple weeks. There is a little bit less ETF stuff, although not none entirely. Plus, we get to talk about why Bitcoin excitement is back, although, spoiler alert, I argued that it never really left, and how much we should care about things like the Salana outage this week. It's a great conversation. I think you'll enjoy it, so let's dive in. We're pretty much on time today.

It's like catching a unicorn on Mars or something. We did it. This is the Royal Wii. I appreciate you taking credit for the lateness here. Hey, man, we're a team, you know, one of us is late. The other one is late. We just basically schedule it for 908 every week. But Bitcoin is flying, man. Bitcoin is flying here. I mean, just quick chart for people who are looking at a classic sort of pattern here. But yeah, I mean, we're pushing towards 48,000 rapidly closing that sort of gap we had when we had the ETF pump on the first listing. I mean, this is going pretty, pretty crazy. crazy right now. What do you make of the price? Actually, you can even look at these articles.

And like this morning, it's like Bitcoin crosses 46. And by the time the article comes out, Bitcoin had crossed 47. Yeah, you know, a day ago, Bitcoin could hit 48K in days. That was yesterday. And here we are knocking on the door. Propeled by historic Chinese New York games. We love Chinese New Year narratives. That is like the sneaky, like perpetual narrative every year. We love talking about that. It's every year. It's like Wall Street bonuses, Chinese New Year. Although I thought Chinese New Year was supposed to be bad because then everybody sells to get the cash to give presents.

So I'm confused, actually. Yeah, I think it's the thing to talk about. I mean, listen, one of the things that we had been observing kind of in the lead up to the ETF was that it felt like there had been a, you know, there was a long period of price discovery where we finally priced in the ETF, right? We got to where we got it sort of, you know, 48, $49,000. And then we had a little bit of a sell-to-news effect right after, but even more than that, there was just a lot of sell pressure, right?

You had miners who put a billion dollars onto exchanges the day the ETF launched to sell into that market. You had gray-scale outflows, which have slowed down to a trickle at this point. I mean, a trickle, relatively speaking, you know, tens of millions of dollars instead of a half-billion dollars a day. And at the same time, that it sort of inflows into all of these other products have continued. And so in some ways, it looks to me almost. like what was the real break in the pattern was the outflows that happened in the immediate wake

of the ETF and we're now just sort of resetting to where we were, which from a psychology standpoint kind of makes sense because no one was really stressing all that much other than Twitter folks who wanted something to talk about around the price changes in the sort of days following. There's so many good explanations having to do with actual sort of market dynamics for why Bitcoin was going down. It wasn't like someone all of a sudden got, you know, scared or nervous or there was some new FUD or anything like that. It was just people were selling a lot of it, you know, because it was the first time that it was open.

So it kind of just feels like a resumption of where we had been going into the ETF a little bit to me. And I think to some extent, the bigger question is once we hit, you know, we get to sort of a new high for the year, right? If we hit like a $50,000 level, do the news articles start again that, you know, actually gets retail to start looking? Or is it going to take actually hitting a new? all-time high or getting into the 60s before, you know, regular retail consumers start looking at.

That, to me, is kind of the more interesting question from where we are right now. Yeah, I guess we'll see what happens. I love that explanation. I mean, we, for the first time, had a very clear-cut fundamental reason for price to be going down. And we're now seeing it lift and it's going up. So I don't think we need to be talking about the year of the dragon or any of these things. I think that we simply are seeing more buying than selling again. I think I also saw that there had been eight consecutive weeks of inflows to exchanges. A lot of that was miners, as you said. And this is the first week that we've actually seen that outflows from exchanges. So I think very, very obvious what's going on here. And a lot of it has to do with story number two,

because we can't go a week without talking about ETFs. First Move for America's, BlackRock's ETF demand ranks among top five. That's for 2024 and comparing it to the biggest ETFs in existence. You're talking about like IVV, which has a whopping 428 billion of assets under management. Number two is VO had 11.1 billion in inflows so far, but that has 398 billion in assets under management. I mean, what's happening with these Bitcoin spot ETFs is astounding. We could just pop through a couple of tweets from Eric Valchunis. Normally it takes five to 10 years for newborn to get even close to toppling a category as liquidity king. Ibit did it in under a month, trading more than both GBTC and Bitto. Here's a look at the top 25 ETFs by assets after one month

on the market out of 5,535 total launches in 30 years. I bit an FBTC in League of Own with over $3 billion each and they still have two days to go. Arkby and BitB also made the list. I find it curious, by the way, Bitto not here. So we talked about Bitto being the most successful launch ever, that was the fastest to a billion, but it didn't get to three. Right. So it doesn't make it onto that link. You can just basically like repeated, repeated tweets and clear evidence here that this is just a monster success and it's continuing.

One of the stories that it tells is just how big the existing audience of Bitcoin buyers are, you know, and sort of the people that were right on the edges of that. Because we haven't sort of seen any of the thing that I think some people were hoping for or expecting, which is some mad rush of retail into this now that they can invest. And we talked endlessly about why that is and where, you know, advisors are with all this sort of thing. But the reality is that Bitcoin has had 15 years to grow an ever stronger, ever more committed, ever, you know, sort of smarter market. And it's sort of flexing that a little bit right now. It's showing how much dynamism there is just in the existing crypto buying audience. And, you know, frankly,

their Tradfai allies that have been recruited over the last couple years as part of that as well. And I think that, you know, it's a very common tweet structure that you see, a bullish tweet structure to basically say some version of wait till the other folks actually start rushing in. But that's kind of what's actually being shown right now is, you know, if this is what it looks like just with the folks who were already trading Bitcoin, already interested in this asset, or maybe this was the one thing that pushed them over the edge because they were real close, imagine when it starts being a much more mainstream thing. Now, I do think that we have a much bigger wall of skepticism to climb this time that we ever have before,

thanks to a variety of folks from the last couple years. But it's a pretty profound statement on the state of the markets just to see how these products are doing already. Let's talk about that skepticism in context. Still the same story to me. J.B. Morgan's survey shows over half of institutional traders don't want crypto. exposure. The bank survey of over 4,000 traders found that 78% of the participants do not plan to trade cryptocurrencies, while just 12% plan to do so in the next five years. These numbers are down massively from the same studies two years ago when we were sort of peak bull market or heading

into the bear. Back then, it says 7% now the survey participants see blockchain as an influential technology falling from 25% in 2022. So clearly, even to your point with these ETFs, with all of this happening, maybe we just need to be at all-time highs for people to get interested again. Maybe it's going to be dependent on the price action, but institutional traders still don't want to participate here. I mean, listen, one of the things that we had talked about or, you know, the industry had talked about in the wake of particularly FTX collapsing was how many years it was going to set things back.

And, you know, we sort of used that term vaguely, right, in the sense of it was sort of just broad. It referred to everything. But I think that what we're seeing is where we got set back the most was around sort of these questions of trust, of, you know, a sense of legitimacy. And the way that that's playing out is that there's a starker demarcation between the people who are still interested in crypto and those who aren't. There's kind of not a big middle anymore, right?

There's not a lot of folks who haven't made up their mind in the way that there perhaps was a couple years ago. And I think that if you look at sort of bull cycles, a lot of what has happened is the folks who are somewhere in the middle who don't really have strong. feelings, just start to kind of go along with their friends. Well, what's happened now is that many, many of those folks have had, you know, their worst sense of the industry confirmed, right? This whole crypto is just for criminals thing. That narrative had started to finally dissipate. And then we saw some of the most egregious financial criminals that we've had in decades.

And so, you know, the downside of this is that a huge number of people just will not pay attention at all. And it's going to take even more this time, I think, than, you know, you know, new all-time highs. I think people will be able to cynically write off as, you know, sort of gambling games and things like that. I wouldn't be surprised that the dynamics feel a bit different this time around. The good thing about this, not to be too sort of, you know, polyanish or optimistic about it, is that having a little bit of counterpressure to the frenzy that tends to happen when we start to get into the price part of the cycle, I don't think is necessarily a bad thing. I think the fact that it's going to have to prove itself a little bit more,

to get a lot of regular people, a lot of advisors, a lot of traditional investors back and interested probably means that when they do come back in, if they come back in, they're going to be coming back in for at least slightly better reasons than they might have otherwise. Yeah, next story is Salana. We had an outage on Tuesday. It had been seemingly forever. Everything was fixed. This could never happen again. No worries. And on Tuesday, they were down for about five hours, still trying to parse kind of what happened. The price dipped a couple percent, but flew immediately after. Almost no price impact.

And Matthew Siegel from Vanek, this tweet basically went viral. Solana outage, what happened? BPF loader, the Berkeley packet filter, which is the mechanism to deploy, upgrade, and execute programs on Solana failed. So we can get into that more deeply, but Solana went down and that was something we thought would maybe never happen again, begging the question whether it is fundamentally sound, whether this is really a blockchain at all, if they can potentially just turn it off and turn it back on,

blow on the cartridge, shake it, and hope for the best. What happens here? I mean, so one, I have no idea what happened. There's way, way beyond my capacity. Way above my big idea. Yeah, sorry. Not even coming close to knowing anything about that. But listen, I think that the thing that people miss with this discussion

is that there is still an active market conversation around tradeoffs when it comes to decentralization and what the appropriate tradeoffs are and what people are willing to bear, whether there is one answer, whether there are multiple answers for different types of applications. And in Bitcoin Ethereum and Solana, we have three different answers to those questions. And if you ask people who don't think that the tradeoffs of one of those chains are the right ones, they're going to viciously argue that the other ones are wrong, whereas their approach is best, right? The Bitcoiners think that Ethereum, you know, is a cabal that, you know, Joe Lubin and Vital

are going to turn off at any given time or that infera is going to make everything go down because there's centralized infrastructure. The Ethereum folks look at Solana and they scoff and point to, you know, these individuals and the ability to do this and downtime and things like that. And the Salana people think all of those people are dinosaurs because the functionality is so fast and, you know, they feel so affirmed in the choices that they've made. I don't think that this changed anything about where any of the folks who have those feelings are. I think that we are still figuring out and it is undefined. decided the market has not awarded a single winner yet when it comes to the question of how decentralized

is appropriate for these sort of different applications. And so it doesn't surprise me at all that we saw a tiny little nervous dip and then right back to it because the people who are excited about Salana aren't going to be thrown off by this. I think that they don't see Solana as its fully mature state. I think, you know, we can be cynical from the outside about the sort of designation of it still being beta, but the folks who are building on it are not cynical about that. So they're much more willing to deal with this stuff. So listen, to me, it's just a, a, a great indication of how many, you know, these fundamentally different categories of belief about how blockchain should be structured and what the tradeoffs that should be made are that still

exist in the market right now. I, yeah, I totally agree. I think that they're moving fast and breaking things. And in the previous times when it went down, they didn't have the passionate community, the development, the hype that they literally have right now. Prices were lower. So it was easier to be cynical. When the price is high and everybody's excited, it goes down and they say, of course,

man, we're pushing the envelope. The envelope. This is great. We're really testing what's possible here and price goes right back up. I think that this is going to end up being a nothing burger. And if they have other outages for four or five hours, the people who hate it are going to continue to hate it. The people who love it are going to continue to love it. We have to pivot a bit to macro, although nobody ever wants to do that.

We've got Jerome Powell on 60 minutes. This is the interview happening right here, full 2020 for 60 minutes interview. but this was actually pretty interesting because Powell said some of the quiet parts out loud. I think the one that to me was the most shocking, although obvious, was when he was talking about the U.S. fiscal trajectory, he said, it is unsustainable. I don't think that's at all controversial. And I think we know that we have to get back on a sustainable fiscal path. But I think you're starting to hear now from people in the elected branches who can make that happen.

It's time we get back to that focus. But I mean, he said a lot, but he definitely admitted that we had some major problems and that what's happening with policy can't last. And there's nobody who's going to pivot. I don't know what he's talking about, but nobody's going to be changing that. I should probably also highlight, by the way, that there was a lot of fear about CPI numbers today. And they came in basically in line. Seasonal adjustment was fine. So that was another nothing burger in line with this. Yeah, this is interesting to me. I mean, so, you know, the, the core function in some ways of this interview was to reset market expectations around how fast we're going to get rate cuts and how big

there going to be this year, right? The market was pricing in six rate cuts before the interview, and then it was pricing in three after. And so it seems to me that that was sort of the, you know, when it came to why he would do this, right? He hasn't done one of these, you know, this high profile in interviews since around the COVID times. You know, when it comes to that that almost like throwaway comments on the U.S. fiscal situation, it feels a little bit more personally mediated than, than sort of like, you know, Fed policy. I think, Powell staring down, you know, either we go into a second Biden administration or he, you know, goes into a Trump administration where, you know, Trump has sort of made clear that he's not keeping

Powell around. And so I wouldn't be surprised if we start to see, you know, Jerome say what Jerome thinks a little bit more here and there, especially when it's not stuff that the Fed is necessarily, like, expected to control in the immediate term. So it was, you know, weirdly it was on the one hand, And, you know, the most illuminating or interesting part of the conversation to us, certainly, who are thinking long term, but it's also like fairly irrelevant to, you know, the traders who are going to make decisions based on what he said for Monday morning. Yeah. And you talk about the political side of it.

Powell emphasized, as he has repeatedly in the past, that Fed officials do not factor politics or elections into their policy decisions. We never do. And we never will, he said. What do you think? Maybe. I mean, perhaps unpopular opinion relative to the crypto crowd. But like, I think that history will judge Powell fairly impressively when it comes to resisting outright political pressure during his tenure.

Now, that doesn't mean that there weren't sort of concessions to that here and there. But, you know, I think it's preposterous from what we've seen from this Fed that somehow he was going to try to throw the election to Biden by doing more. of rate cuts. It's just so, there's nothing to indicate at any point in his thing. Listen, I think that where history will judge Powell harshly is for continuing to keep rates so low when inflation was clearly coming, right? They will rightly recognize that the Fed played a major, major role in causing the sort of the depth of inflation that we experienced. That'll be the biggest stain. But, you know, the issue will be that, not sort of, you know, cowtowing to political pressure in some way. At least that's my, not's my perception of it.

So you're saying that inflation was not transitory. It was just on a five-year scale, you know, after the highest rate-hiking in history. Yeah. Yeah, coincident. It's how that happened. I'll give it to you that he's not bowing to political pressure. I mean, I think Elizabeth Warren was very aggressive even in the past week saying that the Fed needs to cut rates immediately.

You don't see any response to that. And frankly, when you listen to Waller and the other Fed, uh, you know, you know, the Fed, you other members of the Fed, you can see them constantly reiterating. There's no reason for us to cut yet. Right. Everybody thinks it's March. Everybody thinks it's May. I wouldn't be surprised if it's not till the end of the year, if then. Nothing would surprise me at this point. One of the other things that's been fairly remarkable about the Fed for the last few years is how lockstep in general they have been on message at every single point. This is not the historical norm where you have every Fed official saying the same stuff basically every time. Now, there was a little period last year where you

started to kind of see a divergence between the Hawks and the Doves, but even that was really, really minor, relatively speaking. And we are right back to full court press of the same message once again. And it's pretty interesting to see. Yeah, the final story that we have today is this slight regulatory crackdown or legal crackdown on the crypto world in South Korea and in the United States, the first story. And I loved the headlines. This one's a bit less hyperbolic, to be honest. But South Korea to enforce tougher crypto law with potential life sentences. The other headlines I read made it seem like if you committed any crime related to crypto, you are do not pass go, do not collect $200, go directly to jail and for the rest of your life.

But clearly, Korea is outlining some higher level offenses that could get you more severe penalties, including life imprisonment. But man, it would have to be a hell of a crime. for that to be the case, I think. Yeah, I mean, listen, I think that you have a toughening of the posture vis-a-cropto around the world, but it's moving back to enforcement related rather than what we saw in the immediate wake of FTX, which is sort of proactively trying to kill the thing. You're seeing this in Hong Kong too, right? Hong Kong came out with much more permissive regulations than we thought we're going to be.

Towards the end of 2022, we anticipated that Hong Kong was basically going to officially outlaw any sort of trading for retail. And instead, they painted a very clear path for, you know, what types of assets retail could be involved with, what, you know, you had to do if you were in exchange there. The exchange requirements weren't particularly easy. And right now, there's still a very small number of people who have been actually licensed under that regime. They're starting to crack down.

But what we've heard from them over the last few weeks is all about the penalties for for non-compliance and being kicked out. Now that they have had that sort of like the olive branch of this is a thing you can do, they're shoring up the other side, which is basically like, but if you don't play by our rules, we're going to hit you even harder. And I think that that's kind of what this looks like to me a little bit as well. Totally fine. They should do that.

That doesn't anger me or surprise me in the very least if that's all it is. SEC adopts rule to have stricter oversight over dealers looping in crypto and D5. There's a 247 page rule that I obviously did not read. The part that was interesting was with the exception of having assets less than $50 million. So a lot of people shrug this off and said, who's got more than $50 million in this market that doesn't apply? But I've actually heard some lawyers have some very concerning takes about what this could mean and how this could be extrapolated. Can you dig into this at all? Yeah, sure.

I mean, so a couple things to note. One, this is not a crypto-specific rule. In fact, I think the original draft of this was 197 pages. so it got 50 pages longer. And in that draft, crypto was referred to only once in a footnote. The issue with this is that we are once again in a situation where because the relative posture of this as it relates to crypto is not articulated, people are left guessing. So in a lot of ways, this is actually more targeted on hedge funds, on certain types of,

you know, high frequency traders. In fact, at one point, you know, high frequency, there was a sense in the high frequency we trade our space in 2022, that this type of rule adoption could be an existential threat to the industry. They were fighting against it pretty tooth and nail. When it comes to crypto, if you kind of read, for example, Hester Persis dissent in the SEC decision, she really reinforces the same thing that's happened over and over before, which is, you know, we pretend as the SEC that it's as simple as coming in and registering, but it's not. And anytime we get into a situation where we've imposed the new rule that the result of which is come in and register,

but it's impossible for a new category of organization or structure or whatever to participate in that. We've just set the market up for failure. And so this is once again a situation where we have a new rule that leads to less clarity, not more clarity. And, you know, we're seeing the response and the frustration to this. You know, the House Financial Services Committee Republicans wrote a big letter about how this. was deployed poorly and it's going to end up in legal challenges and things. But I mean, at this stage, really legal challenges are the only thing left because the rule is on. This seems like when we saw the reports of the $10,000 rule that if you sent or received

more than $10,000, you had to gather the K.YC and reported and the IRS was going to come after you and they were going to put you in jail, not the IRS. Of course, they don't put you in jail. And then a few weeks later, it was like, dude, these rules can't be enforced at all. all, we're going to look at this again. These are rules that just can't be enforced, to your point. They can make as many kind of ideas and share them and have these rules as they want, but there's just no way for anybody to even report on these things. Yeah.

I mean, listen, the big thing that keeps coming up is that the U.S. regulatory establishment has not meaningfully dealt with, frankly, they haven't even meaningfully thought about the implications of defy, right? They're just putting their heads in the sand saying, isn't a thing. And one of the possible outcomes, of course, is that they say, nope, we're right. You're not allowed to have this be a thing, you know, and the ways that these things are organized, you're just not allowed to participate in them at all. But we have a sort of de facto version of that right now where it hasn't gone through a process where that's been the decision. It's just de facto.

And until we deal with that, you know, we're going to continue to live in this weird, challenging in between where no one knows anything about what's going on. But listen, if we can't even get stablecoin legislation done, though their likelihood of the U.S. political establishment dealing, you know, comprehensively with DFI seems pretty low. Yeah, it ain't happening. Even if they pass the rules, they don't even have the staff or understanding to actually enforce them.

But that doesn't mean we shouldn't push back when the rules are wrong. Dude, we did it. By 9.30 a.m., we managed to finish the Friday 5 guys follow NLW, the breakdown. to check this out on his channels, of course, and on the weekend. Anything else I may have missed? Are we done here? We're done, man. Let's go have a weekend. Awesome. Everybody, have an amazing weekend. We will see you back on Monday for Macro Monday. Thanks, man. Bye, guys.