The Breakdown - Bitcoin Is the Most Illiquid It’s Ever Been: 12 Numbers That Tell the Current Story of Markets

Episode Date: September 25, 2021

NLW looks at the current state of crypto markets through numbers, including: Bitcoin illiquid supply  Lightning Network capacity  Evergrande’s debt The total value of CryptoPunks  And more 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 “The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Tidal Wave” by BRASKO. Image credit: Vertigo3d/E+/Getty Images, modified by CoinDesk.

When this is an asset class that is used to 10, 20% drops in an hour that are amplified over a course of days and function relatively orderly relative to what you would imagine and recover in turn, all the while without putting their hands out asking for a bailout like traditional finance. Regulators are allowed to be concerned about whatever they're going to be concerned about, but I keep coming back to the fact of when it comes to crypto markets right now, which investors are asking for their protection. 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 sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Friday, September 24th, and today I have an interview that had to be rescheduled at the last minute. And so I had to pull a quick audible. Now, if I were a smarter man, And what I would do is I would have a number of evergreen episodes just sitting around ready to slot in for circumstances exactly like this. There are so many good ones out there, a primer on the lightning network, a look at stable coins and what their history is and what they mean, et cetera, et cetera, et cetera. However, doing a daily podcast means that you don't have a lot of time for planning ahead.

So, instead we're going to adapt and we're going to do an episode that I actually think is a really fun way to look at things. I'm going to do the story of markets in 12 numbers. So I've gone through, I've looked at a bunch of different parts of the crypto industry as a whole, and I'm going to use numbers to sort of summarize or give a sense of where things are. This is across the whole crypto space. It involves Bitcoin, Defi, NFTs, etc. I'm stacking the macro in Bitcoin up front.

But anyways, hopefully this is a fun little substitute show for what I was planning on doing, which is an interview, which you'll have next week. And either way, I think it should be a cool way to see where we are. right now. All right, first number that tells the story of markets is $300 billion. That's the approximate size of Evergrand's outstanding debt. At least it's the number that media keeps pointing to, so it has sort of meme power even if it's not exactly right. The relevance of this, of course, is that Evergrand is a Chinese real estate developer that has fallen on dire straits. It is, as you can tell, super in debt, so much so that there are serious questions about whether

it can even service that debt, i.e. pay the interest on the debt, much less the debt itself. And the question for a couple weeks now has been, would there be systemic cascading problems if Evergrand were to fail? Would the Chinese Communist Party step in and make sure that it didn't fail? How exposed is the rest of the world to Chinese real estate debt? Is this something that would just be Evergrand? Would it be just Chinese real estate? Would it be just Chinese companies? Would it actually spill over into the rest of the world? For some, God bless them very hard-trying tether truthers. They speculated about how Tether might hold Evergrand commercial paper. Because why not? Anything that's bad in the world, let's just chuck tether into it.

By the way, they have categorically denied that, and there has been literally zero evidence to that point, but I digress. The point for me is that the Evergrand story this week has sort of petered out a little bit. It started the week as something that the West was finally paying attention to and very concerned with, and now it's a little bit more mixed. It doesn't seem like the disaster scenario has come, and sort of, as my point was earlier this week, when there's so much focus on a potential disaster, it usually doesn't come to pass exactly the way that people are worried about. It's the things that come out of nowhere and surprise you that are the real concern. Still, I think this story, this number, $300 billion in debt, a company so in debt that

it can't afford to service its debt to say nothing of actually pay that debt back. That's a zombie company, and the world is full of them. They are a particular byproduct of this long era of low interest rates and cheap money and cheap borrowing, and the real question, the biggest macro question of the next 10 years, in fact, might be one, how long can that be sustained, and two, what happens when it can't. A second number that tells the story of markets right now, and now we're moving into crypto. That was my one little macro homage. 2,738 Bitcoin, a.k.a. 116 $1.3 million. That is the current network capacity of the Lightning Network. This is the layer two network that makes Bitcoin more usable for day-to-day transactions, and there has been much more of a

spotlight on Lightning since September 7th when, in addition to it being my birthday, El Salvador put into practice its Bitcoin law. From a couple of years ago when Lightning was still just an experimental technology to now when an entire sovereign country is effectively running on the Lightning Network, it's a pretty remarkable shift, and watching the capacity of the Lightning Network grow is an extremely important part of how much that's going to be able to scale. Another Bitcoin number that I think is notable, 13.9% of supply. That's how much Bitcoin Minos, Bitcoin Minos being holders who hold less than 10 Bitcoin hold.

Now, Bitcoin Minos have historically accelerated their holdings, accelerated the percentage of the overall Bitcoin market that they hold after corrections. this in 2013, 2017. And it has happened again this year that 13.9% of supply represents an increase over the last few months. We talk a lot about whales and we also talk about the small holders, so it's interesting to see how these sort of medium-sized Bitcoin holders, which represent, I got to imagine a lot of the folks listening to this show, actually hold. Another Bitcoin number that I like is 14.43 million. That's the illiquid supply of Bitcoin. That coins that are not in a liquid state, i.e. cannot be sold with a click. And it's the most

illiquid supply of all time. Bitcoin is more illiquid right now than even the December 2018 bottom. Illiquidity in Bitcoin is a sign of conviction on the part of hoddlers. And so to see it now at this incredibly high number, even though we're in the midst of what is undeniably a bull run, is very, very encouraging to see. One last encouraging one on the Bitcoin front, $68. That's how much hash rate has recovered since the bottom, since the China mining ban. When the China mining ban happened, first we all kind of brushed it away. We thought that it would be nothing just another bluster from China reinforcing previous positions. But then the vice premier of the CCP got involved, and it was very clear.

It sent a very clear signal to the rest of markets that this time it was for real. Over the next few weeks, hash rate crashed by about 50%. half of the Bitcoin network's hash rate went offline as China-based miners scurried to figure out what was next. Were they going to move over the border to Laos, which is now accepting Bitcoin miners, or to Kazakhstan or to Russia, or were they going to pick up and move even farther to North America, to Texas, or were they just going to liquidate and get out of the game altogether? Whatever their answer, it was something that was still in the middle of being figured out for quite some time. But now, a couple months later, the fact that we've recovered nearly 70% of the hash rate that was lost, shows just how unbelievably resilient this network is.

To have a network that can have a 50% drop in its network security as based on hash rate recover so quickly and on this side of the recovery have none of the same exposure to CCP whims and control that had been worried about since the very beginning of the Bitcoin network is pretty remarkable. Nidig sponsors this podcast and they also put out a really good newsletter. focused purely on Bitcoin. If you want insights into what's driving market moves, regulatory changes, and the metrics that deserve your attention, sign up at nidig.com slash NLW. That's NYDIIG,

forward slash NLW. Next up, we are moving to some other parts of the crypto markets, and the numbers that I want to share are 9 and 25. That's where Bitcoin and Ethereum rank respectively in terms of overall assets by market cap. Gold is number one, Apple. Apple's number two, Microsoft number three, Alphabet or Google number four, Saudi Oramco number five, Amazon six, Silver seven, Facebook eight, then Bitcoin. Yes, Bitcoin is nestled between Facebook and Tesla, ahead of Berkshire Hathaway, take that rat poison friends, comfortably ahead of Visa, JPMorgan Chase, and Walmart. But all of those are still ahead of Ethereum, which is sitting at 25. Still not bad for an insurgent asset. These are sort of silly numbers in the sense that

obviously the market cap of Bitcoin, the market cap of Ethereum, represent something very different than the market cap of a single company. I only pointed out to show just how relevant, how large these are in the context of the global stage. Speaking of Ethereum and speaking of large, 352,841Eth, that is my next number, and that is the amount of ether that has been burned since the implementation of EIP-1559. Now, as I've said before, EIP-159, now as I've said before, EIP-151,000, was designed primarily to smooth out changes in gas and times of turbulence and high demand or shifts from high demand to low demand, etc. But as a byproduct, it also introduced a token burn that some argue will eventually make Ethereum a deflationary asset, where in general more Ethereum is being

burned to fees than is being issued. That 352,000 eth burn means that Ethereum is on track to burn 2.6 million ether this year, which is a pretty significant number. The other Ethereum number that I wanted to share is 3.3 billion. That's the total value locked on ETH layer 2s. And I think that that layer 2 number matters because of what we're going to get into next, which is the Layer 1 battles. One of Ethereum's biggest credible answers to the insurgency of things like Salana, like Avalanche, these other Layer 1s,

that are effectively saying that Ethereum is making the wrong tradeoffs when it comes to a Layer 1 smart contract platform, is that Ethereum layer 2s are going to allow it to scale. That 3.3 billion represents a big jump over the last couple weeks with the introduction of Arbitrum, which is currently the market leader in ETH layer two value locked. Whether these layer twos can allow ETH performance to catch up with some of the contenders remains to be seen, but you have to know that they are coming online and they are attracting value to them. Speaking of that, though, and moving on, 4,725%.

That's how much the price of Solana's soul is up in a year. I think that number is relevant for two reasons. One, to me, it shows the openness that crypto markets have to the idea that there could be a contender to the Layer 1 smart contract throne that Heath represents right now. Salana has become an undeniable market force, even if it's making a very different set of tradeoffs than Ethereum is. Now, I think that the other reason that that number matters is that when you're talking about what is a risk factor for an Ethereum when it comes to Layer 1 battles, is that people always want to get in early on things. For folks who missed being early on Ethereum a couple years ago, throwing your lot in with a

credible competitor could create a lot of upside opportunity. That doesn't mean they'll be right long term. It just means that there's an obvious human psychological reason for these contenders to attract attention and the fact of 4,725% gains in a year is certainly going to make people take notice. At the same time, my next number is 20, 20 hours. That's how much downtime Solana recently had. To get it up and running again, it required a full reboot of the network using a good quorum of the network's validators. And as Ethereum pointed out, the fact that they could get all the validators in the same Discord meant that it was just much less decentralized than something like Ethereum was. Now, of course, the real question isn't an arbitrary or binary

decentralization versus not. It's how decentralized is enough and what are the the tradeoffs. Salana's thesis is that East fees represent a failure of their own kind, and that the tradeoffs they're making in terms of comparative decentralization are absolutely worth it. I don't so much have a horse in this race. I think that it's important to define the terms of the race correctly, and I think it's important to understand to the extent that you want to see what matters to the crypto industry as a whole and how it's likely to shake down in terms of the narratives that are presented to institutional investors and investors outside the crypto space in the months to come.

Speaking of outside the crypto space, boy, oh boy, the next two numbers are 250 million and 680 million. Those are the sizes of the raises, respectively, of Dapper Labs and So Rare, both slightly different types of NFT platforms, both of which focus on bringing NFTs to sports. Dapper Labs is, of course, the company behind NBA Top Shot, and so rare has its roots in European soccer. Although Dapper Labs is now challenging them a little bit with the announcement that La Liga, Spain's biggest, soccer league is doing an NBA top shot type project as well. I think the thing that I want to mention here is two parts. One, just the enormous size of these rounds shows the interest, the excitement that at least investors have for NFTs right now. But second, these are NFTs in a different space than the profile or avatar NFTs that we've talked about a bunch recently. These are making bets that

collectors from traditional areas like sports are going to be using NFTs as a key part of how they interact with fandom and with the teams that they care about going forward. But speaking of those avatar profile pick NFTs, and we're coming to the end of the list soon, but the next number on this list is $1,326,928,722.88. That is the total estimated collection value of the Cryptopunks, one of the most popular OG NFT collections in the world. This week, the big notable thing about Cryptopunks was that Cosimo de Medici on Twitter, who has been regaling us with threads about why punks matter and why they're the king, et cetera, et cetera, is in fact Snoop Dog. I've done a lot of talking about why that matters and how it's relevant,

so I'll move on from now, but still, I just want to point out that number. $1.3 billion in value across this collection of 10,000 punks is pretty remarkable and shows, if nothing else, just how much money crypto-OGs who are into NFTs have made over the last few years. Finally, the last number that I want to point out is $125 billion. That's the total outstanding supply of USD stable coins, with the biggest being Tether and USDC. It is very clear as we head into the fall that there is no more significant issue on the minds of U.S. regulators than stable coins. 125 billion is apparently the number at which they find the outstanding supply and volume of stable coins to be unignorable.

Every day it seems the New York Times or the Washington Post or Bloomberg publishes a story about how a Treasury report and government thinking on stablecoins is coming. The big question is whether they will be determined to be systemically important. I have a whole rant I could do on how ridiculous I think it is. The government officials are doing all of this pearl clutching about a potential bank run in stablecoins. When this is an asset class that is used to 10, 20 percent drops in an hour, that are amplified over a course of days and function relatively orderly relative to what you would

imagine and recover in turn, all the while without putting their hands out asking for a bailout like traditional finance. Regulators are allowed to be concerned about whatever they're going to be concerned about, but I keep coming back to the fact of when it comes to crypto markets right now, which investors are asking for their protection. Anyways, guys, I hope this has been a fun look at the story of crypto markets on the basis of these 12 different numbers, I think about 12 numbers. I kind of lost count in there. I hope you're having a great week and headed into a great weekend. And until tomorrow, be safe and take care of each other. Peace.