The Breakdown - Bitcoin Reclaims $1T Market Cap, But Political Fights Remain

Episode Date: February 15, 2024

Even as BTC reclaims an important milestone, the Blockchain Association is pushing back on legislation that could have a significant negative impact on the industry. 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 Wednesday, February 14th, and today is a day to express your love with 52K Bitcoin. 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. Show notes are go to bit.ly slash breakdown pod. Well, friends, while our main story today is about the blockchain association raising concerns around Elizabeth Warren's new bill, we have to kick off with a little bit of price

talk because with an early morning jump above 51,500, Bitcoin is once again a trillion-dollar asset class. The first time Bitcoin hit this milestone was all the way back in February 2021. The halving was nine months in the past and the bull market was nearing its first peak. this time around, the having is still 65 days away, and your grandfather hasn't even called to see how he can buy stock in Bitcoin yet. Bitcoin has only spent a few months in this market cap range in its history, so we are in fairly uncharted waters. The highest market cap ever claimed was $1.25 trillion for just two days in November 2021, which means that if Bitcoin manages to climb

above that, there is no history, no levels, just unrestrained price discovery. We'll comment to the co-founder of reflexivity research writes, The story of Bitcoin is so incredible. Zero to a trillion dollars in 15 years. The only asset in history where retail was able to get the cost basis low for years and front-run billions of institutional capital. This is why so many suits are in denial. No, you can't just organically grow magic internet money into institutional acceptance.

Not realizing the more Lindy Bitcoin is, the more liquid it becomes, and better infrastructure the more de-risk it is. You will buy our bags and you will be happy. One of the drivers for this price action was that Tuesday was the largest day of net inflows for the Bitcoin ETFs since launch day. 631 million was added to the products. Greyscale outflows were 72.8 million, roughly average for the past week, but much lower than the earlier bleeding of assets. BlackRock registered just shy of a half billion worth of inflows its largest single day by over 100 million. Overall, Tuesday only had 20 million fewer inflows than launch day and 15% more than

anything seen since. With Bitcoin beginning to show wildly bullish price action, activity in the options market is exploding. Last weekend, options positions were open to bet on Bitcoin crossing 65,000, 70,000, and even 75,000. Options volume in this price range centered around the April to June maturities, meaning that traders are looking for some wild price action following the halving. Kelly Greer, head of America's sales for Galaxy Digital, said, these flows demonstrate conviction from buyers willing to pay a premium to take on these positions, suggesting investors have a constructive view on Bitcoin. Greer noted that this option's activity was similar to the bets placed on 30,000 and 40,000 Bitcoin in Q4 of last year, which ultimately

paved the way for a strong rally through those levels. By far out-of-the-money call options was also a common practice during the price run-up in late 2020 and 2021. As Bitcoin experienced its last parabolic move, sophisticated traders would often buy wildly speculative options positions at bargain prices, just in case. This activity culminated in the first quarter of 2021, when options open interest concentrated on an $80,000 price target for April, which, as you well know, failed to materialize. Still, this kind of options positioning can often become a self-fulfilling prophecy. In Q4 of last year, Galaxy Digital's Alex Thorne noted that out-of-the-money-call options were causing a price squeeze as Bitcoin's price approached. This market dynamic occurs due to market makers

hedging the options they have sold to traders. As an options price becomes more likely to be hit, Marketmakers are forced to buy Bitcoin positions to avoid losses if the option pays out. This leads to a sudden rise in price-inensitive bidding, pushing Bitcoin higher. Whether this will actually occur this time around is another question. Bitcoin is already showing signs of becoming overbought after a few days of strong price action over the past week. Specifically, Bitcoin's 14-day relative strength index has risen above 70, suggesting that the price action has run too hot for too long. These indicators often signal a trend reversal cooling off the price action with a downtrend.

Alex Kupsukovic, a senior analyst at FX Pro, wrote on Monday, Bitcoin posted its seventh consecutive day of gains, but the strengthening slowed over the weekend. It also coincided with a move above 70 on the RSI on the daily timeframes, which could increase players' appetite for short-term profit-taking. Caution is also building as we approach the January peak. Aside from the technicals, Bitcoin is facing some looming fundamental headwinds. The Genesis bankruptcy is heading towards the liquidation phase. Earlier this month, Genesis trustees requested permission to sell off $1.4 billion in grayscale Bitcoin trust shares, along with $200 million in Ethereum and Ethereum Classic trust shares. The sale is still pending court approval, which was scheduled for today.

The Bitcoin ETFs have already managed to digest $1 billion in GBTC sales from the FTX estate shortly after launch, but another large liquidation could present a significant overhang in the short term. Ethereum options are also having a hot streak with record volumes on the CME. With ETH up more than 10% since Monday, institutional traders are crowding into the CME to bet on additional price rises. CME-Eeth option volume for the month has already exceeded the volume for January and is on track to reach a new all-time high. Open interest for options expiring in February has already reached $468 million exceeding January's total. The largest month ever for CME Ethereum options was in December of last year when they hit $510 million. Bitfinex analysts noted that

the arrival of Bitcoin ETFs appears to have juiced the numbers for CME crypto futures. They wrote, trading volumes on the CME surged by 35% in January, reaching a high of $94.9 billion, the most substantial volume since October 2021. This indicates heightened institutional interest in cryptocurrency exposure. According to Coinglass data, the CME is surging ahead as the premier venue for Bitcoin futures trading. The CME now commands over 27% of the market compared to Binance's 25%. So, very exciting times in markets. Maybe not a clear path from here to forever with some challenges coming up, but still a good time to be a bitcoiner. Today's episode is brought to you by Cracken.

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Alas, our main story today is a little bit different. The Blockchain Association is again raising concerns that anti-money laundering legislation proposed by Elizabeth Warren will cripple the U.S. blockchain industry. Warren's bill, called the Digital Asset Anti-Money Laundering Act, would expand Know Your Customer and Anti-Money Laundering Compliance to a wide range of crypto entities. Miners, validators, and wallet providers could be dragged into the AML compliance regime, despite having no means of accessing the relevant customer data. In a new letter to Congress, the Blockchain Association wrote,

The bill risks our nation's strategic advantage, threatens tens of thousands of U.S. jobs, and bears little effect on the illicit actors at targets. The lobbying group has again leveraged their network of over 80 former military, law enforcement, and national security professionals to co-sign the letter. As the legislation is nearly impossible to comply with, the blockchain associations argues it will ultimately be counterproductive.

They wrote, Senator Warren's legislation would inadvertently hinder law enforcement and national security efforts by driving the majority of the digital asset industry overseas. This shift could also lead to increase liquidity in unregulated offshore exchanges and a loss of valuable expertise and visibility for the U.S. in the blockchain realm. Thus, it is their view that it is critical to national security interests that the digital asset industry continues to develop within the United States

governed by domestic laws and regulations. You might remember that blockchain association had written a similar letter in November to express the same concerns. Senator Warren failed to engage with that substantive critique and instead chose to slander the national security and military professionals who co-signed the letter, questioning their motivations and integrity. Warren suggested that they were accepting payment for their opinions and demanded payroll information from a number of lobbying organizations in order to prove this claim. This time around, the Blockchain Association chose not to include Senator Warren in their list of bipartisan recipients.

Instead, the letter was addressed to leading Financial Committee Democrats, Sherrod Brown, and Maxine Waters, along with a number of Republican leaders. The signatories addressed Warren's claims, stating that they, quote, again raise our voice not to inject ourselves needlessly into a political world that is new to many of us, but to stand up for what our experience tells us is right. Blockchain Association CEO Kristen Smith made an appearance on Bloomberg to discuss the issue. She said that although Congress is unlikely to get much done this year, quote, I think it's important, especially when Senator Warren has been so public about trying to advance this legislation that we take it seriously. Smith paraphrased the opinion of the panel of

National Security and military professionals stating, Hey, Congress, we care about these issues too, but it doesn't make sense to apply the Bank Secrecy Act to crypto. This was legislation that was developed for centralized institutions when there isn't a clear picture of what the accounts look like. Smith noted that public ledger blockchain technology already provides most of this information transparently, adding, quote, what we're asking for is a more nuanced conversation that can look at the unique features of this technology. Let's identify what are the real gaps here and create a different kind of system for regulating this space if it indeed needs to be further regulated.

Smith pressed home the point that the Bank Secrecy Act already applies to centralized crypto exchanges and many other centralized firms in the industry. Warren's legislation would only really serve to extend the BSA onto decentralized services like validators, miners, and wallet providers. Now, the House Financial Services Committee will be holding a hearing around these issues on Thursday, with a view to having that nuanced conversation about what really needs to be done to combat illicit activity on crypto networks. Just to put a fine point on this, late last year, the blockchain Association held a panel featuring numerous lawmakers, regulators, and law enforcement personnel. The consensus seemed pretty clear. Blockchains are a terrible way to launder money.

Jim Himes, the Democrat ranking member of the Intelligence Committee, said, Today, I would so much rather Hamas attempt to move money across Bitcoin than do it in the Hawala system or do it in suitcases full of cash. We have zero visibility in either of those latter two cases. We have utter transparency in cryptocurrency. U.S. Treasury Deputy Secretary Wali Adiyammo said, many of the tools that are being created in the digital asset space are actually far better in terms of the ability for us to know your customer to track where money is going. Christopher Wong, an FBI special agent, said,

If you're talking about following crypto and catching somebody, we're pretty good at that. Look at the Bitfinex case. The transparency and permanency of the ledger means that a laundering decision you made five years from now might be a mistake. Continuing on this theme earlier today, the House Financial Services Committee held an oversight hearing for the U.S. Treasury's financial crimes and anti-terrorism departments. Brian Nelson, the Undersecretary for the Terrorism and Financial Intelligence Department, argued that the Treasury needs stronger tools to combat illicit finances in crypto.

Nelson said, Treasury is deeply concerned about the use of virtual assets for all illicit financial activity. He added that this is why Treasury has been working for over a decade to implement an AML and counterterrorism financing framework that, quote, mitigates illicit finance risks while promoting responsible innovation. Nelson recognized the fact that crypto's use in terrorism financing is still, quote, a small fraction of more established mechanisms to move money. Nelson noted that the limitations of crypto enforcement are largely related to jurisdictional

arbitrage and non-compliant exchanges. In most situations, the Treasury is already able to hold crypto firms accountable, with Nelson using the Binance settlement as an example of Treasury's ability to enforce the Bank Secrecy Act in the crypto industry. Nelson also pointed out that the Treasury has successfully limited the use of crypto mixers by terrorist organizations and North Korean hackers. Despite these successful enforcement actions, Nelson said, to root out illicit finance by players in virtual asset markets and forums, we need additional tools and resources. That is why we are eager to work with Congress to adopt common sense reforms that update our tools and authorities to match the evolving challenges we face today.

The shape of these expanded tools is currently being negotiated in Congress. According to Politico reporting from last month, Democrat Senator Sherrod Brown is actively looking at legislation to combat money laundering using crypto. He said at the time, we're looking at a lot of different proposals, including what we want to do ourselves, but nothing specific yet that I want to talk about. As the policy discussion around illicit use of crypto reaches a critical stage, the Treasury's Financial Crimes Division has released a new report that seeks to quantify the size of the problem.

On Tuesday, FinCEN published a report on the use of digital currency for suspected online child sexual exploitation and human trafficking. The report analyzed suspicious activity reports filed by crypto firms from 2020 and 2021. It found that there was an upswing in the use of crypto in this category of crime during that period, in particular the use of Bitcoin increased. The analysis found 2,311 reported uses of crypto amounting to over 412 million in payments. The conclusion that the use of crypto was increasing was based on a single data point. The fact that there were 336 relevant SARS filed in 2020, which expanded to 1975 reports in 2021.

The report claimed that many transactions were conducted using Bitcoin ATMs or crypto mixers, reducing traceability due to regulatory conditions at the time. The obvious issue with this analysis is that it only uses data across two years. A recent report from chain alice found the, quote, scale and severity of crypto being used in these crimes peaked in 2021, and has been on the decline ever since. In the interim, numerous measures have been introduced to combat this problem. KYC requirements are now standard across crypto exchanges all over the globe,

whereas back in 2020, there were still a huge number of large exchanges with minimal compliance and reporting policies. Bitcoin ATMs worldwide have generally become required to record customer information as well, cutting off that avenue for anonymous crypto use. More generally, since 2020, industry has begun to take the filing of SARS much more seriously. The FinCEN report even highlighted that there could be confounding factors in their data. It said that some of the increase in 2021 could have been as a result of, quote, raised awareness and vigilance on the part of

crypto firms, rather than due to an increase in the activity itself. So what is the takeaway with all of this? The TLDR is that on the one hand, we have Bitcoin ripping its way into the traditional finance world. At the same time, that does not mean that these battles in Washington are over or not going to matter. The ETF was not the end of those battles. The coin-based lawsuit won't be the end of those battles. Even the current slate of legislation won't be the end of those battles. It is worth even as we get excited and we should about the market side of this market right now to keep these battles in mind, to keep our eye on what we can do as a broader Bitcoin or audience in order to help, and ultimately to keep this whole industry moving forward.

For now, though, that is going to do it for today's breakdown. Big thank you, as always, to my sponsor for today's show Cracken. Go to crackin.com and see what Crypto can be. Until next time, be safe and take care of each other. Peace.