The Breakdown - Bitcoin Smashes Through $50,000

Episode Date: February 13, 2024

NLW collects a set of takes that all amount to a shifting sentiment around the institutional bid. 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 Monday, February 12th, and today we are talking about Bitcoin, hitting $50,000 for the first time since 2021. 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, you probably don't need me to tell you that Bitcoin has been on an absolute heater. Over the weekend, it extended its recent rally into its fifth day of strong price action, with Bitcoin gaining 12.6% for the week, the best week so far this year. On Sunday, the price flirted with the new year-to-date high, coming just short of reaching the $49,000 mark, which was touched on the morning of the ETF launch. Bitcoin's market cap, is now right around that $1 trillion mark, which hasn't been reached since November 2021. Bitcoin led both Ethereum and Solana for the week, also outperforming the overall crypto market, which rose by around 10%. Unlike its previous trip above $48,000, Bitcoin appears to have found

a stable level at these prices. Just prior to the ETF launch, Bitcoin spiked and then quickly collapsed into a major drawdown. This time around, we saw price action grinding higher over the weekend before holding steady above $48,000 for all of Sunday. And by the time that you are listening to this, Bitcoin will have claimed $50,000 for the first time since the end of 2021. Interestingly, short liquidations were elevated throughout the week, but there was nothing that looked like a major short squeeze. Friday was the largest day of liquidations with $53 million in short Bitcoin positions wiped out. That only ranks as the fourth largest day of short liquidations in the past three months. Future's open interest continued to ramp up

over the weekend to reach $20 billion in noational value for the first time since November 21. That's a 20% increase over the past week. Opinions vary on whether increased leverage building up is a danger here. Quant wrote in a recent report, The steady increase in open interest and the state of the positive funding rate resemble the early stages of the bull market that emerged after the COVID shock in 2020. Late last week, analysts Crypto Crock Star tweeted, Without wanting to jinx it, the current move looks pretty unpleasant. There's a massive increase in open interest with a strongly positive trending funding rate.

We might see a slight dip downward to flush out the positions. It's always very risky to fomo into a resistance. As always, we do not know where the price will head next, but for the first time, in a long time, froth in derivatives markets, is supported by a strong bidden spot. Oliver Vela's tweets, As much as Bitcoin has risen, there have not been a tremendous amount of liquidations. It's not small, but it's not at the level we've seen commensurate with this type of rise. This is an indication that excess leverage is out of the system now. What does this mean?

Well, it usually means that odds of continued momentum are now higher. Excessive leverage leads to choppiness. to no leverage tends to lead to trends. And when it comes to trends, you can feel the excitement in the Bitcoin space. Dennis Porter, the CEO of Satoshi Action Fund writes, the Bitcoin ETF sell the news, Doomers are awfully quiet right now. Exit pump writes, as you can see, it is mostly spot-driven. Every strong push-up hasn't retraced, but rather kept on going higher. Blockworks co-founder Mikey Alito writes, I have a strong gut feeling that we are in the calm before the storm. We have macro tailwinds, hundreds of millions pouring in every day from the ETFs, and the halving is two months out.

I don't think crypto has ever had a setup like this. Trader Main writes, Normies aren't even going to start pouring into crypto until we are past all-time highs. Last cycle, I had friends who could barely operate a computer running crypto Facebook groups. It gets way crazier than this. Andrew Kang from Mechanism Capital had more extensive

and really interesting thoughts. He tweeted, Long-term Bitcoin demand flows this year I approximate to be 40 to 130 billion. One of the most common cardinal sins of crypto investors and traders is underappreciating the amount of wealth, income, liquidity in the world, and it spillover into crypto. We hear stats about the market cap of gold, stocks, real estate so often that it likely turns into noise for many. Many in crypto gets stuck in

their own little crypto bubble. But the more you travel and meet other business owners, high net worth individuals, etc., the more you realize how incomprehensibly massive the amount of money there is in this world, and how much of that can come into Bitcoin and crypto. Let me put this into perspective with a rough-to-man sizing exercise. The average U.S. household income is 105K. There are 124 million U.S. households in the U.S., which means the average annual income in the U.S. across individuals is $13 trillion. U.S. is 25% of GDP, so global aggregate income is around $52 trillion. Global crypto ownership on average is 10%. In the U.S. it's 15% and as high as 25% to 30% in the UAE. Assuming crypto owners allocate only 1% of their income annually,

that works out to be $52 billion buying for Bitcoin annually and $150 million daily. Realistically, this buying isn't linear and has a lot of daily variation depending on seasonality variables. Keep in mind, this is an estimate for non-ETF pre-ETF flows. People seem to forget that there has been a massive, consistent demand for Bitcoin even before these ETFs were approved. How do you think Bitcoin got to become a trillion dollar asset and has consistently trended higher over the last 10 years? These estimates are quite conservative for a few reasons. One, you probably see more than a 1% allocation. True believers are putting 50% plus in. Average allocation may be actually 3% to 5% on average. Two, allocations from businesses, macro funds, pension funds,

sovereign wealth funds, etc., are not included here, and probably on a similar order of magnitude. What about Mount Gok, Celsius, USG selling, minor emissions? This has been the bare argument for many, but the reality is when you size up the buy flows, they dwarf all of these cell flows put together. Traders, investors in this space always overemphasize what they can see. Open your eyes and understand the size of the flows that aren't publicly stated. Now add on top of this the ETF flows. Just the lower bound of estimates covers the cell flows itself. But recently, we've been seeing many days above the upper bound. Wouldn't be surprised to see us run at $100 to $2 million plus daily over the next month. Really, what is the bare argument here? I still believe this ETF launch is not comparable

to previous events like CME futures, Coinbase IPO, et cetera, and we don't spend any time below 40Ks, 50 to 60 in February and all-time high by March. Building off of that and into the ETFs, the Bitcoin ETFs have now been trading for a little over a month. By any metric, this has been the most successful first month for any group of products in the history of ETFs. The next Nine new ETFs have gathered 10 billion in assets under management. That's offset by a $6.3 billion drawdown in Grayscale's AUM, but still a huge amount of assets to accumulate in such a short amount of time. Individually, the BlackRock and Fidelity products are number one and two in terms of asset accumulation after one month. Each managed to double the first month for the gold

ETF and triple the launch of the NASDAQ index ETF QQ. Ark became the third product to hit $1 billion in AUM on Friday. Bitwise continued to take over in fourth place and look set to hit 1 billion within a few weeks. The past few days of trading were also incredibly positive for the Bitcoin ETFs. Thursday saw the highest day of net inflows since the products began trading. It was the first day with over 400 million in net inflows in the past three weeks. Friday was even better. 541 million in net inflows made it the biggest day since day one of trading. Grayskill's daily outflows, meanwhile, didn't get above 110 million per day for the entire week. The previous week had averaged 185 million per day. Friday was the new lowest outflow day for GBTC, with just 52 million

leaving the fund. If last week's inflows can be sustained, that's over $1 billion in buying pressure on Bitcoin every week. Roughly twice the size of the largest monthly micro-strategy buys over the past year. According to a report from Coinbase research, the ETFs now account for only 10 to 15% of global spot volume. While their point was that ETFs are not yet taking over crypto exchanges as the primary Bitcoin trading venue, it still seems like a fairly significant change in market structure. There's now more than 690,000 Bitcoin owned across the 10 ETFs, with more than two-thirds of that amount in GBTC. That's more than 3% of the current total supply. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been

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customers by Payward Ventures Inc., PVI, DBA, Crakken. A few things to watch moving forward with the ETFs. First is where inflows stabilize. It's highly unusual for an ETF to have consistent inflows this large weeks after launch. Basically, in every way, this is unprecedented. The past two days of trading saw inflows accelerate, so it's not entirely clear whether enthusiasm is waning or just getting started. Secondly, whether there is some cyclicality to inflows in trading activity. The past three weeks have seen an uptick inflows on Thursday and Friday. This could simply be flows following price action, but it could also be a structural bid forming from some kind of calendar effect. Finally, one more thing to watch is

whether there's going to be enough Bitcoin to go around. We still don't know the wallet addresses for each ETF, so tracking flows is still more art than science. But last Friday, one trader noticed an order for 332 Bitcoin passed through Coinbase's order book, landing in the publicly disclosed bitwise wallet moments later. If the ETFs are all, already resorting to buying from the open market rather than through OTC deals, that says a lot about how little Bitcoin there is available at these prices. Basically, every commentator in the ETF space is just increasingly noting how remarkable this phenomenon is. Eric Bakunas from Bloomberg writes, I thought the nine would get a bit weaker as GBTC outflow subsided, but they're getting

stronger, another half a billion day beyond GPTC bleed. Nate Garassi from the ETF store says, only four weeks after Spot Bitcoin ETF's debuted, we have 4 billion ETF in iBit, 3 billion ETF in FPTC, 1 billion ETF in ARC, and possibly another 1 billion ETF in BitB. I can't explain to you how ridiculous this is. Oliver Vela's again writes, The next Bitcoin crash may not even break 100K. The spot ETFs have introduced a permanent institutional bid for Bitcoin. The first 15 years never had this.

This means the all-future bear drops should not only be much shallower, but they are likely to be shorter in duration. We've only just begun. David Bailey from Bitcoin magazine writes, the inflows are going to accelerate. All-time high before having, unprecedented situation, Supercycle. Dylan Leclair writes, we're not even one month into passive institutional flows. This is just the big boys attempting to get off zero. The bid has barely yet begun. Going back to this concept of bit-wise having to buy from the open market,

on-chain activity is showing that there really isn't much supply to go around. Almost 80% of Bitcoin hasn't changed hands in the last six months, more than at any other point in Bitcoin's history. Around 20% of Bitcoin, Bitcoin supply hasn't moved in more than seven years, with most of that being locked up for 10 years or more. Whale accumulation has been strong for months, but hit high gear in January. Wallets with over 1,000 Bitcoin added an extra 140,000 BTC over the past three weeks, worth around 6.16 billion. Shrimps, however, also continue to stack sats. Small wallets with less than one Bitcoin have been buying throughout the bear market and have upped the pace recently. This cohort of Bitcoiners

are now accumulating at the fastest pace in over six months. There's now 2.8 million wallets with at least 10,000 worth of Bitcoin, way more than at the peak of the last cycle when there were only 2.5 million. Bitcoin is currently being removed from exchanges at a pace of 3 billion worth per day. Exchanges hold around 90 billion worth of Bitcoin at the moment after getting a big refill at the start of the year. We're nowhere near recent lows for exchange holdings, but the recent trend is rapid and sustained outflows. Over 90% of Bitcoin transacted on chain is now in profit, with a cost basis below the current price. This means that almost all long-term Bitcoin investors are now sitting on healthy gains. The question, of course, will be how much

much higher does the price need to go to convince some of them to sell. This brings us to the next big upcoming event, which is, of course, the halving. And this halving, frankly, is looking to be unlike any we've seen before. Bitcoin's block reward will be cut in half in mid-April, reducing minor rewards from around 900 Bitcoin per day to around 450 per day, at current prices that's a little over 150 million worth of Bitcoin being created each week. In previous cycles, the halving has caused additional sell pressure, as miners liquidate some of their Bitcoin's stash to make up for reduced revenue. A new report from Grayscale suggests this halving will be completely different.

A big change from previous halings is the structural bid from Bitcoin ETFs. Grayscale wrote, Bitcoin ETFs could significantly absorb cell pressure, potentially reshaping Bitcoin's market structure by providing a new, steady demand source, which is positive to price. End quote. The ETFs are currently adding more than three times the entire block reward each week. This would obviously counteract any reasonable amount of selling for miners related to the halving.

Grayscale even noted the double-having effect that some analysts have been suggesting would occur from voracious ETF buying. They wrote, A sensitivity analyst of daily net inflows suggests that at the higher end, the reduction in cell pressure could mirror the effects of another halving, fundamentally transforming Bitcoin's market structure in a positive way. Grayscale's report also pointed out that miners have been taking action throughout the recent months to prepare for the halving. For example, miners liquidated over $1 billion in the day surrounding the ETF launch, taking advantage of the associated price spike. Some publicly listed miners have also turned to traditional financing avenues to get them through the halving.

Marathon Digital was the big example of this behavior, raising $750 million through equity sales in the final quarter of last year. High fees could also play a role. We're nowhere near the crazy fee spikes of late last year as the Ordinals frenzy hit its peak, but Bitcoin fees are still at an elevated average of $450 per transaction. This will be the first halving where fees contribute a meaningful amount to mining rewards, offsetting some of the halving's impact. Currently, fees are adding about 20% to minor revenues. Still, Grayscale nodded to the idea that the supply reduction associated with the halving could be more of a meme than a fundamental price driver. They wrote that other cryptocurrencies with similar halving mechanisms such as lightcoin

have not consistently seen price appreciation post-having. This suggests that while scarcity does sometimes influence price, other factors also play a role. To me, it's less about a meme impact, and more that it's a once every four-year reminder of what makes Bitcoin different than every other asset in traditional finance. I think we're almost for sure going to see that again this year, with extremely positive effects because of it. Lastly today, for the second year in a row, there was almost no crypto presence at the Super Bowl. Although crypto prices have come roaring back to life over the past year, crypto firms are still hesitant to spend big money on advertisements during the big game.

Late last year, there was speculation that new ETF issuers would crowd the game with marketing, but nothing materialized. As someone who has bought Super Bowl ads before for a crypto firm, I never anticipated that we would actually see these ETFs advertising. That's not because of some big feeling that crypto wasn't welcome there. although I do think that the host networks are going to be extremely, extremely skeptical of any crypto advertising in the future, which is not to say that they wouldn't accept Black Rock's money, but I know for a fact that the networks were one of the players holding the bag after the FTX collapse.

Still, the biggest reason that I didn't ever think that we were going to see ETF issuer ads this year is just based on when ads actually sell for the Super Bowl. When we bought the Larry David spot at FTX, we purchased that ad space in August of 2021 for the 2022 Super Bowl. In August, we were already one of the final buyers, with our initial slot being in the fourth quarter. The earlier you buy, the more choice you have on when you want your ad. Ultimately, we were able to move that spot to what's called a floater, where they fit it in at a time that you don't have any control over or don't know, and it ended up just before the halftime show. But the point is that these slots are filled by the end of the summer before, which once again

isn't to say that BlackRock couldn't have muscled in and grab some last-minute inventory, But considering that you're talking about $7 million plus for the 30 seconds of airtime, plus almost for sure a couple million dollars on the production agency, plus however many more millions for any talent that you have in the ad, means that it was always very unlikely that someone was going to be willing to put up eight figures on speculation that Gensler would finally say yes. However, thanks to Mr. One Jack Dorsey, Bitcoin was on display at the game. At one point, the cameras panned over to Jay-Z Skybox,

where he and Beyonce were hanging out, with, of course, their business partner and friend, Jack Dorsey, who is wearing a Satoshi shirt. If you ask me, that is a much cooler presence for this year's Super Bowl. You got to love it. Anyways, friends, that is going to do it for today's breakdown. One more big thank you to the sponsor of today's show, Cracken. Go to Cracken.com and see what crypto can be. And until next time, be safe and take care of each other. Peace.