The Breakdown - Bitcoin Was Created for Times Like These

Episode Date: March 19, 2023

On this week’s Long Reads Sunday, NLW reads: “Should I Keep My Money in Bitcoin or a Bank?” By Daniel Kuhn  “Evaluating Bitcoin as a Store of Value” by Joe Orsini  “Bitcoin Was Built for This Moment” by Tatianna Koffman    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

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 CoinDes. What's going on, guys? It is Sunday, March 19th, and that means it's time for Long Read Sunday. 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 Bates.

bit.ly slash breakdown pod. All right. Well, when the storybooks are written, I think it's pretty clear that these last few weeks will have been a seminal moment in our discourse about banks and Bitcoin. And so today for Long Read Sunday, I'm going to read three different pieces that all have a little part of that story. And we're going to start with one that comes directly on the nose of it, should I keep my money in Bitcoin or a bank? It's my Coin desk writer Daniel Kuhn.

Daniel writes, have failed in less than a week. U.S. government officials have stepped up to backstop losses in a bid to prevent further panic. There are genuine concerns about whether that was the right move, effectively bailing out two poorly run institutions facing highly irregular problems and letting the third collapse, as well as the risk that more banks will fail. So should you take your money out of your bank and keep it safe under the mattress or in Bitcoin? The answer is, if you're anything like me, whatever money you have in a checking account is insured by the Federal Deposit Insurance Corporation up to 250,000, so no, it's improbable that J.P. Morgan Chase will rug you. Still, many are moving

their money into crypto, like Tatiana Kaufman, who described this move Monday in CoinDesk as an act of protest. Putting aside stable coins, crypto is volatile, making these assets less than ideal currencies if you want to preserve your wealth. But they offer quote-unquote root ownership, meaning no one can make a run for your deposits. Bitcoin, as many have already said, was born out of an earlier banking crisis. The blockchain's very first block contained a message about bailouts. It was designed to disintermediate third parties from internet money by making people responsible for their own keys, in contrast to the highly intertwined private banking sector and public sector. President Joe Biden has said U.S. taxpayers will not foot the bill for the bailout,

and that unlike in 2008, the architects of this financial crash will not benefit. There are enough responsible actors here to play the blame game, but if you're like Tatiana, the issue is the system itself. Senior management of Silicon Valley Bank sold millions of dollars worth of shares in the lead-up to the crash. This is seemingly the only risk management they performed. In 2015, SVB chief executive Greg Becker said institutions like SVB did not present systemic risks while testifying before Congress over plans to deregulate banking that were implemented in 2018. SVB essentially took a bet that interest rates would stay near zero forever. Over the past couple of years, it took in deposits from a tech industry that was booming in part due to historically

low rates that made venture capital financing worth the risk for many investors. In an effort to juice as much yield as possible from those deposits, SVB put a majority of its money into long-term fixed-rate interest investments. The Federal Reserve essentially created the foundation for a tech hype cycle through financial engineering to stimulate the economy, and then threw the frying pan into ice water when things got too hot. The recent interest rate rises were not necessarily unpredictable, but the Fed's inconsistent messaging,

saying rate hikes were unthinkable until they weren't, did not help the situation. Venture capitalists like Peter Thiel helped accelerate SVB's outsized growth and its quick and collapse. Teal is reportedly a believer in Gerardian mimicry, which explains why groups of humans make predictable, if irrational decisions, and are relentless pursuit of scapegoats. Tech leaders have said SVB grew out of a feedback loop that made it the place for startups to bank. Also, a similar social dynamic, fueled by chat groups and social media, kicked in on the way down. Some even put sometimes coin desk author Bryn Hobart at the center of things because he wrote a supposedly well-read blog last month, saying SVB was effectively insolvent. And so depositors like Roku, which left some 487 million uninjured.

at SVB are not blameless. Politicians who, like Florida Governor Ron DeSantis, are using the situation to justify their pet causes, once promised us no more bailouts, yet wrote the rules that allowed SVB to use a little accounting magic to hide billions in unrealized losses. Some, like former Representative Barney Frank, said Signature Bank, where he is now a board member, was attacked for political reasons because it dealt with crypto. When Frank was in Congress, he co-sponsored the legislation ultimately enacted as the 2010 Dodd-Frank Act.

Signature had reportedly experienced the worst of its bank run and could have survived without government intervention, Frank said. If moral hazard is the argument that people will engage in riskier behavior, if protected from the consequences of their actions, then we need a new term for Frank's claims. There were sound arguments for stepping in and preventing a cataclysmic blow to the valuable U.S. tech industry. Taxpayer money isn't being used, at least not directly. Deposits for growing businesses are safe, shareholders and bondholders aren't being bailed out, and even the New York Times is calling for clawbacks of SBB executives' compensation and stock sales. And yes, there are solid arguments in favor of having let Silicon Valley Bank and signature run

their course. Expected losses were almost certainly exaggerated. A sound startup could have raised equity and banked elsewhere, and it would have put the fear of God back into the supposedly capitalistic U.S. economy. But not bailing SVB and signature out was never an option. Bank failures today are exceedingly rare and would cause a tremendous amount of panic, such as how the collapse of Silvergate Bank, essentially a free-floating entity detached from the wider economy, led here.

And because SVB and signature both rode the wave of cheap money created by Fed policy up and down, how separate can public and private interests really be? So if the U.S. government is officially in the business of bailing out banks, should you keep your money out of bank? Join CoinDesk's Consensus 2023, the most important conversation in crypto and Web3, happening April 26 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, entrepreneurs, and more. Use code breakdown to get 15% off your paths. Visit consensus.com or check the link in the show notes. All right, so that kicks us off with the question that many

are wondering, and I thought a nice compliment to that would be this piece by Joe Orsini that actually is diving deep on evaluating Bitcoin as a store of value. Joe says that two on-chain metrics realize capitalization and holding trends demonstrate belief in Bitcoin as an SOV. It's a common question. is Bitcoin a store of value? While proponents say yes without hesitation, skeptics note it's historically large drawdowns, and that's fair. Not long ago in November 2021, Bitcoin reached nearly $70,000, but is now around $20,000. That said, Bitcoin also used to trade below one cent, so using just prices, the answer to the initial question is, it's hard to tell. For an asset in its speculative price discovery phase, volatility should be expected. New opportunities and

technologies often capture the attention of speculators and traders, often result in wild fluctuations as participants seek to determine true value. Care growing interest with this skepticism, controversy, and industry speed bumps experienced thus far, and the rollercoaster of highs and lows makes sense at just 14 years of age. While the asset exhibits qualities of sound money, it's durable, portable, scarce, uniform, and divisible, acceptance is the final uncertainty. Through the following on-chain metrics, I aim to prove that Bitcoin's users believe it's a store of value despite the volatility.

One, realized capitalization. One measure of Bitcoin's use as an SOV is a realized capitalization. Different from traditional market cap, this alternative considers the last transfer price of each Bitcoin rather than the current market price. In doing so, realized capitalization is an aggregate cost basis of Bitcoin's on-chain users. The total realized cap is the amount of money that has been stored in the network over time. To me, this is a proxy for inflows. Realized capitalization rises when transfers are made at higher prices than before, and declines when transfers are made at lower prices. According to Glass Node data, Bitcoin stores a total of a

$380 billion in value, down from a peak of $460 billion. But importantly, this is four times more than in December 2017, when Bitcoin was priced around where it is today. So money has flowed into the network to store value. Two, holding trends. Not only that, but Bitcoin users are also holding the asset for longer and longer. Just last week, the percentage of supply that has been held for long periods has hit all-time highs, despite the drop in prices since late 2021. As of March 7th, according to GlassNode data, percentage of supply held for 1 plus years is 67.7%. The percentage of supply that has been held for 2 plus years is 51.4%. The percentage of supply held for 3 plus years is 39.2%.

And the percentage of supply that has been held for 5 plus years is 28.3%. There is a saying that perception is reality. Remember, Bitcoin has essentially been wheeled into existence. Despite the noise and skepticism, money continues to flow into the network and its users are holding their assets for longer periods of time. The next time somebody questions Bitcoin's use as a store of value, show them these charts. As Satoshi Nakamoto wrote, if enough people think the same way, that becomes a self-fulfilling prophecy. I think Joe gets here to one of the most important points that is so often overlooked when we have these, especially trad-fi debates about Bitcoin as a store

of value or not, which is that functionally, for a huge and growing number of people, Bitcoin functions as a store of value. To the extent the proof is in the pudding, the pudding just keeps getting bigger and clearer. And the question is, does it really matter if a whole bunch of the world doesn't view? Do you Bitcoin as a store of value? If another big part of the world does? Do the people who actually use Bitcoin as a store of value determine it to be a store of value or to those who don't? Think about it differently. Is art not a store of value just because most of the world doesn't use it as a store of value? Of course not. So, okay, we've now read, should I keep my money in Bitcoin or in banks. We've looked at some evidence about the historical

trends around how many people are keeping their money in Bitcoin. And then we come to our most contemporaneous. This is a piece by Tatiana Kaufman, who's long been a crypto investor, and she writes Bitcoin was built for this moment. Amid a U.S. banking crisis, value is flowing into Bitcoin. Tatiana writes, The failure of Silicon Valley Bank, Silvergate Bank, and Signature Bank continue to ripple through the markets, causing U.S. bank stocks to plummet. Most recently, Charles Schwab's stock was halted in trading Monday morning. Meanwhile, Bitcoin and the rest of the cryptocurrency market are experiencing a double-digit rally, which may be the first time that Bitcoin is rallying in a risk-off environment. Perhaps this is exactly the moment that Bitcoin was built for. The Bitcoin network was created as a

direct response to the great financial crisis in 2008, during a period when many hardworking people felt both the government and the financial system were working against them. In fact, the very first block of Bitcoin had an inscription in the code, the Times-03 January 2009, Chancellor on the brink of a second bailout for banks. Now that regulators are gearing up to backstop another centralized financial institution, which collapsed in part due to an aggressive monetary policy at the Federal Reserve, and what appears to either be poor risk management or greed, it's important to heed Satoshi Nakamoto's message. For years, I've been talking about the Great Reset, a concept that advocates for us to stop trusting centralized institutions with the things

that matter most. After all, these institutions are run by people who are not necessarily better or smarter than us, but they make all the decisions and mistakes for us. Bank runs. If we look at the sequence of events over the last week, we quickly begin to recognize the errors of human centralization. Last Wednesday, Federal Reserve Chairman Jerome Powell outlined a new approach to the Federal Reserve's policy path, indicating that interest rates may continue to rise for a longer period of time than previously expected. The expectation of higher interest rates for a prolonged period of time almost immediately sent a ripple effect through the bond market, causing bond prices to drop drastically because prices move opposite to yields. At the same time, Silicon Valley

Bank was forced to sell some of the 10-year bonds on its balance sheet at a 20 to 30 percent discount, to meet obligations amid a period of climbing withdrawals. As rumors of a cash shortfall began to circulate, a full-on run on the bank ensued and regulators took over. This caused even further panic. Could every regional bank go under? After all, according to fractional banking rules, most of these banks hold only 5 to 10% of your capital in reserves,

making every bank vulnerable to a bank run. And then there was the obvious question as to who led the risk management department that decided it was okay to buy 10-year securities for an institution that has daily cash flow obligations to their depositors. When the current economic slowdown began last year, many were worried crypto failures such as those at FTX, 3-0 Capital, and Terraform Labs would spread to traditional finance. But the exact opposite happened because the Silicon Valley Bank failure directly impacted

the stablecoin market. USDC. DPEGs USDC, the second largest U.S. dollar peg stable coin after U.S.D.T is run by Circle. Circle's model is simple. It takes your money and gives you a digital coupon called USDC. Then it takes your money and invests in super liquid three-month U.S. Treasury. bonds currently yielding 4.87%. What could be safer? Well, Circle reasonably decided that it should still keep some cash on hand and spread it across six different banking partners, one of them being

Silicon Valley Bank. As SVB began to go under, Circle announced that it had 3.3 billion deposited with SVB, creating a whole of over 5% in its balance sheet. Canic ensued as USDC lost its dollar peg and dropped below 87 cents on Saturday. Traders quickly switched to tether the largest USD stable coin, although questions have been raised about its issuers business practices and reserves. I personally chose to move a large portion of my holdings into Bitcoin, apparently like many. The deep-pegging of USDC is significant because Circle, considered a highly regulated and secure business, was poised to go public as a separate entity. The incident provided a wake-up call to investors, demonstrating that not your keys, not your coins, applies not only to banks, but to all

centralized entities, even those that run our stablecoins. Circle tried to restore trust by announcing it will use its corporate resources to cover any shortfall, which caused the stablecoin market to rebound by Sunday evening. As a result, USDC and Die, which has significant USTC reserves, have returned to their dollar peg, and it is expected that USTC will now trade at par after compensating for SVB depositors. But is that enough? Who do we trust? Our assets may be bouncing back, but the shock to our nervous system remains. How can we trust anything centralized? How can we keep our money in banks above the FDIC insured limit of 250,000? Could the insurance fail? How can we keep our money in stable coins that use the same banking partners?

Bitcoin's beauty lies in its ability to store value in a decentralized manner backed by math without requiring humans to validate or support it. No one lends out 90% of your deposits to make a profit. There is no possibility of a bank run, and no one gambles with your hard-earned money on bonds. Bitcoin was made for this moment, and it seems the market agrees. The Great Reset presupposes a future where Bitcoin is the most valuable asset and the ultimate measure of value. It is what we use to store our wealth, perhaps selling small pieces for stable coins

to pay our daily expenses, but nonetheless only trusting this decentralized store of value. The concept of decentralization, however, applies to other areas as well, such as how we run our communities, allocate resources, and decide what our government should or should not control. A significant shift is underway, and more people are opting out of the traditional system. We do not know how long it will take, but the great reset is happening, and Bitcoin will be its chosen currency. All right, guys, back to NLW here. You know, one of the interesting things, if you've watched the crypto markets for a long period

of time, is that if you go back to 2017, everything was priced. against Bitcoin. It wasn't priced against stablecoins. Bitcoin was the trading pair. It was the reserve currency for the entire crypto industry. Over the next couple of years, based on the rise of Tether and then USC, Stablecoins started to play more of that role. Now, in the wake of Circle, finding itself exposed to regulated bank problems in the U.S. More value is flowing not just back to Tether, which is offshore and somewhat outside of the U.S. system, but into Bitcoin. It turns out when push comes to shove, the distinctness from the larger financial system is to many worth more than the cost of the volatility of Bitcoin prices.

I don't know how much of this week's run-up was ultimately about the Bitcoin narrative. I do, however, know that Bitcoin once again has proven why it exists and why it's important. I think the image of it's staying strong and even going up in the face of these bank failures is one that's going to stick with people, even who aren't in Bitcoin yet. I think as we go into the having next year and beyond, this will be seen as a seminal moment in the trajectory of Bitcoin, and I'm excited to have witnessed it. Thanks to Daniel, Joe, and Tatiana for these pieces, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other.

Peace.