The Breakdown - Bitcoin’s Rally to $30K Being Driven by Good Old-Fashioned Spot BTC Buying

Episode Date: April 12, 2023

Description Bitcoin hit $30,000 for the first time since June 2022 last night. On today’s episode, NLW looks at why the evidence suggests this rally is – unlike previous crypto rallies –driven by spot buying instead of leverage trading. He also looks at how the crypto market has evolved and is seemingly more hostile to previously hyped narratives.  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 and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh. Join the discussion at discord.gg/VrKRrfKCz8.  

In the wake of one of the most tumultuous years in crypto history, the conversations happening at Consensus 2020 has never been more timely and important. This April, CoinDess is bringing together all sides of the crypto, blockchain, and Web3 community to find solutions to crypto's thornyest challenges and finally deliver on the technology's transformative potential. Join developers, investors, founders, brands, policymakers, and more in Austin, Texas, April 26th to 28th for Consensus 20203. Listeners of the breakdown can take 15% off registration with code breakdown. Register now at consensis.com and join CoinDesk at Consensus 2023. 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 CoinDest. What's going on, guys? It is Tuesday, April 11th, and today we are talking about why Bitcoin is just an absolute narrative bulldozer right now as we hit 30K for the first time since last year. Before we get into that, 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. com.com. All right, friends, lots of fun things to talk about today. We hit $30,000 Bitcoin for the first time since June of last year. We're going to discuss what narratives are driving that

and why it is such a distinctly Bitcoin rally. Before that, for those who missed it or haven't heard the show yet, I made a big announcement earlier today. In short, we are launching the Breakdown Network. It's an entire network of podcasts and other content dedicated to these big picture power shifts that are at the heart of the breakdown. The first spinoff show in the series

is going to be Bitcoin Builders, a show about this Cambrian explosion of incredible creativity and energy and excitement that is flooding into Bitcoin and Lightning right now. You can hear all about that announcement and the new show if you go listen to the previous episode. And the only detail that I'll remind you of is that as part of this announcement, this awesome partnership with CoinDesk will be coming to an end.

So after April 23rd, to keep listening to the breakdown, you will have to subscribe to the breakdown-only feed. But for now, there is much more news to cover. Today we are talking price, but it's not just a boring old price show. Like I said, we're talking about the narrative steamroller behind Bitcoin right now. It is chewing up and spitting out pretenders to the narrative throne. and I'd be lying if I said it wasn't beautiful to see. So for the news, last night, Bitcoin reached a price of $30,000 for the first time since

June of last year. That milestone came on the back of another scorching hot day of trading that saw the price rise by more than 6%. The broader context is that Bitcoin has quietly had one of its strongest periods in recent history to start the year. Bitcoin is up more than 80% since the beginning of January, recording the two strongest months since October 2021 in January and March. Even with a basically flat February, the first quarter of this year was the strongest three-month

stretch for Bitcoin since the opening quarter of 2021, which was, of course, when Elon Musk announced that Tesla had bought Bitcoin. This is also the first time that three months of gains have been strung together since that first quarter of 2021 as well. Of course, it is hard to know if this price action is the beginning of a new bull market or is simply a strong bear market rally. Bitcoin bull markets have in the past follow the halving, which occurs roughly every four years. In 2020, the bull market didn't get fully underway until five months after the halving. The 2024 halving is still more than a year away, but the class of market participant with eyes on Bitcoin has changed significantly over the last three years.

It's entirely possible that investors in the space are generally more tuned into Bitcoin's cyclicality and are front-running that anticipated price action. But Bitcoin is also no stranger to face shredding bear market rallies. In 2019, for example, the Bitcoin price ran up by more than 3x in the second quarter. It rose from around $4,000 per BTC to almost $14,000 in the space of three months before being cut in half to close that year. There were a number of different narratives floating around at that time. Some were talking about hyper-bitoinization. Some were talking about Facebook's Libra, which was putting the larger Web3 conversation on the political map.

Then again, behind the scenes, there was a gigantic Ponzi scheme called Plus token that was driving demand in China and South Korea. The scheme collapsed in June of that year with the arrest of six Chinese nationals, coincident with the collapse in Bitcoin's price. Now, of course, the point here is two things. The first is the capacity for bear markets to see pretty significant rallies, and the second, that there's always some combination of narrative and market structure behind whatever's going on. Now, with that in mind, what are the possible drivers of this rally?

Well, one possibility is, of course, the macro. The biggest of all macro drivers right now is that the Fed is quickly arriving at the end of its tightening cycle as government bond yields, and in some cases, financial infrastructure seems to be on the verge of collapse. Richard Miko, the U.S. CEO and chief legal officer at Bonsa, a payments and compliance provider for crypto firms said, it's clear that the market is pricing a slowdown in growth, and in turn, elucening a monetary policy by the Federal Reserve over the course of 2023. For evidence of this, just look at the bond market. What does he mean? Well, U.S.

treasuries have indeed priced in monetary loosening, with the yield on a two-year note, recently falling below 4 percent from a peak above 5 percent in early March. The next FOMC meeting is now just three weeks away, and markets are pricing in a 25-bases point hike, at a 71% probability, bringing the Fed funds rate to a range of 5 to 5.25%. Looking ahead, it's anticipated that the Fed is almost certain to pause there, with a strong chance of a pivot to cutting rates being priced in for the September Fed meeting. If Fed policy plays out as markets predict, then higher for longer is dead and will see multiple rate cuts by the end of the year. The other strong narrative for Bitcoin has been

the banking crisis. Although bank runs have slowed in two bank walks, there is still a steady stream of deposit outflows. In early March, we saw the narrative of deposits moving. up the food chain of counterparty risk. Customers were moving their deposits away from less important regional banks into too big to fail megabanks. In that context, some are taking another look at Bitcoin's value as a self-custodial asset with minimized counterparty risk. Certainly, mainstream media outlets have been more than happy to talk about it as such. Then, as we covered on yesterday's show, there are geopolitical tensions that are high and rising. The theme of de-dollarization, while certainly questionable on the evidence, is resonated with many people both in the U.S. and

around the globe. Bitcoin has notably decoupled from its correlation with U.S. equities, perhaps indicating that it is now being viewed as a viable safe haven asset alongside gold. Bob Ross, co-founder of Sologenic, a blockchain-powered network for tokenized securities, said, while the 2020-20 to 2021 period was perceived as Bitcoin's breakthrough moment, the present time truly marks its ascendance onto the global stage as a formidable asset. Amidst heightened geopolitical instability, faltering banking systems, and mounting concerns surrounding reserve currencies, Bitcoin has emerged as the reliable refuge that many had anticipated. This crucial juncture signifies a pivotal advancement for the digital asset sector. Now, one thing this rally isn't being

driven by, at least not this most recent leg, is Binance buying. As we mentioned last week, Binance had been rapidly selling off BUSD held as part of an industry support fund and converting it into Bitcoin, Ethereum, and BNB. Many believe that these purchases and CZ talking about these purchases were part of the way that the March rally got started. However, it appears that this crypto buying is almost done, with just 16 million in BUSD remaining in the exchange wallet known as Binance 14, which is down from 96 million last week. Now, refocusing back on the market structure factors, two quirks of this Bitcoin rally really stand out. For the first time in a long while, we're seeing a Bitcoin-led rally across crypto markets. In comparison to Bitcoin's 80% gain this

year, Ethereum has only managed a 60% increase. Now, that's obviously still impressive, but kind of lackluster, given excitement building towards the Shanghai upgrade and the availability of staking withdrawals being introduced. For the long tale of alts, only nine coins with a market cap above one billion have outperformed Bitcoin this year, with Solana being the only top 20 coin doing better than Bitcoin, chalking up a 117% return with almost all of that outperformance coming in the first two weeks of the year. I think that one of the possible explanations for Solana outperforming is that many people just wrote it off as entirely dead after the collapse of FTX. Solana was seen by many as just another Sam coin. However, whatever your personal feelings around Solana are, it's been

clear that there is still a passionate developer community that is building on that chain. And so it doesn't surprise me to see a bit more of a catch-up rally relative to its peers. Now, moving back to the larger Bitcoin rally, the second notable thing is that there is very little leverage being built up in the system. In other words, this rally appears to be driven by good old-fashioned spot Bitcoin purchases. According to data from Glassnode, the ratio between perpetual futures open interest and Bitcoin market cap is at its lowest level in around 12 months. Open interest collapsed following the failure of FTX, which was one of the largest venues for derivatives trading, but we're just not seeing traders seek out new platforms to lever up

their positions on. In a report from last week, Blockware Solutions suggested that this lack of open interest could also reflect a low appetite for risk in the market. The report said, BTC has essentially traded sideways for the past three weeks, yet we haven't seen a buildup in open interest. This is a signal that the market is still in a risk-off mode. Checkmady, the lead on-chain analysts at GlassNode, dive deep into the state of leverage. in Bitcoin markets in a Twitter thread yesterday. During steep rallies, funding rates for perpetual futures positions often go positive, meaning that longs pay shorts a handsome interest rate for taking the other side of the trade. During the start of the 2021 bull market, funding rates were comfortably

above 20% and hit a few peaks above 60% on an annualized basis. Currently, according to Glass Note data, funding rates sit at a paltry 2%, meaning there is no financial incentive to enter the market short to collect this premium. He noted that new leveraged open interest has mostly shown up in options markets, which have recently grown to an all-time high. He explains that a large amount of this speculation is going into longer-dated call options above a price of $50,000, which aren't likely to be realized and shouldn't impact spot prices significantly. In summary, he writes, I find it quite hard to argue that leverage is driving this rally and market. This feels and looks like spot-driven Bitcoin behavior. There will come a time when the leverage tail wags the dogs,

but I do not believe it is now. Feels more like hated disbelief. Great, great phrase there. By the way, if you want to hear more from Checkmatey and GlassNode, keep an eye on the Bitcoin Builders feed, as there might be something that interests you later this week. Anyways, this lack of leverage trading is a stark contrast to the run-up in 2021, which featured insane leverage and giant liquidation waves. Monday night's price action by comparison saw around $145 million in short liquidations, which is less than a third the size of the largest liquidation day in January. Still, for me, there is another piece of this that I think is interesting from a narrow

narrative perspective, and the TLDR is that there have been a number of quote-unquote crypto events that are sort of architected for hype, but which have been fairly aggressively and flatly rejected by the community as irrelevant. Take for example the buzzword salad that is crypto-GPT. This week's nominally big fundraising announcement was for a new project called CryptoGPT, which managed to raise $10 million on a $250 million valuation. The specifics of the deal on the protocol are pretty unimportant for the purposes of this show, but there are so many red flags around this project. The funding round was led by a market maker that Twitter suggests no one has ever really heard of. The protocol itself reads like an exercise in cramming in as many

buzzwords into a sentence as possible, zero knowledge, layer two, AI assistant, etc, etc., etc. And what's more, the token for the project was launched back in March and formed part of a very frothy wave of blockchain AI projects. Still, what's notable is that in other years, people might have poured into this sort of hype. Instead, this time, it was profoundly and immediately rejected on crypto Twitter is somewhere between vaporware and a scam. Users of the platform posted screenshots of the AI product explaining that it was in fact derived from OpenAI's GPT3 system. Jason Yanowitz, the co-founder of Blockworks, posted a long thread looking through the team,

marketing and the product. Summing up, his finding is as guttake, crypto-GPT is an outright scam. I wouldn't touch it with a 10-foot pole. Jill Gunter responded to Yanowitz's post saying, Thank you for calling out the shit publicly. There is little incentive to do so, but it's important for the industry. to if you did this last cycle. So we've got, on the one hand, outright scam or seemingly outright scam, rejected.

Then there was the Arbitrum governance token launch. Arbitrum was one of the last ETH layer twos did not have a token. And so when they announced a token, it was the type of event that had juiced markets in the past. This time, however, something a little bit different happened. Taking the shine off of Arbitrim's much anticipated air drop, the newly formed governance community was kind of outraged over the last couple weeks as a proposal to distribute nearly 1 billion in tokens was put forward. The Arbitrum Foundation proposed to distribute tokens to a special grants program,

as well as convert some into stable coins to fund operations. New token holders looked set to reject the proposal in an overwhelming Dow vote, which led to a real mask-off moment where the Foundation stated that the vote was merely a, quote, ratification of decisions already made. The Foundation held enough tokens in Treasury to push through any desired outcome and appeared to be treating a positive result as inevitable. Prior to the vote, around 80 million worth of tokens had been loaned to a, quote, sophisticated actor in the financial market space, referring to marketmaker Wintermute, as well as around

20 million worth of tokens being sold for stable coins to pay operating expenses, again, all without a Dow vote. Now, the core of the controversy is that this entire Dow structure and airdrop appears to just be decentralization theater. The community was irate at being treated as a rubber stamp for unaccountable spending. One anonymous Dow member told CoinDesk, we're talking about $1 billion to start, having seen other governance examples where large treasuries got basically drained for community pet projects, this is pretty concerning. Another said, news flash, governance is hard, but that doesn't mean you

should circumvent due process. Elections are annoying, but democratic nations at least pretend to do them for a reason. All of this uproar eventually led to the Arbitrum Foundation deciding to take another approach, scuttling the vote before it's scheduled conclusion and setting out a plan to break the proposal up into smaller chunks for individual votes. Sudonymous crypto personality chain link gods at the foundation was, quote, listening to the community and incorporating our feedback. It's a good move in the right direction, in my opinion. The foundation also committed to not putting its thumb on the scale and using its tokens to push through proposals. It said in a blog post, quote, The objective in setting up the arbitram Dow was to lead by example to create the

most decentralized roll-up, and despite this blunder of communication, we will continue to aggressively pursue this goal. Not everyone super-believe this explanation. Adam Cochran writes, If the only value of your token is governance votes including funding, then don't rug that. You've made your token worthless. Even more simply, Alex Kruger writes, the Arbitrum Foundation thinks you are all idiots. Now, as for me, I have no dog in this fight. I hope that the foundation lives up to its promise of incredible decentralization. I think that would be good. For the purposes of this show, it's simply noteworthy that the sort of behavior that went on routinely in 2021 is just sort of beyond the pale now. It speaks to the idea that this community is not like some of the DeFi and Dow

communities back then. Instead, it is a well-informed and pissed off group of enthusiasts. Echoing this idea of who's still around is based carbon, who writes, by the way, I met up with one of my Norby friends today, dude who I was dying to talk to during the bull when he bought, etc. Doge and ADA at the tops, and I tried to chat a little about crypto with him, and he showed zero interest, none, just so you know where we're at in the cycle. So let's take a step back and try to sum this all up. Here's one plausible mental model for market participants at this moment. Effectively, all the people who bought the top in 2021 have been washed out. All the Macrolarp's and Wall Street tourists are gone, and the people who are left are either the people

who are here in 2020 before all this run got started, or people who have held through 3AC and Celsius and the FTX hit and have come to their own conclusions and convictions. These are folks who don't care about Warren's crypto army. They don't care about a New York Times Enviro-Fud article. They saw a ton of firms declare bankruptcy and they're not scared of the Winklevye handing Gemini $100 million. These people are, in other words, narrative proof. They're immune to FUD. Especially because they've been hearing the same FUD recycled for years. Everyone that was going to sell has sold. The traders that are left have survived some of the most volatile markets of this size that have ever existed. It got taught a pretty big lesson in risk

management over the last year. These people are all seeing what Satoshi saw in 2008 play out in front of their eyes. The banking system is increasingly broken. The monetary system is unwell. And in the face of all of this, Bitcoin just keeps chugging along. At least that's how it looks to me. Who knows? I could be completely wrong. It could be, as some have suggested, just front-running, the halving, there might be buyers that we haven't picked up on that are secretly tapping in behind the scenes. There's also the possibility that we're just resetting to where we were supposed to be if we hadn't had all these institutional failures and collapses last year. In other words, that prices were overly depressed relative to stock market peers

and other asset groups, and that they're finally coming into equilibrium. No one knows for sure, certainly I don't know for sure, but I will take a beautiful day of 30K, and I'm pretty sure you will too. Till tomorrow, guys, be safe and take care of each other. Peace.