The Breakdown - BTC's 10% Weekend Dip: How Much Should We Worry?

Episode Date: March 19, 2024

Short: not very much. NLW talks about ETF flows, past cycle patterns, and why we should expect some resets along the way. Today's Show Brought To You By Kraken - Go to https://kraken.com/thebreakdown and see what crypto can be Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet 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, March 18th, and today we are talking about all sorts of things, a little bit of a Bitcoin correction, plus some ETF flows and interesting speculation. 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. Hello friends. Welcome back to a new week. Bitcoin is in the midst of a fairly significant correction after hitting new all-time highs above 73,000 back on Thursday. Since then, the prices dropped more than 10%.

The deepest part of the drawdown happened late on Saturday night, as Bitcoin plunged below 65,000, roughly 10% from the highs. We've since seen a brief recovery to 68,000, but no stable levels, suggesting that the strength of recent weeks has dissipated. There was no large liquidation spike, but rather persistent liquidations that have weighed on the market since Thursday. More than 1.3 billion and long liquidations have been processed in the last four days. It seems as though leveraged traders had piled into every dip on the way down, adding more fuel to the liquidation fire. The last flush on Saturday night appears to have been accompanied by the smallest liquidation, which could mean that traders have finally taken the hint and stopped buying the dip with leverage.

Changes to futures open interests seem to confirm this theory. Open interest is down by around 10% since Thursday, but it took the entire weekend to get there. A decent chunk of positions were taken off during each drawdown with a slight rebuild into each bounce. Most commentators remain constructive on crypto markets over the medium term. Investor Jesse Eccle tweeted, There are bearish selloffs and there are bullish selloffs. This is clearly a bullish sell-off.

It's flushing out the leverage and putting some healthy fear into the market. Markets crawl up a wall of worry. We resume the climb soon. Researcher Gumshoe noted, the crypto market is somehow healthy. Funding rates not seen since February 25th, meme coins down 30 to 50% across the board, Bitcoin sideways and down, Seoul and other quality coins steadily rising. If ETF inflows keep up last week's pace, there's not much leverage to unwind equals pump. Masari CEO Ryan Melkis gave the obvious advice that every crypto trader needs to hear at least once

tweeting, for the love of God, please do not use leverage in this market. It's the only thing that can wipe you out when money is otherwise falling from the sky. For those who have been around Bitcoin for a few cycles, this drawdown was nothing out of the ordinary. On-chain College wrote, Bitcoin's price retracing negative 10% on this move when greater than negative 30% corrections are normal during bull runs. This drop is after a strong move to all-time highs with over 95% of the supply sitting in unrealized profit. Nothing to see here, very normal bull market behavior. One thing that does seem potentially worth watching, Defi Risk is beginning to build as traders take out on chain leverage. The total debt outstanding on DeFi protocols has already

doubled so far this year and currently sits at around 4.15 billion. Lending protocol Avey, one of the main sources of on-chain debt, has added 700 million in wrapped Bitcoin collateral year to date. A report from Into the Block suggested that the defy ecosystem is already running too much risk, writing, the crypto market is likely to experience a significant correction as leverage positions get paid back or are liquidated. Zuming out a little bit, it's not just Bitcoin which hit a rough patch at the end of last week. Invidia stock also suffered a major pullback on Friday falling more than 5%. This stock has been dominating returns for the NASDAQ index all year, so much so that it has grown to represent 6.3% of the index weighting larger than Google and Tesla combined. During the last

cycle, Bitcoin was highly correlated with the NASDAQ, and it seems that the correlation with NVIDIA stock specifically has been rising. The 90-day correlation is now at 0.86, on a scale where zero means there is no correlation, and 1 means a perfect correlation. That's the tightest that correlation has been since May 2023, but the pair has only been positively correlated since November. This is jumping over a little bit to AI breakdown territory, but there are plenty of analysts who are arguing that there is an AI stock bubble forming around Nvidia. They point at the stock's price to earnings ratio, sitting above 73, which is around twice the average for an S&P 500 company. But then again, right now we are in some strange territory when it comes to AI, so it's kind of hard to tell.

For our purposes, the more interesting point is that the two assets are now moving in lockstep, suggesting perhaps a broader macro price driver. It could be as simple as a few hot weeks leading traders to take some risk off the table heading into the weekend, could also be the looming Fed meeting, which will conclude on Wednesday. A recent string of hot inflation data suggests that Powell might come out hawkish during the press conference. We'll also get a new set of economic projections, which will no doubt pour cold water on rate-cut expectations anytime soon. We could also be seeing the effects of quarter-end rebalancing and window dressing, which typically has a negative impact on liquidity across markets. It's probably not important to identify the exact reason for the recent Bitcoin

sell-off through a macro lens. The main reason to bring it up is that it gives a plausible. narrative reason for the drawdown outside of Bitcoin weakness. Or, in other words, a reason to be hopeful that the bullish trend will continue in the medium term. Greta Yuan, the head of research at VDX and exchange based in Hong Kong, gave a wide-ranging explanation for the drawdown stating, the recent strong US CPI data has further cooled the expectation for a Fed rate cut, and gold prices have also tumbled. The recent surge in Bitcoin prices has been too fast for the market to price correctly, so the current correction is expected. And I think this is representative of the current macro take. There are a million reasons that could have caused Bitcoin to stumble

over the past few days. But right now, they still all look like a temporary setback, rather than some premature end to the bull market. One of the factors that is easiest to track is weakness in Bitcoin ETF flows. Throughout the last two months, the ETF flow narrative has dominated the Bitcoin market. A weak set of numbers on Thursday night triggered a panic sell-off, and Friday's flows were not significantly better. Overall, the ETFs took in just shy of 200 million in fresh capital. BlackRock infidelity had a solid if unimpressive day, each raking in around 150 million. Gray scale outflows came in just below 140 million. Total net inflows were a little below average, but noticeably cold compared to the monster

billion dollar day recorded on Tuesday. Last week, still brought in 2.5 billion to the ETFs good enough for a new weekly record. The problem is that flows are slowing down and it's questionable whether there's any ability to move higher. We've already seen the weekly flow double over the last two weeks, and that sort of increase just doesn't seem likely moving forward. To be clear, the absolute level of flows is still incredibly strong, but rapid growth makes for much better headlines than steady, consistent buying pressure. Adrian Wang, the CEO of MetAlpha, suggested we're seeing the market temperate's expectations in real time, stating, the historical trading volume of BlackRock's Bitcoin ETF has caused

some unease in the market, with some stakeholders fearing that Bitcoin's price will surge too much too soon and could experience a flash crash. The price correction indicates the market is adjusting its expectations on Bitcoin, given the uncertainties presented by the halving event as well. Singapore-based QCP said they're still seeing bullish long-term demand, writing in a note, it is very difficult for these short sell-offs to put a lasting dent on the uptrend as long as as the daily Bitcoin spot ETF demand remains strong. Our desk has seen strong demand for year-end Bitcoin 100 to 150K calls. Indeed, most analysts are constructive over the long term despite these few days of weakness. Well, Panda tweeted, lots of people were expecting outflows,

but that ain't happening anytime soon, I think. Price is just stuck a bit above previous all-time high consolidating in this range. It does show that there are quite a few sellers. in this range, which is normal. We'll bounce around a bit here until the supply dries up. We are 34 days from having above all-time high with ETFs taking in 2.5 billion a week. That is complete insanity and nothing most of us expected before the ETF launch. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others.

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Check out the link to the Bitcoin Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin development. Thanks once again to Ledger for supporting the breakdown. Now, if we do see another major uptick for ETF flows, it's likely to come as the large wirehouses bring products online for their advisor networks. We don't have any updates from the trillion-dollar wealth managers like Merrill Lynch and UBS. The whispers seem to be that clients are able to purchase Bitcoin ETFs on request if they have over 10 to 20 million in net worth.

But the ETFs are still not generally available and certainly can't be suggested by investment advisors. Some of the smaller firms have been pushing forward and getting the products listed a little faster. CETRA is the latest to come online. The wealth management firm has over 475 billion in assets and a network of 12,000 affiliated advisors. CETA selected four Bitcoin ETFs to list, the products from BlackRock, Fidelity, Franklin Templeton, and Galaxy slash Investco. The firm said these asset managers were selected for their quote, track records of successfully launching new product strategies. Matt Frye, Cedra's head of investment products said in a statement, as expected, we are prudently embracing Bitcoin ETFs, and we prioritize developing this important guidance to help

our financial professionals implement these products and client portfolios. Nate Grassee, the president of the ETF store, tweeted, financial advisory firms now issuing press releases regarding use of Bitcoin ETFs, in other words, attempting to use Bitcoin ETFs as a point of differentiation and competitive advantage. Things are getting wild. One significant holdout remains Vanguard CEO Tim Buckley. Two months ago when the Bitcoin ETFs launched, Buckley came out firmly against them and the entire asset class. Vanguard blocked customers from purchasing and even went so far as forcing the sale of existing ownership of grayscale Bitcoin trust shares and client portfolios. A few weeks later, he announced his resignation, leading some to speculate he had been forced out due to the

success of Bitcoin products. On Sunday, however, Buckley released a video doubling down on his decision. He said that Vanguard wouldn't be changing their mind on Bitcoin, quote, unless the asset class changes. Throughout the whole process, Buckley has been referencing Vanguard's philosophy of asset allocation for retirement, the firm's core business. A Bitcoin, he said, we don't believe it belongs in a long-term portfolio of someone saving for their retirement. It's a speculative asset. Buckley then dived into a list of the common Tradfifud. He said, The funds that we offer invest in asset classes that actually have underlying cash flow. On stocks and bonds, he noted, both can be valued. We can understand why they would rise up in a portfolio.

We can model them. Something like Bitcoin, he said, is just too volatile. It's not a store of value or it hasn't been. When stocks got hammered in recent crises, Bitcoin went right with them. Obviously, there was no recognition there that during the 2020 crisis, bonds got just as clobbered as stocks falling so hard, in fact, as a store of value that the Fed intervened in that market. Also, beyond Buckley's memory was apparently last year's banking crisis, when Bitcoin rallied as the financial stability of the U.S. was shaken. Perhaps the most interesting theory for the Bitcoin drawdown surrounds micro-strategy and a trade gone awry.

Lagged position reports have shown 20% short interest in micro-strategy stock dating back to late February. Many suggested that this looked like a large hedge fund or even multiple funds putting on a pair trade. The trade would be to short micro-strategy while going long, the spot Bitcoin ETFs, to capture the premium in Microstrategy's valuation. At times over recent weeks, Microstrategy has traded at up to a 70% premium to their underlying Bitcoin holdings. There's no mechanism to force MicroStrategy stock back in line to the value of their Bitcoin, so this trade can get

increasingly offside with no clear end. It's also not obvious that Micro Strategy should be valued based on its current holdings, rather than an anticipation that Bitcoin per share will grow as Michael Saylor continues his strategy. On Friday, rumors spread that a hedge fund was stopped out of this position, acting as a trigger for the weekend's drawdown. Investor Andrew Kang tweeted apparently a fund blew out $1 billion on the Microsoft Bitcoin spread trade today. They covered into the close, which is why Bitcoin dumped and master stock premium went to the highs. P&L pocketed by Bay Sailor will be put back into Bitcoin. AP Abacus and anonymous source for relatively accurate crypto rumors stated,

this is correct, I know who the fund is, or maybe was. There's some rumors that the fund was a very recognizable or longstanding crypto-native firm, but the sourcing isn't even close to solid enough to name them, and frankly, it's not even clear that this actually happened, or if it's just the product of an overactive rumor mill. Either way, if a large fund was forced to liquidate a billion dollars worth of Bitcoin on Friday, that would certainly go a long way to explaining the drawdown. It would also change the read on the drawdown.

There is a big difference between a leveraged blowup and a wave of spot selling when it comes to sentiment. Thomas Ferrer, the CEO of Crypto Reviews Portal Apollo, pointed out how bullish this interpretation would be, tweeting, yes, this is a bear trap. Waves of liquidity are going to rain down on the Bitcoin ETFs. Real money hasn't even started allocating. If a billion-dollar hedge fund position sent Bitcoin tumbling 10%, how high do you think $150 billion from advisors is going to send it?

While the ETF flows in futures trading dynamics are the big and obvious narratives to follow, an intriguing new Bitcoin whale has also shown up in on-chain data and could be making a meaningful market impact. Analysts have nicknamed the whale Mr. 100 after their buying pattern. Mr. 100 has been receiving Bitcoin in 100 BTC chunks multiple times every day since November 2022. There's also a linked address which has been showing the same activity dating back to 2019. So far, Mr. 100 has accumulated around 53.

thousand Bitcoin worth around 3.5 billion at current prices. On some days last week, they were in the market for around 50 million worth of Bitcoin, about 15% of the average ETF flow. This has been enough to make Mr. 100 the 14th largest Bitcoin holder. Hoddle 15 Capital, who coined the nickname, who is Mr. 100? It's been suggested, one Hong Kong financial institution preceding for ETF approval, two, Qatar Investment Authority, three, Middle Eastern sovereign wealth fund, Abu Dhabi, Kuwait, etc. For a South Korean exchange. Although recent purchases were made on upbit, the early coins were bought on Ku-coin, Bit Hum, Binance, and OkX. Number five, Dubai slash the UAE. Number six, a Singaporean tech billionaire. Number seven, Jeff Bezos, Zuckerberg, Elon, et cetera. Number eight, China, CCP. What I do

know is that this is not one of the US ETFs. I have all of those mapped. Archam Intelligence added their analysis tweeting, who is Mr. 100? Mr. 100 is a Bitcoin address that receives 100 Bitcoin at a time. Many have speculated that Mr. 100 is buying Bitcoin as a large fund, Middle Eastern nation, or even a Bitcoin ETF. We believe these assertions are incorrect. Mr. 100, is in fact an upbit cold wallet. This is because of its strong and consistent associations to other upbit wallets, which match the pattern of a typical exchange cold wallet. The Mr. 100 address receives the 100 Bitcoin inflows primarily from sweeping upbit deposit wallets. Some of its outflows also fund upbit hot wallets used for customer withdrawals. While this explanation makes sense,

it isn't the only explanation. The wallet has less than 500 million in outflows over the past three months, all going to the upbit hot wallet, which means that either South Korean retail is buying up a lot of Bitcoin, or a large entity is using Upbit as their custodian. Haudel-15 again questioned the logic, writing, the big question is who is slash are the buyers behind the consistent increase? Exchanges buy on behalf of users. Using Michael Saylor and Microstrategie as an example, you could show a similar visual showing that the Bitcoin buying is done by Coinbase and the custody is in Coinbase wallets,

but the buyer-slash-owner is not Coinbase. Would be great to find the micro-strategy behind the exchange slash custodian. The consistent day-to-day accumulation in this address does not mirror the experience of other exchanges. Most exchange balances are in steady decline. In the last two years, finance balance is down 47,8,8 840 Bitcoin, Gemini down 60,300 Bitcoin, cracking down 48,100 Bitcoin, etc. There appears to be a persistent and deep-pocketed buyer that increases this wallet, while all other major exchanges are losing coins. Speaking of Qatar rumors, a local fund executive recently dismissed those allocation rumors as unlikely. For several months, Max Kaiser has been insisting that the Qatar Investment Authority was on the

verge of adding 500 million Bitcoin to their 475 billion sovereign wealth fund. The rumors hit fever pitch earlier this month when the Emir of Qatar made a trip to El Salvador. Sadi Kishhta of Kahn Capital said, I don't think it will happen in one way or another anytime soon, since the QIA has a diverse investment strategy, spreading investments across various asset classes, sectors, and geographies to mitigate risk and capture opportunities. On top of that, Qatar still has a crypto trading ban, which was installed in 2018. Although the nation has a blockchain strategy, they have publicly stated that they're more interested in the underlying technology than the digital assets themselves. Interesting things. I think we're poised for yet another fascinating week, even if perhaps it is

a little bit different than the weeks we've had recently. For now, I want to say one more big thank you to the sponsors for today's show. Go to crackin.com slash the breakdown and see what crypto can be. And of course, check out Ledger. Specifically, I would recommend checking out the Ledger Bitcoin Nano, where 5% of sales are going to support Bitcoin Development. Until next time, be safe and take care of each other. Peace.