The Breakdown - Bullish or Bearish? 2022 Markets Started Rough, but It Wasn't Just Crypto

Starting point is 00:00:00 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 sponsored by nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, February 1st, and that means we are doing a little bit of a review of how 2020 got started. Are things bullish? Are they bearish? Are they somewhere in between? We will get into all of that. But first, if you're enjoying the breakdown, go subscribe to the show, give it a rating, give it a review, or if you want to dig deeper into the conversation, join us on the breakers discord. You can find the link in the show

Starting point is 00:00:48 notes, or you can go to bit.ly slash breakdown pod. And as always, a quick disclosure. In addition to them being a sponsor of the show, I also work with FTX. So what we are doing today, as I mentioned, is we're going to look at January. This is a January review. It's February 1st. Kind of just make sense, right? Let's start with the tail of the tape. Bitcoin started January at around 47,000. Currently, it is at around 39,000 and got below 34,000 for a time. Overall, it was down about 19% on the month. Ethereum started January at around 3,700. Currently, it's at around 2,700, and got down below 2,300. so it was down about 27% on the month. The market as a whole started January above $2.35 trillion.

Starting point is 00:01:40 Currently, it's at around $1.8 trillion and got down close to $1.7 trillion at the lows, down 23% on the month. Trading volumes also weren't great. Bitcoin trading closed the month with only $78.7 billion in volume, according to Trading View. That's down from $103.6 billion in volume for November, compared to an all-time high peak of $200.4 billion for May. However, when it comes to understanding January, you have to also understand what's been going on with other parts of the market as well.

Starting point is 00:02:13 The NASDAQ index closed the month down 10%. In fact, it narrowly avoided doing worse than its worst January ever, which was in 2009. The S&P Index closed the month down 5.8%. Even the supposed safe haven of U.S. government bonds had a rough month with the TLT long-duration bond ETF closing the month down 1.32% and shorter duration bonds dropping in price as interest rate hikes got priced in.

Starting point is 00:02:39 Fang stocks didn't serve as a store of value either, down between 4% for Apple on the low end and 30% for Netflix on the high end. Even gold is basically flat for the month. So what was going on? Well, of course, if you've been listening to the show, you'll know that the key thing that happened in January when it comes to short-term prices was a fundamental shift from risk on to risk off. That was precipitated a little bit by December's FOMC meeting, where the Fed announced that they expected at least three rate hikes in 2022.

Starting point is 00:03:12 However, it really accelerated during the first week in January when minutes from that Fed meeting came out, and it showed that the Fed was actively considering not just hiking rates, not just an accelerated unwind of asset purchases, but in fact, a full shift from quantitative easing, i.e. the government buying assets to quantitative tightening, i.e. the government selling assets. The term they used for this was balance sheet reduction. This was something that almost no one in the market was expecting to see so soon. In previous periods, quantitative tightening hadn't started until

Starting point is 00:03:46 years after some initial quantitative easing phase. So that really shocked the market and made this 180 turn from risk on to risk off happen in a pretty pronounced way. What you see in all of those assets, that I just mentioned, was basically the risk-on assets falling, and even the traditional hedges retaining their value but staying flat. Lucas Udomuro, who's the head of research at Into the Block, said this has led to the highest correlations between crypto and traditional markets since March 2020. By accelerating interest rate hikes and likely beginning quantitative tightening, the Federal Reserve is disincentivizing investment in order to manage inflation. So that is the key TLDR of what was going on in January. It was the market coming to learn that the Fed was likely to start

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Starting point is 00:06:30 With that, let's dig a little deeper into crypto and let's look at fun flows. Coin shares releases a weekly report that looks at investment inflows and outflows into popular crypto-related products, such as ETPs or Exchange-traded products, mutual funds, and OTC Trust that reference Bitcoin, Ether, and other digital assets. To get a sense of how things shifted over this month, let's just look at the headlines week by week. January 10th, investors remain very bearish, with record outflows totaling 207 million. January 17th, outflows of 73 million, but negative sentiment could be cooling off. January 24th, minor inflows of 14 million suggest investors are taking advantage of the price tip.

Starting point is 00:07:15 January 31st, investors cautiously adding to positions with inflows totaling 19 million. So basically what you have here is another way to recognize that things had shifted pretty seriously in around the middle of December, when funds started flowing out of crypto-related products. By the middle of January, however, even though sentiment was still incredibly low, especially if you were hanging out on Discord or Twitter, funds had started to cautiously wade back in, taking advantage of some of the big price dips that we'd seen. Now, digging a little deeper into some of the details, Bitcoin products this week saw inflows for a second week, totaling $22 million, while Ethereum products continued to suffer

Starting point is 00:07:53 from negative sentiment and had outflows of $27 million. This is the eighth consecutive week in which Ethereum products have had those outflows. And although there's not that much data to work with, I think it's probably a fair working conclusion that the TradFi investors are currently considering Ethereum as a higher risk position than Bitcoin and are slower to commit back to it during this higher risk period. Not by a lot, but still, it's there in the numbers. Of course, Ethereum isn't even close to the riskiest asset in this space. Terra's Luna declined 50% in January. Solana's soul dropped 49% and Avalanche's Avax lost 42%. The key thing that I would say here is that all of this

Starting point is 00:08:35 tracks, right? In a broad switch from risk off to risk on, you would expect to see the most risky things to be hit the most. Assuming that crypto is the far end of the risk spectrum for most traditional finance investors, within crypto, there's also going to be relatively safer or relatively riskier assets. I don't think it's a surprise that younger assets with smaller communities and smaller total market caps had a harder time during this shift from risk on to risk off than other assets in particular Bitcoin. Now, of course, within the digital asset world, there is an exception to all of this, which is NFTs, which have been operating in their own universe. To take one example, the BoardApe Yacht Club floor price climbed 44% from the start of the year to an all-time

Starting point is 00:09:15 high of $318,000. It was just announced that Justin Bieber, I believe, bought a board ape for over a million bucks. Overall, the NFT market saw record volume of $6.13 billion in January. Now, of course, the caveat is that NFTs have relatively lower liquidity, so there wasn't as much for selling as you saw, for example, in the crypto industry. And two, on some of the big marketplaces, there are wash trading concerns, but it's still notable how sort of anti-gravity NFTs were, at least in January. Now, before we get out of the full kind of market section of this discussion, it is worth noting that over the last 48 hours or so, we've seen a bit of a recovery. Solana, for example, is up nearly 20% over the last three days, in part on the back of Coinbase

Starting point is 00:09:59 listing salana-based assets for the first time. However, there is a lot more going on than just prices, and in many ways January was a preview of the rest of the year. I think the most notable dimension of this was the regulatory sphere. To take a couple examples, on January 20th, we had a mining hearing here in the U.S. We also saw the Fed released their central bank digital currency paper, something that we've been waiting for for years now at this point. Additionally, there has been a flurry of regulatory proposals over the last week. The unhosted wallets provision was put on the Treasury agenda for the first half of 2022. This harkens back to something the crypto industry was up in arms about at the end of former Treasury Secretary Stephen Mnuchin's term.

Starting point is 00:10:40 The SEC announced rulemaking last week on tightening regulation of peer-to-peer in over-the-counter platforms, which would redefine them as exchanges. And of course, last week, as you heard on this show, Congressman Jim Himes inserted an amendment into the America Competes Act that would remove some pretty significant accountability measures on Treasury's process around financial surveillance and censorship in a way that could be pretty dramatic for the crypto industry. Finally, there is, of course, the much-anticipated executive order on cryptocurrency coming from the Biden administration as early as this month. Now, there's obviously a lot going on, but I would caution us to remember that more regulatory engagement isn't necessarily bad for the industry. In fact, it could be

Starting point is 00:11:20 quite the opposite. To take just one example yesterday, Jerry Brito, the executive director, of Coin Center, who had sounded the alarm on the Jim Himes Amendment to the America Competes Act, said, I'm happy to report Jim Himes has listened to our voices, and looks like the notice and comment protections in the Competes Act related to special measures will be retained. This is in a manager's amendment that will be considered later this week. Jim Himes responded and said, thanks for working with us on this Jerry Brito, good outcome. This is a bigger deal, I think, than it seems, and represents something of a small turning point for crypto lobbying in D.C. So the facts of what happened are that in under a week,

Starting point is 00:11:58 a harmful piece of proposed lawmaking was removed and put into a different process. Compare that to prior episodes of lobbying, such as during the infrastructure bill provision last summer, where the crypto lobby had to call for all hands on deck and leverage what was more than a mild panic to get incredible pressure and attention on a potentially problematic part of legislation. This is a pretty significant shift and shows, I think, the maturation of the crypto-political body. What's more, as we head deeper into 2021, there are new resources coming online to support that crypto-political body. Those range from the overtly political, such as the GMI PAC, which is an organization for directing crypto industry and community donations to support political candidates

Starting point is 00:12:43 during the upcoming mid-term elections, to related but very differently focused bodies like the Bitcoin Defense Fund. something that's being spun up by, among others, Jack Dorsey, to pay the legal fees of Bitcoin developers who are targeted with lawsuits. There is also, as we round out this review of 2020, pretty significant signs of investment in fundraising in this space. On January 3rd, Marathon signed a monster, all-time largest order for ASIC miners.

Starting point is 00:13:08 On January 18th, Intel announced a program to develop lower energy ASICs. On January 22nd, Microsoft announced their acquisition of Activision in Blizzard for $68.7 billion as a Metaverse, On January 31st, the Apple shareholder meeting included a statement from Tim Cook that said, we see a lot of potential in the Metaverse and are investing accordingly. And then, of course, there have been so many funding rounds. Overall, in fact, Pitchbook indicates that $4.4 billion has been invested into blockchain startups in 2022 already, which puts us on track for a $50 billion year, which would be a huge

Starting point is 00:13:44 increase on what was already a huge increase between 2020 and 2021. This is exceedingly relevant for any potential crypto-bair market. The thing that ultimately gets us out of bare markets, outside of just changes in the overall macro landscape, are exciting things that bring new money and new energy back into the space. Part of the challenge in 2018 and 2019 and why that crypto winter was so pernicious is that funding absolutely vacated the industry.

Starting point is 00:14:14 There wasn't capital to do big interesting things, and so the pace of development of very important, change of creation, overall was just slower. If this is the beginning of a long-term crypto-bare market, which I don't think anyone has enough evidence to say is the case, but even if it is, so many companies are going in with so much treasury. So many investors are going in with so much dry powder. It's hard for me to see how it has that same dynamic of a long winter that we had before. To sum up, what's bearish? Well, prices have taken a beating and that's hard to ignore. What's bullish, I think the long-term investment in this space from multiple different types of actors is super clear.

Starting point is 00:14:55 What's less clear, what's not clearly bearish nor clearly bullish and could go either way, is to me, regulation. The bearish part of this, of course, is that we do continue to see misguided proposals that don't fully understand the industry, and those could have real serious impacts if put into practice in any way resembling their initial proposal. At the same time, what's bullish is that the political engagement of, of the industry with regulators is more positive than it's been in the past. It comes from a position of strength and willingness to educate and engage in good faith. And it's hard for me to see how, at least in the U.S., that doesn't result in ultimately positive outcomes. There is, of course, an X-factor as we look across 2022, and that, to me, is geopolitics. Already we've seen the

Starting point is 00:15:41 turmoil in Kazakhstan affecting mining hash rate and regional stability. We've seen the IMF urge El Salvador to cease Bitcoin adoption. We've seen Russia's central bank call for a ban on crypto while Vladimir Putin has made it clear that he wants to keep Russians options open regarding crypto policy. And then there's Turkey with their myriad failed attempts to stabilize the lira. All of these in more geopolitical situations could cause pretty significant havoc, not just in crypto, but also in the wider world. And so certainly that's what I'm going to be watching as we move into the rest of 22. But I have to say, I think it was a hell of a start to a year. And if nothing else, it's going to be interesting. I want to say thanks again to my sponsors, nexo.io, Arculus and FTX for supporting the show,

Starting point is 00:16:26 and to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Bullish or Bearish? 2022 Markets Started Rough, but It Wasn't Just Crypto

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