The Breakdown - Can a New Wave of Crypto IPOs Rekindle Wall Street Excitement?

Episode Date: July 10, 2021

On this edition of “The Breakdown’s Weekly Recap,” NLW looks at how Wall Street momentum in crypto rose last year only to fade this year. With Circle coming to markets via a SPAC merger and Robinhood going public, is there a chance those events will bring some renewed excitement?  -- 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=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is sponsored by NYDIG and produced and distributed by CoinDesk.com

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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Saturdays July 10th, and that means it's time for the weekly recap. However, yesterday before Biden's whole executive order around competition in America, I had basically prepared a whole additional show about the Circle IPO. and can a new wave of crypto IPOs rekindle Wall Street excitement? So instead of a weekly recap where I go through 10 different things that happened or whatever,

you're basically just getting another show. Hope you enjoy. Anyways, today we're discussing the Robin Hood IPO and the Circle IPO and whether they can get Wall Street stoked on crypto again. So first, let's talk some background. In retrospect, the Coinbase IPO as the top sort of looks super obvious, right? Coinbase IPOed on April 14th and the Bitcoin all-time high, depending on your exact source, came within around 24 hours of that event.

There was an extraordinary amount of hype around this, which I guess, by the way, is technically a direct listing, not an IPO. But either way, there was a ton of hype, and it's because, in many ways, it wasn't just a single event. It was the culmination of an entire narrative, which had been driving the industry for upwards of a year at that point. Bitcoin had surprising resilience post-Black Thursday crash in March 2020. Hedge fundies, particularly Paul Tudor Jones, start to notice and explicitly identify it as a good trade in the context of massive global money printing. And this wasn't hard to understand, right? It was an incredible moment to see Bitcoin supply issuance programmatically halved at the exact same moment as central banks were getting

comfortable with bigger balance sheets than ever. And by the way, Paul Tudor Jones wasn't even close to the only hedge fundy who bought into this narrative. By late summer, early fall, some others like Stan Druckenmiller were going on CNBC to say so as well. Enter Michael Saylor and the Bitcoin treasury bet, and all of a sudden there's an additional dimension to this institutional buy narrative. Other companies like Square follows suit. Some really unexpected players come in as well, like Mass Mutual's $100 million Bitcoin buy, which is where many of you probably first heard of the breakdown sponsor Nidig. All of this creates an incredibly strong, clear narrative picture going into the holiday in the new year, and then we get Elon. Tesla's $1.5 billion

dollar Bitcoin Treasury buy dwarfs, at least the initial buy of micro-strategy, and we're really off to the races. And then Coinbase's listing is announced. And it seems like the perfect culmination of things. A major, truly legitimizing company from the crypto space moving into public markets. And Lord, to look at their prospectus, were they making money? 1.8 billion dollars in quarter one alone. Hype, hype, hype, hype. That first day trading went, okay. At one point, the stock popped and the total valuation made it over $100 billion. Things closed down a little bit, but the company was still sitting at an $85 billion valuation after their first day trading, but the momentum wouldn't hold. Within a week, Coinbase's stock price had dropped about 10%. After

three weeks, it was more like 2025 and it sort of just kept going finally, finding a range where it's been ever since about 30 to 40% off of where it started. Now, basically no one disagrees with the notion that this institutional push into Bitcoin, was the driving narrative force of this bull run. But there is a difference between narrative force and where actual buying demand that drives prices up is. What I mean is, how much was the run-up being driven by institutions spot-buying Bitcoin accumulating versus crypto market speculators and investors trading that narrative,

which had the effect of driving price up, which seemed to reinforce the narrative even if it wasn't really the institutional allocations carrying the market, versus something else entirely. On that something else front, yesterday we explored how big a source of demand the Grayscale Bitcoin Trust neutral arbitrage trade represented for most of last year in the beginning of this year. I mean, for a time, Grayscale was the fastest growing fund, not just Bitcoin fund, I mean fund, in history. But when the GBT premium turned to a discount in February, the market lost one of its biggest sources of Bitcoin buying pressure. Now, on the question of how much the bull demand came

from institutions accumulating versus traders trading the narrative. Let's turn to a thread from Sam Tribuco at Alameda that I've referenced before. This came in May after that big dip all the way back under 30,000. He tweeted, the narrative in the winter was clear. Institutions were getting into crypto, and that's why crypto rallied so much. This mostly happened in Bitcoin, but the other coins mostly had a beta to Bitcoin, so they all rallied some too. Simple enough. More recently, the rumors turned to ETH. Now, institutions were getting into ETH too, and some other coins, but at least for the past couple weeks, the ETH rally was the big thing happening, ignoring Doge. Many alt's reached all-time high, some for these more fundamental reasons and some for Elon-related

hysteria. Which coins are rallying isn't all that matters, though, and understanding reasons for the buying isn't enough either. We need to go deeper. I saw a ton of speculation that the rallies, especially the ETH rallies, were low leverage and spot-driven, and therefore more organic somehow. An important implication of that is that, in the event of a downturn, there would be relatively few liquidations. This narrative was super wrong, though, and it was possible to know that. How? Well, this narrative has been basically true zero times in the past three-ish years. You can tell from the fact that all the volume is in derivatives or spot where the exchanges allow leverage. More specifically, though, this rally looked identical to all the others I've discussed on here. Open interest on

Binance, but also on all the other platforms, was shooting up basically the entire time. Premium were high for those products, etc. Tail as old as time. That people thought Ethan particular was just all institutions buying on Coinbase or something was particularly baffling to me. This was all on leverage, just waiting for a day like today to come along, and come along it did. Whatever caused the initial market-wide crash, probably a lot of Elon with some China and other vague regulatory news thrown in, or maybe it's a natural correction, it happened, and liquidations did a lot of the work to make the downturn more intense. One of the most important developments in this space is that community banks, regional banks, and credit unions can now start

offering Bitcoin to their customers. That's right. Checking, saving, and now Bitcoin. It's all happening seamlessly thanks to a platform by NIDIG that offers institutional grade custody and compliance. They're also the sponsor of The Breakdown. And if you want to find out more, go to nidig.com slash NLW. That's NYDIIG.com forward slash NLW. Now that we have that, put the Coinbase IPO in that larger context. There was a real trade the news aspect of this, right? The hype created its own sense of FOMO before the event occurred, helping drive Bitcoin to all-time highs as the direct listing happened. When that event faltered, traders looked the other direction. Of course, then we were barraged and assailed by an absolutely

non-stop freight train of fud, and that certainly didn't help things. Now, in all of that, there becomes a question of if and how Wall Street's attitude actually changed. To hear firms that deal with big institutions talk, there is still meaningful interest in allocation happening. You still have banks like Bank of America just yesterday opening up a new research division focused on digital assets. There are still new Bitcoin funds like Morgan Stanley's coming online. Goldman Sachs is still spinning up new crypto training desks. In fact, one could argue that the only real shift in tone has come from the analysts who have published a bunch of more skeptical notes of late. Regardless of where Wall Street fits exactly, I think it's fair to say that there has been a

narrative momentum stall, certainly a FOMO stall in general around Bitcoin and Crypto. What then might the impact be of the Robin Hood and Circle IPOs? Let's talk Robin Hood first. On the one hand, this is a company that has been beset by trouble. At the epicenter of the meme stock movement, they're sort of besieged on all sides. In particular, there is a question of their decision to halt trading of GME and other related assets earlier this year in the peak of a pitched short-squeeze battle. For many of the Wall Street bets crowd, this was a total betrayal.

Robin Hood was, after all, the app that brought them into this summer. space. It was the thing that made their whole approach seem viable. For them to turn and side with the suits was unconscionable. Dave Portnoy from Barstool was a loud voice for exactly this position. This group, by the way, is now using Reddit to try to get the apes and DGens and meme traders to avoid the IPO for exactly this reason. But that halting trade decision also got them in hot water with regulators. Their CEO, Vlad Tenev, was dragged before Congress, and moreover, they just agreed to pay the largest fine in FINRA history, $70 million for, quote, system-wide outages and misleading communication and trading practices. Hell, even Warren Buffett is huffy with them.

He called them, quote, a very significant part of the casino group that had turned the stock market into effectively glorified gambling over the past 18 months. Buffett also lambasted them for their payment for order flow business model in which consumers don't pay with their money, but with their data about orders they're making. Some have said this basically allows big firms to trade against them with perfect information. Anyway, the point is that Robin Hood has a lot of risk and anger around it, and frankly, I don't think it will matter. This is an incredibly hyped IPO. Funded accounts on Robin Hood have grown 151% since last year.

The move to allocate 20 to 35% of shares to traders on Robin Hood means that people will buy it, period. All that really will matter, I think, is broader macro factors around tech valuations, and frankly, even that might not matter that much. But what about the IPO's applicability to crypto? I'm a lot less sure there. I think Robin Hood has become pretty indelibly linked with the meme stock movement,

and to the extent crypto is a part of that, it's Doge, which is just crypto's meme stock. So I'm much more skeptical that the Robin Hood IPO will actually register as a catalytic event in terms of crypto. What then about the Circle IPO? We learned on Thursday that Circle, the company best known for their leadership with USDC, is going public via SPAC. The anticipated valuation is $4.5 billion, and there's definitely some chatter around it. But mostly the chatter has to do with stable coins and USDC. As I've discussed before, there is far more regulatory scrutiny around the world right now on stablecoins than on Bitcoin. Not that Bitcoin is escaping notice, but stable coins feel clearly to regulators more like a threat to monetary sovereignty.

Certainly, this is the case in the U.S., where we've already seen the Stable Act introduced and action targeting Tether. And Tether is a not insignificant part of the reason that so many are interested in Circle and USDC as well. USDC potentially represents the regulated alternative to USDT. It's the thing that regulators could possibly get comfortable with, allowing this key part of the plumbing of Defi in particular to pass regulatory muster. In that, the announcement comes at an interesting time. I've started to see a lot of the same sort of opacity critiques that have focused on tether start to be applied to USDC as well. The prospectus doesn't really go into detail about reserves, for example, and right now

there aren't necessarily super clear regular attestations. Without clear reserve attestations, confidence in any stable coin is going to remain elusive. Circle CEO Jeremy Aller, who was on the show earlier this week, clearly recognized this. He tweeted an initial thread about their SPAC listing, but then wrote a whole separate thread specifically about this. He writes, a separate thread on being a public company and increasing public transparency around USC. As we partner with major companies and financial institutions, and as people around the world

interact with USDC, becoming a public company is a critical step in providing greater transparency as a firm. As part of our transformation from private to public company, that also creates an opportunity for Circle to also provide significantly more transparency about the business we are building around USC and about the reserves that back USDC. Circle intends to become the most public and transparent operator of full reserve stable coins in the market today. With upcoming public filings and new USDC reserve attestations, our intention is to provide a detailed summary of USDC reserves. Not only will all Circle's overall financial accounts be held to the highest standards of But ultimately, all of these public disclosures will be held to the standards of the top financial

regulator in the United States, the SEC. With scale and success comes greater expectations and the need for greater transparency. We also recognize that this is a journey and that self-governance and regulatory models in this space will evolve. We intend to be a leader throughout this. I think of all the commentary I saw about this, Maya Zahavi got it best. She wrote, Huge. The implications of a Circle SPAC on crypto can't be overstated. Circle taking advantage of SPAC's regulatory ease seems advantageous. In other words, they'd rather go public now than after regulatory clarity as to the status of stablecoins. Or, Circle going public by a SPAC is essentially front-running the Stablecoin Act. The question that started this show was can these

IPOs rekindle Wall Street excitement? And the short answer is, I don't think so. Circle, however, is massively more interesting and significant to me than Robin Hood, because I think the implications really are about this whole stablecoin infrastructure. Can USDC thread the needle to find a legally recognized home in public markets for USD stablecoins even in the central bank digital currency era? And in so doing, could we have a stable coin that actually has clear reserve attestations? By the way, as I was writing this, there was another SPAC announced by an exchange I've never heard of backed with Block 1 money, and it just feels like a complete money grab to me, given how hard it's going to be to compete with the exchanges that are already around today. So at least for now,

I find it pretty ignorable. But lastly, I will say going back to the original question is a larger question of whether and how much we care about whether Wall Street's excitement gets rekindled. However, that's a topic for another show. For now, guys, I hope you're having a great weekend. I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace.