The Breakdown - Capital Flight or the Seeds of the Next Cycle?

Episode Date: May 19, 2022

  This episode is sponsored by Nexo.io, NEAR and FTX US.    Today on “The Breakdown,” NLW covers a number of signals suggesting institutional buyers are leaving the crypto space. At the same time, he looks at new corporate engagement and Web 3 infrastructure being built that could help drive the next round of user adoption.  - Nexo is a secure crypto exchange and crypto lending platform. Buy 40+ hot coins with your bank card in seconds and swap between exclusive pairs for cashback. Earn up to 17% interest on your idle crypto assets and borrow against them for instant liquidity. Simple and secure. Head over to nexo.io and get started now.  - NEAR is a blockchain for a world reimagined. Through simple, secure, and scalable technology, NEAR empowers millions to invent and explore new experiences. Business, creativity, and community are being reimagined for a more sustainable and inclusive future. Find out more at NEAR.org. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - Consensus 2022, the industry’s most influential event, is happening June 9–12 in Austin, Texas. If you’re looking to immerse yourself in the fast-moving world of crypto, Web 3 and NFTs, this is the festival experience for you. Use code BREAKDOWN to get 15% off your pass at www.coindesk.com/consensus2022. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “Catnip” by Famous Cats and “I Don't Know How To Explain It” by Aaron Sprinkle. Image credit: sarayut Thaneerat/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8. 

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 nexo.io, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, May 18th, and today we are talking about what's going on really in the markets. Is it all about capital flight and people abandoning the industry? Or are we we also seeing the seeds of the next cycle? 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 dig 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. Also, a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. And finally, if you have not signed up yet, I highly recommend you come check out CoinDesk's Consensus 2022. It's happening in Austin, Texas, between June 9th and June 12th. And the thing that makes it different is it's got such a wide array of topics from within this crypto ecosystem. If you are interested in the sort of big picture power shift side of crypto that we talk about so much here, you won't want to miss speakers like Congressman Patrick McHenry or Senator Kirsten Gillibrand. If you are interested in going, use code breakdown to get 15% off your pass at coindesk.com slash consensus 2022.

All right, so we are firmly in bare market mode. You can tell because the journalists and critics are taking an absolute victory lap. Bloomberg is publishing about how we need to pay attention to all the crappy tokens that have died over time, and especially Luna, as though the industry is somehow ignoring it. Ben Hunt has pompously declared that the crypto revolution has failed, as though he ever cared about it in the first place other than as a narrative. device. More worryingly than that, though, are the actual actions of market participants, or perhaps we should say former market participants. CoinDesk published a piece,

Big Money investors who boosted Bitcoin's price might now crash it. Quote, A key narrative in the crypto world in 2021 was the arrival of institutional investors to the space. Tesla bought $1.5 billion worth of Bitcoin and Wall Street banks like JPMorgan Chase and Morgan Stanley, as well as hedge funds, started allocating client assets to Bitcoin that year. Not only were these institutional investors. a sign of growing mainstream acceptance, they also appeared to drive up prices. Crypto boomed with the sector's market capitalization growing 185% that year. Now as the crypto market's latest swoon wipes off $1.25 trillion from the industry's all-time high market capitalization reached late last

year, the question has risen. What role is institutional money playing in the crash? Or to put it more bluntly, are institutional investors making things worse? End quote. However, in all of this, the long-termers aren't content to just lifelessly limp off into the shadows. Ryan Watkins, who's the co-founder of Pangaea Fund Management, said huge week for the future of crypto-mass adoption. Coinbase providing on-chain access directly in app, enabling direct Fiat on-ramp into wallets like Metamask, Robin Hood launching Web3 wallet and SBF acquiring 7.6% stake. Seeds of next cycle are being planted. This is the beginning of how we get billions of people onboarded to the crypto economy. So what is it? Is this a moment of capital flight or the seeds of the next cycle being planted?

Well, let's come back to the capital flight side and that coin desk piece again. Morgan Stanley recently put out a piece that argued that institutional investors were the dominant force in trading in crypto last year. According to the report, only about a third of all trades on Coinbase were from retail investors. Indeed, the dominance of institutions on Coinbase helped create something of an indicator that some called the Coinbase premium. CryptoQuant explained in a blog post, usually there is a Coinbase premium. This means that the Bitcoin price on Coinbase is higher than on Binance. This was slash is very important because American institutions and high net worth individuals were trading mostly on Coinbase. However, in the last few days,

it's negative. This indicates heavy selling on Coinbase Pro. Now, a lot of the discussion is about the correlation between crypto and traditional markets. And I think Jeff Dorman from Arca sums it up really well. He says, in the past year and a half, we've had new entrance to the digital asset market from the macro hedge fund world. It's the players, not the assets that are correlated. End quote. And given that correlation, of course, everything is going to be tied to the larger macro cycle, as we discuss all the time on the show. The Morgan Stanley report says, we think the increased involvement of institutions, which are sensitive to availability of capital and therefore interest rates, has contributed in part to the high correlation between Bitcoin and equities.

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Business, creativity, and community are being reimagined for a more sustainable and inclusive future. Reimagined your world today. at neer.org. The breakdown is sponsored by FTXUS. FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees.

One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCs, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. Let's talk about the approximately $9 billion in tether redemptions. Investment advisor Christopher Blumstrand writes, Tether bleeding another $1.5 billion and $9 billion over the past week. The fraud of unodited reserves will be readily apparent.

Commercial paper, a lie. Treasuries, so far beyond Madoff. Who believes this nonsense? Massive Ponzi. If you are still in, you get what you deserve. Now you, my clever friends, may be thinking to your... yourselves, wait a second, doesn't tether being successfully redeemed to the tune of $9 billion mean the opposite? That it is in fact backed? You would be correct, and the blockchain community spared no words in letting Christopher know that. Jeet says chart crime, posting a chart showing users

redeeming $9 billion over the last week implying it's a huge negative instead of just a normal market operation. Cash reserves available to meet client withdrawals seems dot, dot, dot, dot, dot, D. Good? Endurance Liv says you're witnessing a massive digital bank run on an asset that's been attacked for not being able to handle a digital bank run. It's handling it perfectly. Bullish. SBF retweeted an article that was making a similar point about this being a death knell for Tether says, think this is backwards. Successfully redeeming $7 billion proves that there were reserves to send back. Gaborga-Box extends this saying, doing $7 billion of redemptions in two days without any issues is a huge win for Tether. It proves to investors that Tether can be trusted with redemptions

at size and speed. When it comes to investing, this is what really matters. But what about the peg? The Peg has at various points over the last week been slightly off of $1, right? Well, in various channels like Twitter spaces, the team at Tether has been making the point that the Peg is actually about redeemability, not market action. Gabor again reiterated this point, saying a Peg is a specific exchange rate that an issuer sets. A peg is not the market price. It It is the price at which a user can redeem a token from its issuer. One can redeem one USDT for one USD with tether minus feeds. This is a one-to-one peg.

Market prices tend to converge to good pegs. Now, I think this is not to dismiss the potential significance of a market divergence, but it's important to note that no real stress has seemed to be exhibited in the tether creation and redemption process just within the market for tether. Now still, I think that without turning into tethered truthers, we can recognize that $9 billion leaving quickly from Tether does send a signal about liquidity, value, and sentiment leaving the ecosystem. Dylan Leclair points out at the first month-over-month decline in USDT and USDC stablecoin supply

since February of 2020. Now, to some extent, this seems an inevitable reaction in part to the implosion of Luna and U.S.T. Despite the fact that Tether is a totally different type of stablecoin, as we've discussed at length, you still would expect to see some nervousness among holders of TEPA. tether or any other stablecoin in the wake of UST's collapse. The question is how much is going to be withdrawn and how the rest of the market is going to read this. I do think liquidity leaving tether is bearish for crypto. One thing that some others have pointed out before is that in general

money doesn't really leave crypto. It tends to just flow either to tether or to Bitcoin or ether or one of the more blue chip or base assets. This means it's there and easily available when it's time to come back in. 9 billion leaving Tether is a more significant leaving than just moving from Chitcoin X or Y into Tether to weather a market downturn. Now, speaking of having a nuanced view, Avi Feldman, who does crypto trading at Golden Tree writes, crypto remains a reflexive asset class. The implosion of Terra and general market prices lower hurts the value of crypto in aggregate.

If you want to be intellectually honest and say prices up improved fundamentals, you must admit the opposite. The convergence of defy yields and tradfye yields is the clearest example of this reflexivity. If part of the fundamental value of crypto came from yields and yields came from capital inflows, then capital outflows and reduced yields hurts fundamental value. All this to say, don't expect a sharp reversal to last. I like the market short term, but skeptical we will see a massive resurgence from here. Bottoms take time. Confidence restoration is not an overnight thing, but crypto is here to stay. So what about those bright sides or

the seeds? I thought Maya's a hobby had a really nice mini threat on this. She wrote, what institutions were to the last cycle, corporations will be to the bare market and merge. Over the last week, Cloudflare and Google Cloud are spinning up units focused on blockchain infrastructure. Presumably both will make use of their global data centers to offer node network services for staking. As an industry, node networks evolved to either be infrastructure providers acquired by exchanges who needed a plug into various protocols or centralized service offerings like Lido. How crypto infrastructure as a service stacks up is crucial in understanding the decentralization path for base layers. Most of the crypto infrastructure as a service in the industry

has a tendency to be monopolized early, think in Furrah or graph, or serve as a centralized API repository. There are several infrastructure companies that get overlooked like Talos and Alchemy, but at scale the preference has been for individual products. Both Google and Cloudflare can offer a complete suite for users at cheaper cost than most crypto-native solutions. But the centralization risks are probably greater. Is it decentralized if every node is on AWS? Now, obviously, Maya is speaking kind of technically, but what underlies the thread is the fact that these corporations are coming in and making a long-term bet on this entire Web3 space. Speaking of bets on this space, Robin Hood has just announced that they will be launching a new

wallet. It'll be a Metamask-style product, but they haven't said which blockchains it will support. The wallet will be able to lend stake, yield farm, and even buy NFTs within Defi ecosystems. It will be a standalone app from Robbins. Robin Hood. In the announcement, Vlad Tenne of the CEO of Robin Hood said, At Robin Hood, we believe that crypto is more than just an asset class. Defi has the potential to be the operating system that powers the future of financial services, and we want to help people experience the full range of possibilities that these revolutionary technologies

have to offer. With our Web3 wallet, we're building a product that will satisfy the most advanced defy believers, while creating a secure on-ramp for those who are just getting started out in crypto to go deeper into the ecosystem. Johann Kerbat, the CTO, added, we're making it not scary, easy to use. Ryan Schott Adams said, Robin Hood just announced a non-custodial crypto wallet, 23 million users with a new way to go bankless. We're converting the fintechs now. This is how we win. Now, Coinbase has also launched something similar, which has some calling this the Web3 Wallet Wars. Now, one interesting dimension of this story, given that this apparent Web3 wallet war is heating up. Earlier this year, I did a podcast reviewing ARC's big ideas.

Diaz 2020 report, and one of the things that they discussed was digital wallets. Their headline number was ARC expects crypto assets and digital wallets to command nearly 50 trillion in equity market capitalization by 2030. Here's how they framed digital wallets. Digital wallets allow anyone with a connected device to transact money instantly, transforming commercial and financial experiences. Consumers hold the power of a bank branch in their pockets and demand wholesale pricing for many financial transactions, changing their relationship with financial service providers. We believe that trillions in annual cash transactions will be digitized, presenting a data monetization opportunity roughly equivalent to that of Google Search.

Digital wallets could become the point of contact for a variety of digital services. Traditional financial services institutions could be at risk. Now, they're obviously talking more broadly than just crypto or Web3 wallets, but I think in some ways they're not even necessarily discussing here this other dimension of crypto wallets, which is how they help access other types of digital or metaverse experiences. There's the potential to use, for example, your ENS domain name as an identifier for online experiences, same with validation of ownership with certain NFTs. What's interesting is that these companies that are nominally competing for a Web3

wallet might actually be competing to be the on-ramp for a huge variety of digital services. Now, that's a whole discussion all on its own and maybe something that we'll dig into deeper here. But I think relative to this show, and by way of wrapping up, what it feels like to me is that a bear market, which frankly has been with us for quite some time at this point, is finally settling in as something that we recognize. In the wake of Luna and UST, we can no longer deny that we are not in the same place that we were. I have my personal predictions for what I think might be the catalyst to help excitement and confidence come back to this space, but what I'm quite sure of is that it's going to be new actual products, new things that people use and interact with,

more than any narrative shift alone. I think that folks like Ryan and Maya are right to identify that even as we are seeing liquidity and excitement leave the space in the form of capital flight and institutions shifting their focus, the germs from which the next set of excitement will come are already here. Doesn't necessarily make it any less painful in the short term, but certainly gives a lot of hope looking forward. For now, I want to say thanks again to my sponsors, nexus.io, neir and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other.

Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web3, and the Metaverse, and is designed for crypto newbies, investors, entrepreneurs, developers, and creators. Don't miss speakers like Kathy Wood, SBF, CZ, Punk 6529, and Joe Lubin to name just a few. Use code breakdown to get 15% off your pass at coindesk.com slash consensus 2022.