The Breakdown - Coinbase Crashes After >10X Surge in Traffic

Episode Date: March 1, 2024

It must be a bull market if Coinbase is going down. NLW argues that yesterday will be seen as the first day of the next phase of the bull market. 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 Thursday, February 29th, and today we are talking about Coinbase outages, liquidations, retail waking up, and more. 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 Ben, at.ly slash breakdown pod.

Yesterday morning, when I was finishing up recording the show, Bitcoin had passed 62,000, we were seeing the price move in $1,000 increments, and the vibes were euphoric. Bitcoin had run up by almost 12% throughout the morning, hitting a high of $64,000 around midday. Then something broke. Bitcoin plunged by 8% in half an hour, ending the streak of green candles and causing a widespread freakout. The chart recovered a decent amount and entered the evening range bound between 61,000 and

63,000, where it is currently over at the bottom end of that range as we are recording. Although the volatility was something to behold, this was still the biggest daily gain since October. Indeed, when we look back on yesterday, I think there's a strong argument that it will be viewed as the first day of the next phase of the bull market. What does that mean? Well, let's turn to a thread from Blockworks founder Jason Yanowitz, who wrote, There are four phases of a bull market.

We just entered stage two. Stage one is rebirth, the exhaustion from the bear markets, still exists. Sparks of hope pop up, then fade. A few new narratives arise but are quickly killed by apathy. Your friends in the media still focus on the bear market blowups. All the while, prices are quietly recovering. Your investment down 90% in the bear just went up 5x, but you barely notice because you're still down 50% off the high. Only the deepest crypto natives who have seen two-plus cycles realize that the bull market has begun. Most people are still in disbelief that this is the bull market. Stage two, excitement. We are here now. The bear market is officially ended,

your coins are nearing all-time highs, some have even blown past all-time highs. Everyone in crypto understands that we are officially in a bull, but it's funny. Your normie friends still aren't texting you. You're a weird combo of excited and anxious. Your stack is growing, but you don't feel like you own enough coins. Your company starts hiring. You start ordering guac at Chipotle again. Life is good. All your crypto friends are winning. This is the calm before the storm. Stage 3. Euphoria. Everything you own blows past all-time highs. There used to be a new narrative every week, there's a new one daily. The private market gets crazy. BCs announced $500 million funds. They skip due diligence and raise to deploy. Every week a new company announces their $100 million raise.

We're mainstream again. Forbes, Bloomberg, CNBC, they love crypto. Then weird things happen. Fortune 500s buy Bitcoin, athletes and artists get involved. Crypto permeates mainstream culture. Everyone starts to believe it's going up forever. Delusion seeps into decisions. Stage four, disconnection. This stage could also be described as insanity. make sense anymore. You have more money than you thought you'd have in your life. Your friend who knows nothing about crypto launches a token. He's worth hundreds of millions overnight. A crypto person buys a sports team. Justin Bieber joins a decentralized social platform. Crypto companies spend billions on marketing. Unfortunately, none of it is real. If you're not careful, your arrogance and laziness

in this stage will cause for a tough next two years. So buckle up. The next 18 months will be madness. You'll experience higher highs than you ever have before. Make sure you take time to enjoy it every once in a while. When you get overwhelmed, step away from the computer, slow down. and go for a walk. Now, let's build. There is certainly much evidence that Jason's assessment here is right on. Dave Portnoy, Davy-Day Trader just signed his second sponsorship deal with a crypto exchange. I'll let you remember who the first was with. So his massive audience is going to be seeing the Crackin logo every day. Congrats, brother, they're a great sponsor. This morning Squawk box featured Bitwise CIO Matt Hogan talking about how the Bitcoin ETFs have exceeded all expectations.

Jim Kramer seems miserable that he's faded this move, asking what has Bitcoin ever done for mankind, and of course, Coinbase crashed because of excessive traffic. One of the features of last bull run was Coinbase going down in line with price surges. Particularly as the market was starting to heat up in late 2020, overwhelming traffic would frequently bring the exchange down. These infrastructure shortfalls were a big part of the reason that Coinbase invested so heavily on expansion in 2021. They brought on an army of new developers and poured money into extra capacity. The problems had faded into memory over the past two years, with Coinbase easily managing last year's traffic increase. Everyone assumed that the problems

were fixed, so yesterday's crash was in a way nostalgic for some. Reflexivity research co-founder Will Clemente said, Coinbase app is down. We are so back. The nature of the problem was actually pretty nerve-wracking. Customer balances displayed as zero, so many who logged in to check the price momentarily thought their net worth had been nuked. Coinbase quickly added a note to explain the issue and engineers were no doubt feverishly working to restore functionality. Coinbase went down as Bitcoin hit its peak for the day, so seems to have been part of the trigger for the price collapse. Then again, it's very difficult to find anything overly bearish about Bitcoin drawing down because too many people were trying to log into Coinbase. Once the website had recovered, Coinbase CEO, Brian

Armstrong gave a full post-mortem on Twitter writing, apps are now recovering. We had modeled a 10x surge in traffic and load tested it. This exceeded that number. It's expensive to keep services over provision, but we'll need to keep working on auto-scaling solutions and killing any remaining bottlenecks. Thank you for bearing with us. Listen, I could quote you a slew of people who were ripping on Coinbase for this. But I would just point you to that thing that Brian said. They had modeled a 10x surge in traffic, load tested it, and this exceeded that number. If you need the story of what's going on right now, there it is. 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. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7, 365, and moves at the speed of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry, facing forwards towards progress throughout. And now they're inviting us to see you, what crypto can be. Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S.

territory customers by Payward Ventures Inc. PVI, BVI, DBA, Crakken. Now, while Coinbase going down might be seen as a minor annoyance for spotholders, it's a much bigger issue for leveraged traders. Wednesday saw Bitcoin's price go up by 5% and then down by 8% all within an hour and a half. That kind of volatility is destructive for futures and the carnage showed up in liquidation data from yesterday. 395 million in short positions were liquidated alongside 338 million in longs, making it the largest liquidation event since at least November. On the short side, this was twice as many liquidations as any other day over the past three months,

highlighting just how aggressive and unexpected the pump was. This was the largest leverage wipeout since last August, with more than $1.7 billion in open interest flushed. Byzantine General tweeted, 1.7 billion in Bitcoin open interest just got nuked on that last candle. Good chance, this is a local top. Credible crypto noted, for some context about this recent liquidation flush,

OI has been wiped back to levels we saw at 46K, taking out both longs and shorts and one aggressive move. This is very healthy. The lower open interest is as we climb the better. The shakeout sets the stage for higher, faster, now that we've removed some froth off the top. Interestingly, for the first day in a long time, ETFs weren't the main bullish story,

but that doesn't mean activity has cooled off. In fact, yesterday was yet another day of record volume. this time hitting 7.7 billion, around 40% higher than the previous record set on Monday. BlackRock was once again the leading product, recording 43.5% of total volume and doubling its record from the previous day. Fidelity, Arc, and Bitwise also all set new volume records. Halfway through the day, with record volumes already on the board, Bloomberg Senior ETF analyst Eric Belcunis tweeted, we got four Bitcoin ETFs in the top 20. Ibit is number four overall. It's going to trade more today than in its first two weeks combined. This is officially a craze.

I get that the coverage is relentless and probably annoying to some, but these numbers are absurd, highly rare stuff here. It would be like asking a scientist not to get obsessed with Haley's comet or something. TLDR, it was already completely unheard of for an ETF to set its volume record almost two months after launch. To double that, the next day, is far beyond anything that's ever been seen before in the ETF industry. Ibit's daily volume was so insane that it eclipsed QQQ, the primary NASDAQ index fund. Overall, yesterday's volume was more than five times larger than the futures ETF launch day, which occurred at the peak of the last bull market. This time, record volume did convert into record inflows, with 673 million being added to the

ETFs. BlackRock led the way with 612 million worth of inflows, which was its largest day ever. Grayscale outflows had a large increase to 216 million, but are still below their long-term average. Fidelity looks likely to pass 5 billion in total inflows, either today or tomorrow, and the nine newly launched ETFs have now gathered 15 billion in inflows, a simply astounding pace of asset accumulation, which looks to be increasing. Pomp really summed up the mood when he wrote, I have been one of the most bullish people in the world on Bitcoin, and I completely underestimated how fast the ETFs would push us back to all-time highs. Travis Kling responded to that. It makes for an incredibly straightforward explanation to why is BTC price going up so much, because the ETF inflows

have massively outperformed all experts' expectations. So my favorite comment came from Nick Carter, who wrote, It's enjoyable that we dragged all of TradFi into our deranged, nonsense. Feels good to grow the tent. One of the most astonishing things about the success of the Bitcoin ETF so far is that major wirehouses and investment advisor networks haven't allowed investors to access the products. Most firms are taking their time to go through the diligence process, but we're starting to see headlines suggesting that some of the largest ones are close to giving the green light. Last week, Carson Group, which supports a large network of independent advisors, signed off on the ETFs. On Wednesday, it was reported that Morgan Stanley is about

to give their approval. Two sources told CoinDesk Z and Allison that the ETFs, are about to be added to the brokerage platform. Morgan Stanley is one of the country's largest broker dealers, representing around 2 million clients with $1.3 trillion in assets under management. When it comes to others, Merrill Lynch and UBS are two of the most noteworthy holdouts, who could buckle to pressure and offer the products in the coming month, but Vanguard doesn't seem to have backed away from its aggressively anti-Bitcoin posture. Massive ETF inflows this week have also added to the demand shock narrative. CoinShare head of research, James Butterfield, seems convinced that the Bitcoin shortage

has become a major price driver. He said, while 900 Bitcoins are produced daily, the newly issued US ETFs are demanding 2,800 Bitcoins per day. This has led to a 28% reduction in exchange holding since 2020, indicating a market experiencing a significant demand shock. That measure of demand is based on a longer-term average. The issue has become much more acute over the past few days, with Wednesday's ETF demand sucking in over 10,000 Bitcoin.

Pomp also noticed the disconnect between supply and demand, tweeting, There was 10x more demand for the Bitcoin ETFs yesterday than what the network produced. the price will continue going up until people stop buying it, and that doesn't appear to be happening anytime soon. Butterfield noted that this mismatch between supply and demand could be causing Bitcoin to detach from macro factors, adding, until recently, Bitcoin prices were closely aligned with expectations for interest rate cuts, but have since diverged following the introduction of US-Spot Bitcoin Exchange traded funds. These ETFs have significantly influenced recent price trends. Of course, this is all happening prior to the having, which will drive the mismatch

even wider when Bitcoin supply is cut to just 450 per day. Finally, another key narrative during this rally has been the lack of engagement from new retail investors. People have quoted many metrics with Coinbase app downloads and Google searches being the most popular. Others who work in crypto have noted that friends aren't calling to ask how Bitcoin is doing yet. Just yesterday, Into the Block analysts released a report to explore this concept. They noted that Bitcoin transaction volume is still nowhere near its 2021 peak. The number of new Bitcoin addresses has recently remained steady, cooling off dramatically from a spike last year during the Ordinals frenzy.

Analyst wrote, Despite Bitcoin's incredible price movement, current data indicates a quiet retail front. This suggests that institutional investors could be steering this phase. Eyes are on the ETFs as potential accumulators. However, as I mentioned yesterday, I really think what made yesterday so different was that it was the first time that people started widely reporting getting phone calls and texts from old friends asking about Bitcoin. Matt Hogan, the CIO of Bitwise, summed up, 60K woke people up.

For the first time this bull market, non-bitcoinsers started texting me about the market today. Cold-blooded Schiller pointed out, you think, damn, how much crazier can stuff get? Then you realize the Coinbase app is still ranked 257 in the app store. Crazy times, friends, it's going to be a fun one to follow, but for now, that is going to do it for the breakdown. Want to say one more big thank you to today's sponsor, Cracken. Go to Cracken.com and see what crypto can be. Until next time, be safe and take care of each other.

Peace.