The Breakdown - ‘Crypto Is Here to Stay’: Activist Investor Carl Icahn Looks Toward a Crypto Position in the Billions

Starting point is 00:00:00 The interesting thing to me is that every time a person like Icon, like Dahlio from a couple days ago takes a position and says these sort of things, they increase the Lindy effect of the entire industry. They make it more likely that it survives and thrives. So who will be the next domino to fall? We shall see. 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 nexor.io and BitStamp and produced and distributed by CoinDes. What's going on, guys? It is Thursday, May 27th, and today we are talking about the latest billionaire to come around on crypto, but I'm also going to be putting that in a larger macro context, something we haven't had a chance to do for a little while.

Starting point is 00:00:51 First up, however, let's do the brief. First on the brief today, PayPal to allow withdrawals. Here's one thing that's great to see become normalized. When many of the first set of traditional fintech apps and services got into Bitcoin and crypto, they blocked the ability for users to withdraw their crypto. This, of course, pretty directly contradicts the self-sovereign ethos that drive this market. This has now started to shift. Robin Hood recently made the switch to allow users to withdraw, and yesterday PayPal committed to this as well. Speaking at consensus yesterday, a PayPal execs said,

Starting point is 00:01:24 quote, we want to make it as open as possible, and we want to give choice to our consumers, something that will let them pay in any way they want to pay. They want to bring their crypto to us so they can use it in commerce, and we want them to be able to take the crypto they acquired with us and take it to the destination of their choice. To me, this is a clear example of community values and social pressure shaping the nature of services, so big win for the home team here. Second on the brief today, a couple of regulatory rumblings.

Starting point is 00:01:51 First of all, yesterday in hearings, new SEC chair, Gary Gensler, again discussed crypto and its lack of regulation, this time honing in on defy. He said, quote, crypto lending platforms and so-called decentralized finance platforms raise a number of challenges for investors and the SEC staff trying to protect them. Gensler has suggested and then reiterated yesterday that it might make sense to have a dedicated regulator just for these areas. Second, remember that midnight rule from outgoing Treasury Secretary Steve Mnuchin that would force network nodes to collect counterparty data for transactions

Starting point is 00:02:22 to quote-unquote unhosted wallets, aka people who self-custody? In other words, a rule that many thought would make using defy and smart contracts somewhere between difficult and impossible, as well as threaten the privacy of the Bitcoin network? Acting FinCEN director Michael Mossier, a former chain analysis chief technical counsel, has said nothing has been decided. Quote, there was a point where there was a really strong sense of urgency among political leadership in the last administration for a variety of factors on timing and what the risks and concerns were to address this. I think what you saw was the moment we were given the ability to extend that comment period we did and continued on with our engagement within.

Starting point is 00:02:57 industry on that. So clearly, Mozier is saying that they are taking a much more measured long-term approach that involves perspectives from the industry itself. Finally on the brief today, some hopium out there from coin flow data. Usually when coins move to exchanges, it means that people are getting ready to sell, or at least they want the ability to. When coins move off exchanges, it means they're going into storage, a bullish sign for long-term holders. The seven-day average of net Bitcoin inflows to exchanges turned negative for the first. time since April 22nd. In other words, since April 22nd, Bitcoin had been coming on to exchanges, getting ready perhaps to sell, and now after four weeks Bitcoin are leaving again, meaning presumably

Starting point is 00:03:39 that they're moving back into investor self-custody. Net inflows to exchanges rose to a 14-month high on May 17th, which precipitated the double crash of the past week or so, but on the flip side, there were consistent outflows from March 2020 to April 2021. In total, $615,000 Bitcoin left exchanges during this time period, during which the price ran from 5K to over 60K. So it's good to see that pattern reverse again and see Bitcoin leaving exchanges once more. And now to our main discussion, which as I mentioned is sort of a macro catch-up that ends with Carl Icon. There's been so much going on in crypto that I haven't had the time to really dig into broader macroeconomic topics for a while. However, that doesn't mean that those topics have gone away or that they aren't

Starting point is 00:04:22 exerting any influence on the crypto scene. In particular, while the last couple of weeks of sequential downward moves can be explained largely by a combination of one, a heavily leveraged market structure that led to cascading liquidations, and two, a perhaps overreaction to an endless parade of bad news and fud around ESG, China, etc. The stage was already set for much of that by a larger macro environment that had gone more risk off. Indeed, over the last few months, the same period in which Bitcoin largely floated sideways, risk on tech stocks, had also been battered. This has had to do with a concern around the accommodative monetary policy taking a turn. Investors have been watching inflation fears grow, inflation fears that seem borne out

Starting point is 00:05:05 by the numbers. Remember this month's inflation report saw one of the biggest jumps in decades. In that environment, investors wondered, how long can the Fed possibly keep interest rates low? To play the logical thought process out, if interest rates did rise, the first thing to be hit would be the extreme valuations of tech stocks and, presumably, other risk on assets. including crypto. Now, if you're interested in this, I discuss it more with ARCS Kathy Wood today at consensus. That talk will also be published here as a podcast sometime in the next couple of days. Looking for the best way to unlock your crypto's liquidity? Nexo.io is exactly what you need. Borrow against your digital assets at just 5.9% APR. Earn passive income with yields of up to 12%

Starting point is 00:05:51 and swap between more than 75 market pairs with the instant Nexo exchange. Try the Nexo Wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io. Secure, regulated, and reliable, BitStamp is the cryptocurrency exchange of choice for more than 4 million investors and traders worldwide. Since 2011, BitStamp has been a trailblazer in security, head of the class in personal customer service, and dedicated to making buying crypto fast and easy. Whether you are investing on our desktop platform and mobile app or trading on our speedy APIs, BitStamp gives you all the tools you need to reach your crypto goals. Visit bitstamp.net to learn more. BitStamp for all the ways we crypto. I think it's worth a quick discussion of how Bitcoin actually trades, and specifically, is it,

Starting point is 00:06:43 one, a digital gold, an inflation hedge and store a value that should do well as inflation fears rise, something to flee to in bad times? Or is it, too, a risk on tech stock approximate? Something that does well when people are moving farther out on the risk curve. This question is something that people who don't like Bitcoin love to use as a gotcha. Her-her, how can something so volatile be a store of value? Hur-her, how come something that is supposed to be an inflation hedge went down on a day the big inflation numbers came out? So here's my take. Is Bitcoin a digital gold SOV inflation hedge or a risk on tech stock approximate? The short answer is it's both. The fundamental fixed supply design of Bitcoin means that over the long term, it's going to function as a digital gold

Starting point is 00:07:26 inflation hedge store of value. Simply put, it is designed to be something opposite from fiat, and in so doing serve a totally different purpose. People who study and get excited about Bitcoin see that. It helps them understand why it represents such a different long-term force in their portfolios. But again, that is over the long term. We're talking over the span of years and decades, not days and weeks. In the short term, Bitcoin has other really desirable properties, properties that frankly make the connection to gold just as obscuring as it is illuminating. Bitcoin is a 24-7 deeply liquid global market. That makes it incredibly valuable as a treasury asset, especially for firms that might have to make big moves

Starting point is 00:08:04 quickly. This was what Elon described when they sold that 10% allocation before the ESG stuff was all we were talking about. The other property, however, that Bitcoin has, let's be honest, is number go-up technology. This matters, especially in a zero-yield world. Bitcoin is still early in its overall adoption cycle. If you have conviction about its long-term function vis-a-vis the overall macro context, and if you also believe that more people like you, more institutions, more corporations, more individuals are going to eventually share that conviction? The only conclusion one can draw is that Bitcoin remains underpriced. And so thus, over time, you have a high degree of confidence that Bitcoin's price will rise. It is all of these second

Starting point is 00:08:45 set of properties that relate to this specific moment in time that have the more outsized impact on how Bitcoin trades day-to-day, week-to-week. To make it short, Bitcoin's role as a store value and inflation hedge is a long-term bet on why more and more people will continue to adopt it. The speed at which people adopt it, the excess capital they have to adopt it, the perception of where it fits on the risk curve for adoption, these are the things that drive short-term price movements. In other words, it's a long-duration store-value asset that for likely some years to come will continue to trade like a risk on asset. Now here's the real twist in this whole story. Everything I've said may be a decently accurate portrayal of the mindset of a Wall

Starting point is 00:09:25 Street or traditional finance Bitcoin buyer. But let's not forget, that group are the Johnny Come Lately's of the Bitcoin space. They are now a meaningful part of it, but they are just one part of it. The true base of Bitcoin are hoddlers who are effectively constantly accumulating and setting new price floors. For them, Bitcoin isn't a risk-on asset or even a risk-off asset. It's a savings asset. Or even more accurately, a high-stakes game of how much can you acquire. These folks don't respond to normal market cycles. Net all this out? the risk on Wall Street folks on one side, the hoddlers on the other, the traders are arbitraging in between both, and what you have is something that remains comparatively uncorrelated.

Starting point is 00:10:05 So now that we've gone down that detour, let's come back to the discussion of inflation. A takeaway from the point I was trying to make above is to hopefully explain why Bitcoin didn't jump at those recent inflation numbers, because functionally for the folks on Wall Street on a day-to-week-week month-month level, Bitcoin is still acting like a risk-on asset. And in that context, a reminder that people have been shying away from risk-on assets for months on fears of a shift in Fed policy, and perhaps other fiscal moves like the capital gains tax increase. Still, though, this doesn't mean that inflation concerns are irrelevant. They create the narrative context in which Bitcoin operates. Another way of described this is that Bitcoin's

Starting point is 00:10:40 inflation hedge narrative wasn't manifest in a price gain on the day that 4% inflation numbers came out. It was manifest in the run from $10,000 when Paul Tudor Jones published his great monetary inflation thesis last May to Bitcoin getting to $65,000 less than a year later. that shows the resonance of the narrative. Anyway, it's still worth trying to understand what's going on with inflation, both from a Bitcoin standpoint, but also just from a broader economy standpoint. This discussion matters. It's going to shape a huge amount of policy and resulting economic decision-making. The latest kink in that discussion has to do with an unexpected phenomenon. In short, manufacturers are acting like they simply don't believe in this recovery,

Starting point is 00:11:18 in that they're not willing to increase production. A couple days ago, Alex Williams of Employer America wrote a piece on Bloomberg called The Economy is Booming. Why don't firms believe it? He writes, quote, firms don't trust the boom in demand to last pass the transitory disruption. In shipping, the drop-off in demand following the 2008 crash created a vicious economic environment that led to waves of bankruptcies and consolidation in shipping. For lumber, the problem was in dusting off old mills and making the investments necessary to put them back online and then find trucks for the boards. The investment signal from recent demand spikes is not nearly as loud as the signal from over a decade of structurally low demand. While it is hard to know what the future holds, it's easy to expect

Starting point is 00:11:57 that it will be like the past, and in the past, the demand was almost never there. Sure, our supply chains are rickety and antiquated. However, to update them, firms need to be convinced that demand will be there to validate the investment. This was echoed in another Bloomberg piece, World faces longer supply shortage as China's factory squeezed. The piece starts with an anecdote from a glass Lampshade factory in China. That factory is currently seeing sales doubling from pre-pandemic levels, but they don't plan to expand their operations. Why? Well, it's a combination of reasons. The first is that margins are compressed by higher input costs, but the second is a lack of faith in the larger recovery, exactly what we were just discussing. Said the owner of the factory,

Starting point is 00:12:39 quote, the future is very unclear, so there's not much push to expand capacity. What's more, this input costs and outright input shortages make it so that it's not as easy as just expand production capacity either. There is a huge amount more to dig in around that, around input shortages. Oddlots is doing an entire series around one aspect of these shortages for chips and semiconductors right now, for those interested. But the net point is that this combination of input shortages and unwillingness to increase output is having a pretty significant dampening impact on inflation concerns in the short term. You can see this playing out on Wall Street as a subtle but clear shift away from the concerns of Fed tapering because of an economy running too hot. What does this mean for Bitcoin and crypto? Potentially,

Starting point is 00:13:22 the party continues, driven for the moment by a juicy combination of risk-on opportunity short-term, plus long-term SOV hedging. Just today, Janet Yellen said that we needed to ratchet up the spending. We were acting like it was 2010. And of course, the longer this party continues, the more converts that Bitcoin and crypto win. The latest domino to fall on that front? Carl Icon is one of the iconic, legendary investors of our times, and not always in the heroic sense for many. He embodied and even helped create the image of the corporate raider in the 1980s, after a hostile takeover of the airline TWA that stripped it down to its constituent parts. That sort of activist behavior has been with him throughout his career. Yesterday, he went on Bloomberg and discussed

Starting point is 00:14:03 crypto and was surprisingly bullish. A few notes. He pinned his interest on the growing interest of others, as Bloomberg puts it, quote, as a natural manifestation of inflation in the economy. He also said that people are looking at cryptos because equities are being traded at, quote, ridiculous prices. He called criticism around cryptocurrency having no fundamental value as wrongheaded, saying, well, what's the value of a dollar? The only value of the dollar is because you can use it to pay taxes. He said that he's been studying Bitcoin, Ethereum, and the sector as a whole. And it seems to me from this interview that unlike some others, he's clearly taken time to learn a bit. And of course, the most reported part of this conversation, he said that they're considering taking a big position. A billion to a billion

Starting point is 00:14:43 and a half would qualify for big in his mind. Now, of course, the interesting thing to me is that every time a person like Icon, like Dahlio from a couple days ago takes a position and says these sort of things, they increase the Lindy effect of the entire industry. They make it more likely that it survives and thrives. So who will be the next domino to fall? We shall see. For now, guys, I appreciate you listening. I hope you're having a great week. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - ‘Crypto Is Here to Stay’: Activist Investor Carl Icahn Looks Toward a Crypto Position in the Billions

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.