The Breakdown - Crypto Markets Put the ‘Pump’ in ‘Pumpkin’

Episode Date: October 27, 2022

  This episode is sponsored by Nexo.io, Circle and FTX US.   On today’s episode, NLW looks at the positive price action of the past few days, with an eye to understanding how people are understanding the move. Is it a macro shift and a belief in a coming Federal Reserve pivot? Is it a crypto-specific narrative? Is it the market getting ahead of itself?  - Nexo Pro allows you to trade on the spot and futures markets with a 50% discount on fees. You always get the best possible prices from all the available liquidity sources and can earn interest or borrow funds as you wait for your next trade. Get started today on pro.nexo.io. - Circle, the sole issuer of the trusted and reliable stablecoin USDC, is our sponsor for today’s show. USDC is a fast, cost-effective solution for global payments at internet speeds. Learn how businesses are taking advantage of these opportunities at Circle’s USDC Hub for Businesses. - 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. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is “War” by Enoch Yang. Image credit: Anzhela Mingaleeva/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, Circle, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, October 26th, and today we have a good old-fashioned price show. One quick note before we dive in. There are two ways to listen to the breakdown. You can hear us on the CoinDesk Podcast Network feed, which comes out every afternoon and also features other great coin desk shows, or you can listen on the breakdown only feed, which comes out a few hours later in the evening. Wherever you listen, if you are enjoying the show, I would so appreciate it if you would

take a little time to leave a five-star rating or review. It makes a huge difference, and I appreciate all of you who have done that. Also, a disclosure as always. In addition to them being a sponsor of the show, I also work with FTX. All right, folks, well, the coins, they are running. As I I mentioned the other day, we're getting ready for a little South American adventure, and so I have been buried. I haven't been much on Twitter, and I certainly haven't really been checking the price, so imagine my great surprise when last night I looked and everything was up 5 to 10%. Imagine my even greater surprise when that seemed to continue on into this morning. Was there some major news that I missed, the fabled Fed Pivot, some remarkable crypto catalyst, or did people just get bored of crappy prices?

Today's show is all about finding out what the answer to that question is. So to the details. On Tuesday morning, crypto started pumping hard. Bitcoin was up more than 5% in 8 hours, going above 20,000 for the first time since the first week in October. When all was said and done, Bitcoin posted its biggest one-day gain for the month. The move in Ethereum was even more explosive, moving up more than 11% and breaking above 1,500, which is a level not seen since mid-September. Bitcoin has spent the last 40 days in an extremely tight range, only reaching prices above 20,000 per coin on three days during that period. It also only dropped below 18,500, three times with one of those trips to the lows coming in October. Katie Stockton, the co-founder

of Fairlead Strategies, said, quote, some people are watching $20,000 for the psychological significance of it, end quote, but wanted to see consecutive daily closes above roughly 19,600 to confirm a minor breakout. So let's talk about what interpretations for this move are, and let's start with those focused on crypto. When it comes to Bitcoin itself, nothing new exactly has happened, at least nothing acute. There is sure lots of chatter about Bitcoin's utility in the context of geopolitical instability and or currency crises, the type of things that seem to characterize the macro moment we're living through. There's even chatter of Russia mining Bitcoin as a way to get around economic cutoff after sanctions. But again, none of that is new or acute or specific to this week.

On the Ethereum side, many are pointing to new supply dynamics is possibly relevant. One of the key promises of Ethereum's monetary policy moving forward from the merge was that issuance would become deflationary. This didn't pan out exactly in the weeks immediately following the merge, where issuance was down from what it would have been under proof of work, but token supply was still being added. However, a little over two weeks ago, the situation flipped. Protocol usage increased, which caused the burn rate to exceed the issuance rate for the first time since the merge.

In that context, the ETH supply began contracting. As it stands right now, issuance sits at only a thousand additional ETH since the merge. And if the trend continues, we should see a net reduction in supply since the merge sometime in November. CoinMamba writes, we couldn't burn much on the weekend but back on track now. Deflationary ultrasound money narrative is a good one. Kamikaze ETH writes, the new narrative for ETH is quite simple. Ethereum is the only prime crypto asset without cell pressure. Sure, it has DAPs, proof of stake, defyce going deflationary, etc.

but for the price to go up, only one thing truly matters, sell pressure. There are no structural sellers of ETH, up only. Boy, howdy, I feel like right now is a dangerous time to be using the up only line, but hey, why not? Now, a few other folks were looking more structurally at the long-term dynamics of these assets in comparison. Zero XSysifice wrote, ETH BTC puked vast majority of pre-merged move in September, but as ETH has moved

towards being deflationary in the last week, the cross showed signs of life. ETH as possibly the only asset in crypto without constant selling pressure should make it excellent for pair trades. I think ETHBTC should now work in a bare market because there are structural sellers of Bitcoin, miners, Gawks, Finnex auction, but no such sellers remain for Ethereum that I am aware of. I think Alt still outpump Eth in a bull market because that's where retail flows will go. Now, there remains no word about additional Gox unlock, so for now that remains just fud. Miners, as you'll hear in a show later this week, could actually, though, be facing some of this pressure. Still, net-net, none of these narratives convince me.

When it comes to specific, significant moves on any given day, I'm always going to be looking for something much more acute than these general broad-based narratives. In other words, a key exogenous event, like some big press conference from the Fed announcing some major shift in policy, or, alternatively, something that is more about market structure. So let's ask whether anything happened in either of those columns. There was certainly a fair number of liquidations as part of the move. Odin-free writes, bears get burned by Ethereum, short liquidation. liquidations hit a two-year high. All in all, Tuesday's move saw massive $700 to $800 million worth of

liquidations across all tokens. These are levels not seen since July 2021. Bitcoin markets saw more than $360 million in liquidations and Ethereum almost matched that number. Nearly nine times as many shorts were liquidated than longs across both major markets, which could indicate that a large short squeeze contributed to the speed of the move. Meanwhile, open interest or the amount of outstanding derivative contracts that have not been settled increased by 6.6%. implying traders opened more positions in anticipation of a further price surge. Now, NetNet, some think that this might mean the action is over. Gamma Chain wrote,

aka the powder keg has been burnt and that's all the squeeze we're getting for now. Up to spot to push further or re-revert. Net Net net, there was something going on, but I don't know if it explains all of this. So what about macro catalysts? Basically, all of our recent moves have featured heavy macro elements, and this one wasn't any exception. The dollar index or Dixie, a measure of dollar strength against major foreign currencies, started the day on Tuesday with a sharp

decline, dropping almost 1% between 9am and 10 a.m. It eventually settled at a new level just under 111, which is a three-week low. The Dixie saw highs above 113 in October and 20-year highs of 114 in September. The 10-year treasury bond also dumped at the open, dropping 75 basis points in the first hour. Now, the 10-year is sort of a fundamental tenor that everyone watches, so the yield going down at the same time as the dollar was going down kind of made sense. These moves are quite large for these types of assets, and some are commenting that we may be past the peak now in terms of dollar strength and rising bond yields. Ryan Detrick, the chief market strategist at Carson Group, referred to magazine covers featuring the U.S. dollar from Barron's and Bloomberg Businessweek,

and wrote, the U.S. dollar is looking top-heavy and breaking down. The fact that this is happening after not one but two bullish magazine covers is all the more interesting. A strong U.S. dollar has been a major headwin for risk assets. Should this keep sinking, it could be another positive sign. Cycle strategy and market analysts said there is very good chance that yields in the dollar take a big pause here. Island reversal on TLT yields in dollar breaking down. If you were talking about it here on FinTwit, all burned from previous top calls, us included. Want to keep more profits when trading? Get the best possible prices and trade with 50% lower fees on Nexo Pro. The new Spot and Futures trading platform uses aggregated liquidity of over 3,000 order books collected from multiple

sources. Utilizing the complete nexo suite allows you to earn interest and borrow funds as you wait for the next trade setup. Visit pro.nexo.io. That's p.r.org.n.xo. And sign up today. This episode is brought to you by Circle, the sole issuer of USDC, and a leader in crypto that's held to a higher standard. USDA is a fast, safe, and efficient way to send money around the globe. USDC is always redeemable one-to-one for U.S. dollars and has over $45 billion in circulation as of October 13, 2022. Plus, Circle posts weekly reserve reports and monthly attestations of reserve capital, letting users know that USDA is safe, transparent, and compliant with regulations. Just go to circle.com backslash transparency to see why USDC is a trusted

stablecoin. The breakdown is sponsored by FTX US. FtX US 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 FTX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. Now, what about risk assets more broadly? Have they also been affected by these recent shifts? The short answer is yes. The S&P 500 has gained 5.5% since Friday's open and put in a solid 1.6% gain alongside the crypto pump. The NASDAQ rose even a little bit more

5.9% during the same period. Another explanation then is we're simply seeing crypto keep its correlation to U.S. stocks. Alex Kruger was a little early to this call last week on Friday tweeting U.S. bond yields may have just peaked. He retweeted that yesterday saying, I don't always call the top on interest rates in real time, but when I do, I nail it. That's why I went risk on last Friday. Cross-asset correlation strengthened and weakened, but it is still all one trade. Kruger argues that the triggers on Friday were the Timrose Fed leak, which editors note we talked about a couple of shows ago, Japan MOF's second intervention, and fed's daily. On Monday, the new Xi Politburo Committee sent China crashing but failed to keep global markets lower. Today, it is the

UK in the driver's seat once again, and long bonds. And up ahead, the final arbiter of the week, tech earnings. I have no edge in earnings but feel optimistic based on what I've been reading. Zooming out a bit, this weekend post summarizes my current thought process. The post says, an issue widely in display, in my opinion, is thinking about the Fed's pivot in binary terms. Pivot, no pivot. Yet this pivot is data dependent and not tied to a single data point. It is thus likely we will see many micro-pivots in both directions for months to come, turning markets into an ideal ground for playing both ways, following liquidity, micro-pivots and events. For that to change, markets need a clear and major information shock, e.g. Russian escalation. This also means that it

will be very difficult to buy and hold the pivot in size, unless markets break and that's how we got the pivot. Last Friday, we had one of such micro-pivots, good for 5%, 10% up? No idea. Now, as I mentioned, things continued today on Wednesday. There were a few catalysts that people pointed to as keeping the momentum going. First, the Bank of Canada came in a little softer than expected with their most recent rate hike, and in so doing, they warned of growth concerns. Canada's Central Bank had grown their benchmark interest rate by a full 100 basis points or 1% in July, and then by 75 points in September, and it was widely expected that they were going to raise interest rates by 75 basis points again. However, they bumped rates up by just 50 basis points instead.

More than that, the accompanying statement showed that the bank is clearly concerned about not just inflation but growth issues as well. Quote, future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving. Sven Henrik wrote, what does the Bank of Canada know that the Fed doesn't? But I think this is much less about the Bank of Canada being specifically influential and more about a narrative shift in general, one of the first times we've seen a central bank peel back even just a little bit since tightening started earlier this year. Lisa Abramowitz of Bloomberg writes, the Bank of England reinforces the narrative that

central banks will start tempering their rate hikes. Short-term yields around the world, including the U.S., take a sharp leg lower. Now, Zero Hedge added, they blinked. Bank of Canada hikes less than expected, sparking to beta fed will also surprise next week. Now, in my opinion, subscribing to that narrative would set one up for a nasty surprise. And frankly, the more people who do subscribe to that narrative and react as such with markets make it less likely that it will actually happen. Another data point that people are pointing to is a notable decline in U.S. new home sales. Mortgage rates have been on a steady upward increase rising to 7.16 last week, which is the highest since 2001. Consequently, purchases of new single-family homes fell last month by 10.9%. So far, this sell

pressure hasn't shown up in the price of new homes exactly, where the median price is still up from a year ago, but in many hot markets, sellers are being forced to reprice their inventory. On Tuesday, Home Builder Pulte Group reported that purchase contracts plunged and deal cancellations spiked in the third quarter. CEO Ryan Marshall said on an earnings call that weaker demand was broad across all geographies and consumer groups. New U.S. home construction declined in September and permit applications for single-family dwellings also fell. Now, the gist here is that this is one area where the Fed might feel like rate hikes are starting to do their work. And so again, in the context of a larger pivot narrative, it's one more piece of

evidence. Still, I think a lot of folks are pretty skeptical. They feel like they've maybe seen this movie before. Investor Adam Cochran writes, so markets are currently interpreting good news as good news, bad news is good news, no news is also good news, and unrelated news also probably kind of good news. Might not be entirely healthy. Dan Held said y'all are getting way too excited about a 5% Bitcoin pump. Eric Kaysen writes, good thing this rally is all about fundamentals in the health of the general economy, as opposed to being one last pump for exit liquidity before the real hammer-ficking begins. What do I think of it? I'm not super buying it. I think we want desperately for something bigger to be happening. And certainly to the extent the argument is that central banks won't be able to tighten

forever. Yes, that's true. However, as we've pointed out numerous times on this show, the key narrative pattern of markets this bear cycle is, one, rumor of a pivot, two, market does better because people are excited about a pivot, and then three, the Fed has usually, at this point, said you're getting ahead of yourself. Send a bunch of people to be really hawkish, and then pointed to some sad data number that shows why they have to be so hawkish, justifying their argument in the first place. So what are we hearing from the Fed? Well, there is certainly some pressure on the Fed. On Capitol Hill, Senate Banking Committee leader Sherrod Brown has written to Chairman Powell. He is imploring him to take a break on rate hikes and see what the U.S. economy looks like as monetary policy takes effect.

The Democrat Senator Brown said that the Fed Chair, quote, must not lose sight of your responsibility to ensure that we have full employment. He noted that lower income families are already hurting due to high inflation and could not cope with rising unemployment. Brown said, monetary policy tools take time to reduce inflation by constraining demand until supply catches up. Time that working class families don't have. He ended, quote, quoting J.P. Morgan Asset Management Chief David Kelly is saying, In the long history of Federal Reserve mistakes, one general error stands out. They tend to wait too long and then do too much.

Now, Fed whispered Nick Timoros from the Wall Street Journal gave his take on all this, saying, Senate Banking Committee Chairman Sherrod Brown, Democrat Ohio, asks Jay Powell to slow down interest rate rises in a letter one week before the FOMC meeting and two weeks before congressional elections. These types of letters won't influence for now what the Fed does, but they are a good reminder of the political constraints that exist for essential bank that has a significant degree of institutional autonomy. More context, Powell won a significant bipartisan majority for his post just five months ago, 80 senators voting in favor. And all three new

governors appointed by Biden this year have voted in favor of the Fed's rate increases. Just a few months ago, Brown was arguing that Republicans were the ones AWOL on the inflation fight because they had refused to vote for one of Biden's Fed nominees. If we're going to get serious about inflation, he said, we need a federal reserve in place. Well, unfortunately now the federal reserve is in place, and it doesn't seem like they have any intention of slowing down anytime soon. Lily Frankis wrote, My favorite thing in the world is how, without fail, a few green days on the indices in Bitcoin and everyone starts proclaiming the start of a new bull run.

The bottom isn't in yet, almost surely. And even if it is, as I espoused before, the Fed has put a collar on us. There is an implied fair value of where stonk should be with current rates, and we're roughly in the price to perfection zone. Tread accordingly. Important to note that it isn't just crypto who are perhaps overexcited. Mac 10 at Suburban Dron wrote, once again, Wall Street is front-running the pivot. The S&P 500 is the most overbought since January

2012 when the Fed already pivoted. Stephen Mirren, the co-founder at Amber Wave Partners, writes, the stock market response to the pivot talk since last Friday is a great reason why the Fed cannot bless that idea. If Powell says pivot next week and the stock market goes to 4,400, inflation won't come down. The only way to get inflation down is to engineer a slowdown. Therefore, he can't but fight back against it. The stock market behavior is saying, if you don't stay the course, inflation will not come down. The higher stocks go, the harsher power must be, until there is some assurance that inflation is headed down.

So all in all, it's not clear why the numbers went up. But hey, here we are. We're coming up on the end of October. And you know what October is called, uptober. So maybe, just maybe, the market decides to hold on just a few days longer before giving it all back at the beginning of next month. Would that be good? I don't know, man, but at least it gives us something to talk about, right?

For now, I want to say thanks again to my sponsors, nexo.com. circle and FTX, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.