The Breakdown - Declaring Independence and Freedom From Bitcoin FUD

Episode Date: July 4, 2021

On this holiday edition of “Long Reads Sunday,” NLW reads Jeff Dorman’s “Debunking 10 Digital Asset Bear Market Theses.” -- 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 Sunday, July 4th. Happy July 4th to all of those of you in the U.S. And hell to everyone else from around the world as well. Today, the theme of this Longreed Sunday is going to be freedom. Freedom from FUD.

There has been such an endless barrage of FUD over the last few months that people have been asking me for a show going through and debunking it all. But I didn't have to do that because Jeff Dorman and the folks over at ARCA wrote a piece this week called debunking 10 digital asset bear market feces. It's a great overview of a lot of the common logic that people are using to argue that we're heading into a bare marketer that we're already there. So without any further ado, let's read it. read the piece.

Debunking the bare market theses. Digital assets had another horrific week across the board, with prices of most assets down 10 to 30%. And sentiment is as bad as we've seen in over a year, as buyers remain on strike while shorts continue to build. This is perhaps a bit surprising given that just about every digital asset other than Bitcoin is still up triple digits year to date, but everywhere we look, someone is shouting digital assets bare market. Here's the problem, though. We can't come up with a single reason that validates why the market is all of a sudden so convinced that digital assets are going into an extended funk. We spent all week asking industry leaders, funds, and traders what the bear thesis actually is

that has traders and random BTC number generators so confident about upcoming price declines. As best as we can determine, here are the most popular bear cases and our rationale for why each of these is most likely inaccurate. Debunking bear thesis number one, CCP regime change is intent on killing digital assets. The biggest change to the market since mid-May has been China's stance on digital assets. China's crackdown has been focused exclusively on Bitcoin miners and digital asset exchanges that offer leverage, but not the actual underlying assets themselves. While China is a very large player in digital assets and the short-term price declines have

potentially been warranted, given the shock to the system, it's difficult to believe that this entire global asset class is at the mercy of a single government interjection. In fact, most market participants agree that long-term results from China's potential exodus are actually positive, from a redistribution of hash power globally to more ESG-friendly mining facilities. But perhaps more importantly, we've already seen exactly what happens when an asset itself is unaffected, but the means with which to trade it are shut off. In December 2020, Ripple slash XRP was delisted by almost all relevant exchanges following an SEC complaint about its status as a security and its unregistered token offering. Over a one-week period, peak to trough,

XRP fell 68%. Note, today, XRP is 200% off these lows, and the recovery started roughly six weeks after the initial sell-off. While most degree XRP has no value, the market told us exactly what liquidity was worth, about two-thirds of the value of the token for a short period of time. Similarly, when BSV was delisted in early 2019 by the majority of exchanges, the BSV token fell roughly 40%, and this too lasted for just a few months before the token rose again. So if the biggest takeaway of the China news is that exchange access is going to be shut down and that miners are relocating, we'd expect a similar 40 to 60% drawdown of the assets affected

and a swift recovery. Well, we're six weeks into this sell-off and most assets are already down 40 to 70%. It would be reasonable to argue that we have already bottomed. Debunking Bear Thesis number two, massive regulatory pressure from the U.S. We already debunked this two weeks ago, and even if it were true, it would be a net positive in the long run. While it's cute watching El Salvador pass a law in three days, in the U.S., laws take years to get passed. As enjoyable as it is to watch the markets trade violently every time an official from the Fed,

SEC, CFTC, Treasury, or a Congresswoman opens their mouth, the reality is laws have to change before anyone has jurisdiction. This is years away from happening given laws need to be enacted before any governing body has jurisdiction to regulate this asset class. Debunking Bear Thesis Number 3. The Fed will be tapering soon and that is bad for risk assets. Stop. Tapering is not happening anytime soon. The 10-year is still at 1.5%. The U.S. dollar is at a six-year low. The VIX is back to pre-COVID lows. Tech stocks are booming again. It's safe to say this is overblown.

And even if true, the digital asset market seems to be the only asset class affected by it. Is the most retail-dominated, inefficient, immature asset class really the only market that has the Fed tapering view, correct? Debunking Bear thesis number four. Retail momentum and interest is dead. Off the highs, sure. Dead and never coming back? Not even close. 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 nydig.com forward slash NLW. Debunking Bear Thesis number five,

lack of institutional interest. We speak to institutional investors every day. They are still allocating to funds in record sizes. Goldman Sachs and City just launched digital asset divisions specifically due to client demand. A16Z just raised a record $2.2 billion fund dedicated to digital assets. For the first time on record, junk bonds yield less than inflation. Tell me again where you think money will be flowing, if not into new asset classes like digital assets. Debunking bare thesis number six, ESG concerns. First, the ESG concerns are entirely specific to Bitcoin and not at all relevant to most other digital assets. In fact, most other digital assets are positively influenced by the conveniently forgotten S and G. Second, as noted in

number one above, the redistribution of hash power away from China to more clean energy sources around the globe will be a net benefit for the environmental concerns. Debunking Bear thesis number seven. Tether, Selfias, BlockFi, Binance, Risk. It would take 40 pages to summarize all of the conspiracy theories about these four companies. What's most relevant to the current market sell-off, however, is that none of these concerns are new, and therefore cannot be used as a valid excuse for the current market correction. The market discount regarding this constant uncertainty overhang has been persistent and has had no reason to widen over the past six weeks. Should any of these companies actually run into financial or regulatory

issues, then the question of systemic risk will rightly be discussed, but these what-ifs are lazy excuses for a current market correction. In our opinion, only Tether poses systemic risks, given how intertwined USDT is to the working capital of all exchanges in defy, but even that would quickly be replaced by another perfectly comparable stable coin should a problem actually arise. debunking bare thesis number 8. Micro Strategy is going to be a forced seller of Bitcoin. This is the dumbest of all fears and is 100% not accurate and can be easily disproved by looking at the bond covenants.

Any fears of micro strategy being a forced seller of BTC or being liquidated is a complete farce and a misunderstanding of how bond covenants work. Debunking bare thesis number 9. Grayscale GBT Unlocks are going to crush the market. Nope. When you buy GBTC from Grayscale, you're going to be able to. were subject to a six-month lockup. The biggest unlocks are happening over the next two months, which could lead to heavy selling of GBTC on the open market. But this has no effect on Bitcoin

itself. The Bitcoin and the trust does not trade, only the shares trade, and thus GBTC will continue to trade at a steep discount to net asset value. Moreover, since most buyers of GBTC were doing it for the R back when GBTZ was trading at a premium to NAV, they were also shorting Bitcoin. A hedge fund would, A, borrow Bitcoin, B, contribute Bitcoin in kind to create GBT shares, C, short futures or spot to hedge out directional risk. Thus, as funds unwind this trade, even though it will now be at a massive loss since the ARB went from a premium to a discount, it could actually put buy pressure on Bitcoin, not sell pressure, as those who sell GBT will have to buy back Bitcoin to cover the short leg of the trade.

Debunking Bear thesis number 10. Digital assets are reflexive and fundamentals are deteriorating as price declines. This is probably the most important of all the bare cases, and it's It's just not true. Bitcoin and other cryptocurrencies have no fundamentals, so we can dismiss that sector. But everywhere else you look across defy, gaming, Web3, and other pockets of digital assets with real users, cash flow and adoption metrics, the fundamentals have never been stronger. Many metrics are lower than the May euphoria, but quarter over quarter and year over year, the growth is nothing short of phenomenal. When prices go down but revenues go up, it means multiples are contracting. Does multiple contraction make sense for the fastest growing asset class

in history? Let's start with Defi. The fear of Defi slowing is more narrative than substance. Across Dex's, lenders and stable coins, the second quarter of 2021 is the best quarter in history, and June is the third best month in history. The problem is May was the best month ever, so month over month we are witnessing a steep decline. Moreover, you can look at many individual projects with tokens that are down 50 to 70% even though metrics are at all-time highs. This, of course, doesn't mean that tokens are cheap today, maybe they were expensive last month, but it does show you that the declines in price are not indicative of a decline in fundamentals, and there is no impetus for a multi-month bear market. We will soon find out if this really is an asset class. When other

asset classes crash for no reason, opportunistic buyers step in, as value investors rotate from one asset class to another. There is clearly value in digital assets today. While many are calling for a bare market, the data simply suggests otherwise. Whether or not this is enough to attract new buyers remains to be seen. Back to NLW now. So I think this is a great piece. It's a nice, quick, tight look at 10 different concerns that people have as it relates to where in the market cycle we are. I think one more big thing that's worth remembering or noting is just PTSD from 2018 is real. I think a lot of folks, even who are still risk takers, are trying to brace themselves for what could be an extended bare market and acting as such. Whereas in 2018, people tried to extend the ICO party for way,

way past when it was done. This time around, we're kind of seeing the opposite, where people are sort of preemptively preparing themselves for a new and potentially extended down period. I don't think it's the worst thing. Obviously, it's more fun when number go up, but I'd much rather see a more sustained, longer-term rise than the sort of two-week parabolic insanity we saw in December of 2017. Anyways, guys, I hope you're having a great Fourth of July weekend. I appreciate you listening. Until tomorrow, be safe and take care of each other. Peace.