The Breakdown - DeFi Summer; Bitcoin Fall

Episode Date: October 1, 2020

Today on the Brief: Coinbase offers severance to employees who want to leave over new politics policy Long-term job cuts hamper any idea of V-shaped recovery Last chance for a stimulus package before the U.S. presidential election Our main discussion is a narrative shift from DeFi back to bitcoin.  Over the summer, DeFi led the crypto charge. From growth in total value locked to narrative dominance to even leadership in the all important category of crypto drama, DeFi was it.  Now, as a potentially turbulent macro environment rears its head, the narrative is shifting back to a focus on bitcoin.

I guess my point with all of this is that I do have the sense that this narrative shift of Defy Summer to Bitcoin Fall makes a lot of sense and is likely to be borne out in reality. However, I also think that it just reflects a recalibration to a more natural state of things in terms of where we are as an industry. Defy is the hot new speculators paradise. However, Bitcoin never went away, truly. In fact, it just kept reinforcing its position as a mature asset in the... macro context.

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 crypto.com, BitStamp, and nexo.io, and produced and distributed by CoinDes. What's going on, guys? It is Wednesday, September 30th, and today we are talking about, while it might have been a defy-suffi. summer, it seems poised to be a Bitcoin fall. First up, however, let's do the brief.

First on the brief, a quick follow-up to yesterday's discussion of Coinbase. Aside from sharing both sides of the response to Brian Armstrong's letter about trying to depoliticize Coinbase, my main takeaway was that apolitical is actually a political position. I thought, and I still think, that there would be, on the one hand, a lot of employees who liked this position, who liked the idea of checking certain political conversations at the door. I also thought that there would be many who wouldn't like this, who feel like it denies an entire part of themselves, who feel like there's a line that's not clear, who want to work for a company that is explicitly aligned with their values. Neither of these is by definition right or wrong. They're just different preferences.

What's more, my feeling was that if this becomes commonplace, you're actually going to see the jobs marketplace start to follow the political balkanization that every other public sphere has gone through over the last however many years. Last night, we found out, perhaps unsurprisingly, that numerous employees apparently did have a problem with this policy, and we also got a leak of a letter from Brian Armstrong to the entire team. In that letter, he offers a significant severance package to anyone who doesn't agree with the new direction, and then basically says that if you haven't accepted this severance package by next week, or at least you haven't started a conversation with HR about it, that he was going to

expect that even if you didn't agree with everything about the policy, you were going to respect it and move forward with the common mission, rather than dragging them back into rehashing old debates. Also, like I said yesterday, I think that the larger question here is actually about the role of corporations in society. It's much bigger than Coinbase specifically. Coinbase, for its part, has decided that this is going to be the new culture, period, which is 100% their prerogative as an individual company. The question really, to me, will be whether there are larger ramifications and ripples in terms of other companies following suit, or in fact, going the exact opposite direction. Let's wait and see what happens next. Next up on the brief today, layoffs are ruining the V.

There was a fair bit of talk last night at the debate, if you can call it that, about the shape of the economic recovery, with President Trump firmly in the V camp and Vice President Biden in the K camp. For me, I think it's entirely possible to reject a lot of the anti-billionaire rhetoric of Biden while also recognizing that it's basically impossible to look at evidence and not see this as, a K-shaped recovery. There are some parts of the market that have thrived and some categories of people in the market that have thrived and some who have it harder than ever. However, when it comes to this V-shaped or K-shaped recovery, when it comes to the idea of recovery at all, one of the

big questions is whether short-term job losses will turn into something longer, larger, and more structural. Over the last couple days, we've gotten a couple big and not-so-good pieces of news, on that front. Disney is laying off 28,000 people in its domestic theme parks. These are workers who had been furloughed up to this point, which means that they're collecting health benefits but not pay. Two-thirds of them are part-time employees, and this shows just how intensely political lockdown battles are likely to get. Disney is effectively blaming all of these job losses on the California government for not allowing them to open back up. Shell cut 9,000 jobs out of after its second consecutive quarterly loss.

And this one is one of those second order effects that we talked about in April and May. Oil demand has simply been lower than it was before. And because of that, Shell is in a position where they have to restructure something close to 10% of their employees as they figure out how to make this new reality work. Another one that reflects previous conversations we've had about the knock-on effects for the white-collar jobs

that come after the first round of layoffs, KPMG consulting, which is a tax, auditing, etc. type of consulting shop is laying off 1,400 white-collar workers. Again, not hard to understand how this would happen. Companies that previously hired KPMG or had big contracts with KPMG are trying to reduce the amount of consulting that they need to the lowest possible amount, right, to make it through these challenging times. If you want to keep track of all these layoffs, see Sven Henrik's thread. He was our guest last week, and he has been keeping track of these sort of long-term, bigger-scale job losses on Twitter. And speaking of Sven, Sven's term is going to be our third stop on the brief today, Stimulus Optimism.

So last night, futures were down after the debates, most pointedly around the idea of not having clarity even after the election. That said, stocks were up this morning, and Sven called it stimulus optimism, quoting a Lisa Abramowitz tweet that said, Manuchin is hopeful about getting a fiscal deal done with the goal of finding an understanding with Pelosi by tomorrow. Manuchin said, I think there is a reasonable compromise here. So this is really, even as a Bloomberg piece put it, the last chance for a stimulus bill to pass before the election happens.

As they have been trained to do, markets are hanging on the every movement of the stimulus makers. In fact, Sven again tweeted, he said, markets don't even know what to do without stimulus, and it's hard to disagree. So will this come to pass? Certainly both parties have a lot of incentive to make it so, so we will see. But with that, let's bring it to our main discussion, something a little bit closer to our crypto home base, Defy summer, but Bitcoin fall. So to start off, let's be clear that Defy had an absolute rocker of a summer. There was just $2 billion locked up in DFI protocols at the beginning of July and $9.68 billion on September 1st. There was throughout this period narrative dominance. You saw the rise of concepts

like yield farming and liquidity mining. You saw breakout assets like YFI, which was the first crypto asset to ever have a per unit price higher than Bitcoin. We even got our crazy, beautiful drama around the battle between Uniswap and Sushi Swap. There was a period where by introducing a governance token, a liquidity provider token, Sushi Swap seemed to be sucking all of the liquidity out of Uniswap and all of the energy and attention. But then the pseudonymous founder of Sushi Swap left the protocol and took 13 million of Ethereum with him before handing the keys over to Sam from FTX before saying that he was kind of coming back or giving the money back. It was nuts, right? You had the total numbers and engagement going up, you had narrative dominance, you had breakout assets,

you had this crazy drama. Meanwhile, Bitcoin was really pretty quiet. We talked about this on the show earlier this week, but we had the longest period of over $10,000 Bitcoin in its entire history, which is, of course, a streak that is being extended every single day. As part of that, however, you also saw volatility on Bitcoin weighed down. And I argued earlier this week that, what that does is create a confidence and a self-reinforcing cycle among holders. Both long-term holders, people who have been here for a long time, which includes probably a lot of the folks who are listening right now, as well as newer holders who are getting invested in this asset and this ecosystem.

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and from a narrative perspective around defy than you did have around Bitcoin. However, there is something of a narrative shift happening right now, and those of you guys know me know that I used to do episodes pretty frequently called narrative watches, and this is definitely a narrative that we're watching. Three coin desk pieces this week show that narrative shift. One was titled, Traders Rotate to Bitcoin expecting a quiet Q4 for altcoins. One was called Bitcoin May Return to Center Stage after Ethereum's White Hot Summer. And then just today there was one called Chainlink Sorry September Returns Show Defi Hystereating.

So what's going on? What is underlying this narrative shift? Let's take it from the defy side first. There is, I would argue, broadly a sense. of overheatedness in the market. This is quite perfectly exemplified by the hack that I did a show on yesterday. To recap, in case you haven't listened to that show, you had a protocol by one of the premier protocol developers in the space, Andre Cronier, that was teased but not officially announced, and which, like many DFI protocols, was being developed in a live production environment. In other

it allowed people who discovered this protocol to go figure out and engage with the contracts even though it wasn't formally released yet. What happened is that something like $15 or $16 million went into these contracts and then through an exploit, because again this was unaudited software, someone was able to drain that entire amount. All of this happened, by the way, while this developer, Andre, was sleeping. This shows just how overheated this market is when people, are playing Sherlock Holmes to find out what the next new Defy protocol is and aping into it without any sense of even what it does, you know that there is something going on that's a little bit outside of fundamentals. And obviously I'm being kind of like reverse hyperbolic there.

So there may be a sense of overheatedness in the market, but there is also some narrative shifting even within Defi, right? At the beginning of the month, you saw a lot of people quickly move the narrative from some of the yield farming stuff that you had first seen to NFTs, non-fungible tokens, digital collectibles. Chow Wang, who was formerly at Masari, wrote, defy to NFT was the fastest narrative shift I've ever witnessed, even by crypto standards. Of course, for many, NFTs are a subset or related to or a cousin of Defi as a whole, and there are new yield farming things people are doing with NFTs as well. But regardless, the idea that even within Defi, there's some shifting narratives, I think, is a real thing. A second piece that shows this sort of sense of overheatedness,

however, is just looking at the TVL growth this month versus the previous months. As I said, it went from $2 billion to $9.68 billion between the beginning of July and the first day of September to just under $11 billion today. So a $7.5 billion gain for July and August into just a $1.5 billion gain or less for September. Within that, of course, a lot of what's driving that is that specific assets fell. Going back to that article, whose title I quoted before, ChainLink specifically fell 42% in September. Let's shift then to the Bitcoin side of this narrative shift, and part of it is just a natural reset within the industry, right? Kyle Davies of Three Arrowes basically argued that Bitcoin became, quote, underowned during the DeFi boom, because people were so far.

focused elsewhere. He said the market owns too much stable coins and non-Bitcoin. What's more, we can see the recalibration in a number of statistics that relate Bitcoin and the rest of the industry. Specifically, let's look at the implied volatility spread, and I'm going to quote from that earlier Coinbase article that I mentioned, Bitcoin may return to center stage after Ethereum's white-hot summer. The spread between the six-month implied volatility for Ether and Bitcoin, A measure of expected relative volatility between the two fell to a 2.5-month low of 4% over the weekend, according to SCU. The metric has declined from 21% over the past four weeks.

The spread's reduction indicates that the market doesn't expect a lot of dispersion between the two coins and foresees either trading in line with Bitcoin in the near term. Skew's CEO, Emmanuel Go, said the decline could signal a change in market leadership back to Bitcoin after a couple months' focus on the Ethereum complex. So basically, in this way, if you assume that Bitcoin is the epicenter of the crypto market in general, but during this period of mega-hype and rapid acceleration of DeFi, ETH took more of the center stage, this looks like something of a natural reset as DeFi pulls back a little bit. However, I think that in many ways this idea, this narrative shift of Bitcoin fall, has more to do,

with the dominance of macro factors. One of these macro factors is COVID return fears. We've pointed this out a number of times over the last few days, but you're seeing the return of lockdowns in Europe. You're seeing the UK having higher growth numbers than the first wave. You saw New York City having a daily positive rate of over 3% for the first time in months following air travel from Europe. And all of these things, of course, if we want to try to draw the lines ultimately to Bitcoin, point to more stimulus, point to more risk to the dollar, point to more potential currency debasement, point to more effectively money printer go burr. At least that's the narrative. We can get into the complexities of that another time, but the reality

is if that people expect that money engine to rev up, they also expect that people would expect to see things that hedge the money printer rev up as well. A second macro factor, however, just has to do with election volatility, and people perceive Bitcoin to be a good asset to have when everything else is volatile, when everything else is crazy. Anadotally, you saw a ton of this last night. So many people crush the Twitter algos by having a, this is bullish for Bitcoin tweet after that absolute farce of a showing we saw from these two candidates last night. So what to make of it all? How much is this a real shift versus a narrative shift? First is there's certainly plenty of evidence to counter the idea that defy is somehow off focus. Just today, we saw a new fund announced from Compounds Robert

Lesher with new money from Mike Novogratz. I don't think that there's any real indication that defy is not on people's agendas. It's just retracing from the insane acceleration that was happening over the summer. In fact, a lot of people are settling into this idea that this is a normal and healthy reset. Delphi Digital's Anil Lula said, if you look at August, crypto came off probably with one of the best months of performance ever. So I don't think it's unusual to see a breakdown a little dip like this. Likewise, I think that the macro factors that make Bitcoin long-term appealing never really disappear even if they move out of the spotlight.

That said, narrative is key to driving inflows of new investors. It did matter, for example, when Paul Tudor Jones released his report about the great monetary inflation in Bitcoin. So I guess my point with all of this is that I do, have this agreement, this sense that this narrative shift of DeFi summer to Bitcoin fall makes a lot of sense and is likely to be borne out in reality. However, I also think that it just reflects a recalibration to a more natural state of things in terms of where we are as an industry. Defy is the hot new speculators paradise that has tons of potential in a lot of people's minds

for many interesting things in the future, and certainly plenty of opportunities to make money or get wrecked right now, and that's what the summer was all about. However, even as that was happening, Bitcoin never went away, truly. In fact, it just kept reinforcing its position as a mature asset in the macro context. To the extent it reaps some of the benefits of that this fall, wonderful for all of us holders, but ultimately, it's just one more piece of evidence in a long-term conviction cycle. Anyways, guys, let me know what you think. Are you seeing this narrative shift as well, or is this just me? With that, I'll wrap. I appreciate you listening. And until tomorrow, guys, be safe and take care of each other. Peace.