The Breakdown - Did a Matrixport Report Really Send BTC Crashing?

Episode Date: January 4, 2024

And if it wasn't that, why did Bitcoin fall so much yesterday? NLW looks at market structure and narrative as ETF expectations heat up. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown 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, January 4th, and today we are talking about Bitcoin's big dump yesterday. 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 bit.ly slash breakdown. Well, friends, it had been going so well that something had to give, right? Early on Wednesday morning, Bitcoin went into a tailspin, dragging the rest of the crypto market down with it. A 10% drawdown plunged Bitcoin to 41,500 over the course of an hour.

Ethereum, Solana, and a long tail of altcoin suffered drops of a similar size. Price recovered slightly throughout the day, but Bitcoin headed into the night still trading below 43,000. The trigger for the price drop seemed to have been a one-page report from Matrix Port. The research firm published a note entitled, Why the SEC will reject Bitcoin Spot ETFs again. The block was first to publish a news story on the report, tweeting, SEC will reject all Bitcoin spot ETFs in January, says Matrixport analyst. And from there, the algorithmic news traders did their thing and sold off hard. The report itself acknowledged the endless streams of meetings between the SEC and ETF issuers over the past month, but stated,

we believe all applications fall short of a critical requirement that must be met before the SEC approves. Matrixport suggested that these requirements could be fulfilled by the second quarter. The logic was that Gary Gensler and the Democrat majority of the five-member committee would vote to reject ETFs this time around. The report said, from a political perspective, there is no reason to approve a Bitcoin spot ETF that would legitimize Bitcoin as an alternative store of value. End quote. Now, if ETFs weren't approved by Friday, the trading recommendation was to hedge long exposure by buying put options at a $40,000 strike price expiring at the end of January. Citraxport believes that an ETF denial could cause a rapid 20% drawdown for Bitcoin, pushing

it below $38,000. Their view, however, remain long-term optimistic, forecasting a higher Bitcoin price by the end of the year. Overall, the report was fairly measured once you read below the headline. Although the opinion that ETS would be denied is deeply non-consensus at this point, the trading advice was fairly common sense. The issue is that high-speed traders are in a race to react to headlines. There is no time to read the actual report, only to smash the red button.

We saw this effect in October when CoinTelegraph erroneously tweeted that the BlackRock ETF had been approved, triggering an 8% pump. That price action fully retraced within the day, but yesterday's has proven a little bit more sticky, so there may be more to this particular story. Digging into that, as the markets crashed, some commentators were puzzled about how a research note could impact price so severely. Others were just puzzled. Peter McCormick of what Bitcoin did captured the mood, tweeting, all bite, what's

a Matrix Port? Now, for those who don't know, Matrix Port has been providing digital asset services. since 2019, primarily in Asia. They published frequent research notes alongside their other services. Their reports have come up frequently on the show over the past few months, as they stood out during this rally by taking an incredibly bullish view really early on. Way back in mid-November, Matrixport published a $45,000 year-end target for Bitcoin when it was trading at new yearly highs of 38,000. This consistently bullish and largely correct set of predictions had granted Matrixport additional credibility coming into the new year. Their reports had remained bullish even as recently as

Tuesday. For example, their previous note was titled, Bitcoin Spot ETF Approval Imminent, Bitcoin to Jump to 50,000. This rapid change of sentiment was jarring and contributed to the confusion surrounding the non-consensus view of ETF approvals. Alex Thorne, the head of firm-wide research at Galaxy, wrote a long tweet about the, quote, bewildering note from Matrix Port, saying that, quote, several of their supporting arguments are nonsensical. For example, one of the most confusing and questionable claims, according to Alex, quote, that all ETF applications still lack a critical requirement. Here, they are apparently referring to the fact that the issuers all have surveillance sharing agreements with Coinbase, but, quote, Coinbase is only 11% of the spot market.

Apparently, they missed the DC Circuit Court of Appeals ruling which negated this question, which first of all said that surveilling futures markets was sufficient because futures and spot prices were mathematically indistinguishable. Major Sport also said the SEC is suing coinbase so they are a bad choice. Future ETF applications should also include they write Cracken OKX bybit. The SEC is also suing Cracken, though, and the idea that these would be good but for the omission of OKX and bybit is strange. Alex concludes, it's impossible to know the future and certainly anything could happen, but this prediction from Matrixport is a real head scratcher. Now, part of the criticism of the report was also

that it was unsourced, apparently based on the opinion of the lead researcher Marcus Theelian. Bloomberg's Eric Balcunas asked Thelian whether he had any inside information informing his view. His response was, quote, my report is not based on issuer nor on SEC insider comments. Obviously, this is massively out of consensus. I do think the SEC will vote. voted down. And yes, after being the biggest bull all year, I turned bearish today, but the arguments were ready. Now, of course, the deeper background on Matrixport is that they were founded by Ji Han Wu, the chairman of mining giant BitDeer. Wu has been in Bitcoin since the beginning. He was the first to translate the Bitcoin white paper into Mandarin in 2011, and went on to

found the leading mining equipment firm Bitmain. Suffice it to say that Wu has massive Bitcoin holdings across a number of entities and is heavily involved in markets. This connection led many on Twitter to accuse Wu of triggering this crash deliberately as an active market manipulation. Providing an additional reason to don the tinfoil hat, the block was sold to Forsyte ventures in November, and Forsyte also has Matrixport as one of its many portfolio companies. Still, looking to throw some cold water on the conspiracy thinking, Wu posted a series of tweets responding to the controversy. He wrote, MatrixPorts analysts operate independently, expressing their opinions without any influence or interference from management. They are employed for

their superior analytical skills compared to mine and other management team. I've only briefly glanced at the title of the report, as have many of you. This recent report was prepared for Matrixport's clients. However, its widespread by the media was not planned by Matrixport and is beyond our control. As far as I know, Matrixport has been consistently advising our clients to be mindful of risks and leverage, especially given the market's volatility spurred by expectations surrounding ETFs. This volatility is evident in the perpetual market's high funding fees in the recent decline in crypto-related stocks in the stock market over the past two trading days before today. Wu closed by advising Matrixport clients to buy the dip and said, quote,

I wish everyone gets rich in 2024 by investing in Bitcoin. And indeed, lots of people were out there calling BS on the narrative explanation. Joe Carlos R. I know people are desperate for a narrative, but Bitcoin didn't sell off because some silly report about ETF denial. It sold off because nothing goes straight up and it's an easy grab for liquidity to do a long squeeze. In short, the market was overbought. Scott Melker writes, this is the quote unquote reason for the dump. I put reason in quotes because this is really just a leverage flush. Regardless, this is an opinion with zero new information that flies in the face of everything shared by experts. Are you guys that skittish?

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Over the past month, a significant amount of leverage has been building up in crypto markets. This week, open interest in crypto-native Bitcoin perpetual futures hit an all-time high in dollar terms. Funding rates were at their highest point dating back to November 2021. Even the Tradfai traders were pushing the limits. The premium paid for Bitcoin futures traded on the Chicago Mercantile Exchange, known as the basis rate, has been exploding over recent months. Earlier this week is the CME opened up for the year, the basis rate briefly hit 53% annualized. Since November, the basis rate has been running at elevated levels compared to the longer term average of 14%. With that much leverage applied, crypto markets were primed for a liquidation cascade on any major

price action. Byzantine General warned that leverage was getting out of hand on Tuesday, capping off a long Twitter thread by saying, just sharing a word of caution. Things are getting objectively aggressive and frothy. In bull markets, things can stay frothy for a while, but eventually you'll get a sick correction. In other words, this argument, holds that the Matrixport headline might have triggered the sell-off, but the mass liquidations were the underlying cause of the sharp drawdown. Over the course of two hours, more than 500 million in liquidations were processed across all tokens. We haven't seen such a large liquidation cascade since this rally started back in October. Once the dust had settled, over $1.4 billion in open

interest had been wiped off crypto exchanges, with around 10% of Bitcoin positions closed. Will Clemente from Reflexivity Research wrote, Nice rinsing across the board. Multi-billion-dollar open interest drop across the board funding rates back to room temperature, three-month futures basis down almost 10%. CoinRout CEO Dave Weisberger said, If today's action made long speculators more cautious, it would be a good thing. The less leverage on the way up, the more sustainable the rally. That said, DGens are going to D-Gen, and we will see both explosive God candles and sharp falls,

so don't overreact. Indeed, Matrixport had even warned that excessive leverage was the reason they were feeling anxious at these levels. Their report said, if there is any denial by the SEC, we could see cascading liquidations as we expect most of the 5.1 billion in additional perpetual long Bitcoin futures to be unwound. Still, all in all, Raoul Paul, who was on Scott Melker's show yesterday, thought that it was in general a good thing. Referring to how big trading firms operate in these markets, Paul said, these guys see that massive buildup and leverage, they wait for something and then they press it, and everyone gets liquidated

and they make a ton of money from it. It's classic market maker price action. It would have happened on the New York Stock Exchange floor. It happens in the futures market. It always happens. Regarding what comes after this washout, Raoul added, it actually gives a higher probability of rising because you've flushed out the leverage. If we'd gone in with such high funding, we would have to sell off after the event. Now we can have a rally and maybe a consolidation before it actually goes live. Now, of course, ever since BlackRock filed their application, the people to watch have been Bloomberg ETF analyst Eric Balcunis and James Safart. Their probabilities for approval are still at 90%, but largely only at 90%,

because you never know what this SEC might do. Eleanor Tarrot of Fox Business has also contributed some significant reporting over recent weeks. The point is that all of these actual journalists have credible anonymous sources from within the SEC and personnel at the various asset managers. Recent comments from Balcunas indicated that a denial would be borderline unthinkable at this stage. He said earlier this week, this would be the rug pull of the decade. Everybody put in a lot of work in this, especially over the holidays.

Sadistic might not even be a strong enough word for it. People have spent too much money and tried too hard to give up now. So yeah, it would not be over. I don't even think there'd be a cooling off period this time. I think there'd be hell. Indeed, the consensus seems to be that if the SEC fails to approve ETFs by next Wednesday's deadline, they should be ready to go to court against some of the largest asset managers in the world on Thursday. James Murphy at Meta Lawman writes, if the SEC were to deny all-spot-Bitcoin ETFs, the applicants would immediately sue, and the D.C. Court of Appeals would again rule that the SEC was arbitrary in capricious.

The SEC gave every reason they had for denying grayscale and lost. I expect multiple approvals on January 10th. Now, all of these reporters also, after this whole hullabaloo yesterday, doubled down on their perspectives. Balcunas tweeted, we have heard nothing to indicate anything but approval. At this point, saying SEC rejecting isn't just going against James Safar and I like it was in the early days. Now you're basically saying multiple mainstream news reporters with multiple sources on the inside

of this also have it wrong too. Not saying it's impossible, but it overturns a lot of good intent. The latest came from Eleanor Territ in an article on Wednesday afternoon, where she stated that the SEC had met that day with officials from the New York Stock Exchange, NASDAQ and the Chicago Board Operations Exchange or CBOE. Those are, of course, the trading venues where the ETFs will be listed. Territ wrote that, while the final decision has not been made, sources close to the proceeding say the SEC could begin notifying issuers of approval on Friday with trading beginning as early as next week. ETF analysts and issuers alike remain confident that a favorable decision from the SEC will be made on or before January 10th, as the SEC continues to meet with key players on the matter. Balcunas chimed in on the topic tweeting that these were, quote, Things you probably don't do if you're going to deny or delay.

Hearing similar, by the way, and why when we see updated final 19B4s roll in, this is sign approval imminent as SEC has been doing back and forth with issuers offline to perfect their 19B4s versus doing numerous refilings a la S-1s. James Safart added that he thinks, quote, The gap between approval orders and actual trading will be measured in days, not weeks. Now, what's clear is that more Tradfye firms are lining up to take a slice of the ETF action. According to Coin Desk reporting, Goldman Sachs is likely to play a key role in the grayscale in BlackRock products. The firm is reportedly in talks to be an authorized participant for both funds. Authorized participants are specialized market makers with exclusive ability to create and redeem shares in an ETF. They are responsible for arbitraging the price to ensure the funds track their underlying assets closely.

Just last week, BlackRock disclosed that JPMorgan and Jane Street were already on board as authorized participants, so it looks like all the big Wall Street players are on board. This news also solves the mystery of whether Grayscale will have authorized participants lined up. Their latest filing updated lodge this week had a blank space where the names of their proposed market makers should be. Yesterday also saw headlines about BlackRock planning to cede their fund with $10 million worth of Bitcoin that day. There had already been solid reporting that $100,000 worth of shares had been pre-sold to seed investors, but updated disclosures confirmed the much large. larger amount. It also indicated that cash proceeds had now been converted into Bitcoin. Bitwise's updated filing also disclosed a $200 million Bitcoin seeding the largest we've seen so far. Basically, where we are now is down to looking to clues in the minute details of ETF filing

procedure. The big picture remains the same as it has been for weeks. Neither the SEC nor the asset managers would be undertaking this massive effort to get everything ready to go over the holiday period if the result is just going to be denials. Of course, none of us can say anything for sure, and there's always potential that something could happen to derail the process at the last minute. Marty Bent gave one example tweeting, mentally prepping for the Sunday night emergency statement from the Treasury that identifies Bitcoin as a national and financial security risk in an attempt to nuke the ETF approval.

However, finance lawyer Scott Johnson, who knows his way around the ETF process, doesn't think that's likely due to the countless SEC meetings. He tweeted, in every past ETF wave, the SEC did not do this. Why? Because, one, this takes up a ton of SEC resources. Two, it makes it much harder to successfully survive judicial scrutiny, and after grayscale, this is like drawing blood from a stone. If you intend to deny, you just deny. So basically, when it comes down to it, there were two diverging views presented yesterday. An analyst from Matrixport thinks that the SEC will deny the ETFs because of political machinations based on their own

sensibilities. On the flip side, the journalist from Bloomberg and Fox, who have been on this beat for months, and who have multiple sources inside the SEC and at the asset managers themselves, think the ETS will be approved either on Friday or early next week. And in case you just needed one more piece of evidence of which of those two sides you should be most closely affiliated with, this morning at around 837 Eastern Time, Craig Somm, the chief legal officer at Grayscale tweeted, just filling out some forms. I want to say one more big thank you to Cracken, my sponsor for today's show. Go to crackin.com slash The Breakdown and see what crypto can be.

Until next time, be safe and take care of each other. Peace.