The Breakdown - How Markets Are Reacting to the Middle East

Starting point is 00:00:00 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 Monday, June 16th, and today we are talking about Bitcoin's response to the Middle East conflict, the latest in Bitcoin Treasury companies, and much, much more. 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 pod. While all eyes have been on the Middle East as the kinetic exchange between Israel and Iran ramps up, missiles continue to fly throughout the weekend with targets hit in both Tel Aviv and Tehran. There are also reports of highly targeted drone assassinations taking place at the top of the

Starting point is 00:00:56 Iranian leadership structure. Israeli sources have said direct U.S. assistance has been requested to bomb the underground Fordow uranium enrichment site, and basically the conflict is escalating, and it's unclear which position the U.S. will ultimately take. President Trump gave a range of statements over the weekend. In a Sunday interview with ABC, he said it's possible we could get involved. However, he noted that the U.S. is, quote, not at this moment involved. Trump added that he's open to having Vladimir Putin mediate the conflict as a strategic partner of Iran.

Starting point is 00:01:23 Reuters reported earlier in the weekend that the administration had vetoed a plan to assassinate Iranian Supreme Leader Ayatollah al-Kamini leading into the attacks. But that has been really big fog of war. There's been conflicting reports around that. Speaking on Sunday afternoon as he departed for the G7 summit in Canada, President Trump said, Sometimes they have to fight it out, but we're going to see what happens. I think there's a good chance there'll be a deal. Now, obviously, the impact on markets in Bitcoin is fairly low down the list when it comes to the most important aspects of this conflict. But as we look at geopolitics through a market lens, and as analyst opinions are running hot at the moment,

Starting point is 00:01:58 it is worth digging into how the market, both Bitcoin and traditional, is trying to digest all of this. There are largely two big risk vectors for escalation at this stage. The first scenario is simply out-of-control escalation that leads to a nuclear exchange or some other World War III-style catastrophe. The second scenario escalation path is that Iran starts putting pressure on the globe by shutting the Straits of Hormuz. The straits are a narrow waterway between Amman and Iran and form the choke point for the Persian Gulf. Somewhere between 20 and 30% of global oil supply moves along this route out of Iran, Saudi Arabia, the UAE, and other smaller Middle Eastern producers. 90% of Gulf oil currently goes through the straits. J.P. analysts have already raised the alarm,

Starting point is 00:02:38 warning that oil could spike to $130 per barrel if Iranian supply was disrupted. They said that this would double U.S. inflation and force additional rate hikes, and on Friday, oil saw a price spike from 68 per barrel to 76. Still, volatility has already started to drop, suggesting traders are for the moment fading the geopolitical concerns. Joan Van Borg, who has traded oil professionally and now focuses on crypto wrote, Bitcoin unchanged at 105K tells you everything you need to know about the outcome of this conflict. One, the straits probably won't get shut. Khamini would be truly idiotic to do that. Two, this will probably resolve itself within days and weeks, not months. Three, the world has more than enough oil to cover the temporary deficit. And four, sell-offs and risk assets are a screaming

Starting point is 00:03:19 fade. He added that, blocking Hormuz decreases Iran's leverage. That threat is all the regime has left. That action unites the world against them. One of the key points is that shutting the straits would disproportionately impact Iran's oil trade. China currently takes over three quarters of Iran's oil, with the remaining quarter largely flowing through UAE refineries. Ellen Wald, president of Transversal Consulting, said that there's, quote, no real benefit to shutting the straits given that Iranian oil infrastructure hasn't been targeted. She added, China does not want the flow of oil out of the Persian Gulf to be disrupted in any way, and China does not want the price of oil to rise, so they're going to bring the full weight of

Starting point is 00:03:55 their economic power to bear on Iran. Anas al-Haji managing partner at Energy Outer look advisors commented, their friends will suffer more than their enemies, so it's very hard to see that happening. It's not in their interest to cause problems because they will suffer first. Now, theoretically, while Iran could allow friendly vessels to pass, global insurers could pull coverage, making the shipping lane far less economically viable. Now, situation is all very fluid and could change rapidly, but most analysts were watching for a further sell-off in risk assets and an oil spike over the weekend, which just didn't materialize. S&P 500 futures rebounded to levels from Thursday evening once the Sunday night session opened.

Starting point is 00:04:29 Bitcoin traded flat at 105K, and while it doesn't seem like we're getting the narrative that Bitcoin is acting as a flight to safety, that's largely because markets seem to be betting that this is a flare-up rather than a sustained escalation. Still, Trader Jared Dillian is a little uneasy with the consensus, tweeting, we've been taught over the past X number of years to fade geopolitical risk. It has worked every time, but what if this time is different? One wildcard scenario to keep an eye on is that a splintering world bolsters the narrative for Bitcoin as money for enemies. A.J. Invest's wrote, here's a thought, my family is currently in Iran. I can't send them gold. I can't use Swift to send them

Starting point is 00:05:04 dollars because of sanctions. But you know what I can send them that actually has value in Iran? Bitcoin. So for now, we will just have to wait and see, obviously an extremely dynamic situation, an extremely dangerous situation, but one that markets are for the moment, assuming, is more likely to get better than it is to spiral out of control. Today's episode of The Breakdown is brought to you exclusively by Grayscale. Grayscale is almost certainly a name you know. They've been offering exposure to crypto for over a decade now and offer over 20 different crypto investment products ranging from single asset to diversified to thematic exposure to crypto and the broader crypto industry. They have long been innovators at the intersection

Starting point is 00:05:47 of tradfi and crypto. And one of the benefits for a lot of us is that grayscale products are available right through your existing brokerage or IRA. Now, of course, investing involves risk, including possible loss of principle. For more information and important disclosures, visit grayscale.com. Go to grayscale.com to explore their full suite of crypto investment products and invest in your share of the future. Next up, let's check in on the number one crypto and Bitcoin narrative for the summer, which is Bitcoin Treasury companies.

Starting point is 00:06:19 Feels like additional plays hit the headlines every day, and the largest from Friday was a report of a new company led by Anthony Pompliano, looking to raise $750 million to buy Bitcoin. Southern Fried Crypto said that this feels extremely topy, but Stephen Lubka of Swan and Bitcoin Treasury Company Nakamoto doesn't think that's the case, tweeting, Treasury companies are simply showing the market how much a Bitcoin influencer is actually worth. The other big piece of news is that the SEC has approved Trump Media Group's $2.3 billion

Starting point is 00:06:44 Bitcoin Treasury Plan. Around that, there are broadly two takes. Blockstream CEO Adam Back believes this is a sustainable arbitrage in a world of high inflation and financial repression, saying, the scalability of that arbitrage is enormous because you're talking about how Finney's 200 trillion addressable market of extracting the monetary premium from all sorts of assets. The other take is that this is a bubble. Legendary shortseller Jim Chanos wrote,

Starting point is 00:07:07 I never thought I would see again a group of quote-unquote investors as ignorant and arrogant as the AMC apes, but the Bitcoin Treasury bros are giving them a run for their money. Unfortunately, Channos is expressing this view by shorting micro-strategy against Bitcoin rather than choosing one of the 100-weaker micro-strategy clones. This seems very similar to Tradfai guys trying to short tether in 2022, instead of choosing one of the dozens of altcoins that actually fell 99%. For some, this is just an echo of previous cycles. Investor rewrote, Altcoins were the original Bitcoin treasury companies. EOS is still sitting on a fat stack last I checked. Even they knew it was always about stacking more Bitcoin. Pleditor tweeted,

Starting point is 00:07:45 print up a worthless altcoin, dump it on people for real Bitcoin, the goal of every allcoin scam ever. Bitcoin treasury companies include it. Now, part of the dynamic is that insiders are getting very different terms to retail. Appearing on a Thread Guy stream, David Bailey, the CEO of Bitcoin Magazine, commented that he got early positions in Metaplanet and SmarterWeb in the UK. He commented that SmarterWeb had made his investment group $100 million on a million dollar investment in a month. When Thread Guy commented that he's going to make a billion dollars on these companies, Bailey responded, we're going to make a lot more than that. To some, this is starting to feel a bit like the SPAC bubble,

Starting point is 00:08:18 with investors who got in on the private placement doing very well, and retail set up to hold the bag. We've even had our first example of one of these companies going poorly. Late last month, Sharplink Gaming announced that they would become an Ethereum treasury vehicle with Joe Lubin at the helm. That announcement pumped the stock 20x, but it's now down 90% from the peak. Stephen Zang of the block posted that every single private investor had filed to be able to dump their shares late last week. That turns out not to be the case with the filing simply registering the newly issued shares, but the market action was a stark reminder that these private investors have no mandated lockup. Molly at Big Magic Dow had a look at the terms for Nakamoto, which is the vehicle formed

Starting point is 00:08:54 by Tether and SoftBank with David Bailey promoting. She found that most private investors have zero lockup on their shares, which are currently trading at a 10x multiple to their entry price. The shares aren't invested yet, but we could see investors rushing the exits instead of holding forever. None of these companies are anywhere close to a blowup yet, but some are already suggesting some safeguards. Matthew Sigil of Van Eck suggested they should pre-commit to buying back shares and halting new issuance if the equity premium to their Bitcoin holdings flips to a discount. Overall, there's just a lot of skepticism that this is going to end well for retail traders. One more comma tweeted,

Starting point is 00:09:27 The most interesting part of this cycle is the alt-coinification of Bitcoin Bros via treasury companies. After years of dunking on alt-coin griffs, they ultimately created their own but in capital markets. Quite an interesting turn of events. We also don't know how regulators will deal with dozens of these companies detonating in public markets, but that seems like an active risk for the promoters. Ultimately, none of this is helping to remove stigma that Bitcoin is a Ponzi scheme rather than digital gold. Don Alt tweeted, Bitcoin treasury companies are stupid and will be the reason for the next bear market being as violent as prior bear markets and no one can convince me otherwise.

Starting point is 00:09:58 Good Ponzi while they're going, though, so keep going. Speaking of the financialization of crypto, Solana ETFs appear to be barreling towards SEC approval. Issurers updated their paperwork on Friday at the request of regulators, and the rush of filings also included a new application from Fidelity, which is the first of the large issuers to join the race to launch a Solana ETF. Earlier last week, Bloomberg's Eric Balcuna said SEC engagement was an indicator that they're likely to approve the products, giving a timeline of two to four months. But the pace of engagement could mean the launch is much sooner. One of the interesting parts of the updated filings is that they allow assets to be staked.

Starting point is 00:10:32 A lack of staking was a huge knock on the Ethereum ETFs, but it seems this SEC is now comfortable allowing it. Bloomberg analysts aren't yet anticipating a tidal wave of approvals for all coin ETFs, however, they expect to see crypto index funds tracking top 10 alcoins to come to market within the next month. Overall, these products will test whether there's an appetite for crypto bets beyond Bitcoin on Wall Street. The Ethereum ETFs were generally a disappointment, but adding staking could make the difference for investors. ETH yield is currently at around 2%, so it doesn't look that enticing unless the token also appreciates. But Solana yield is closer to 7%. Polymarket is now pricing 60% odds of approval by the end of July, so we could find out sooner rather than later.

Starting point is 00:11:10 Lastly, on the stablecoin theme, which is the other big dominant narrative right now, Walmart and Amazon are reportedly looking into stable coins. The Wall Street Journal reported on Friday that the two retail giants were considering issuing their own. The article stated that the move could shift the, quote, high volumes of cash and car transactions that they handle outside the traditional financial system, saving them billions of dollars of fees. Now, the nuances are pretty important here. It's essentially a given at this stage that every major retailer will adopt stablecoins as a payment method after the Genius Act passes. But there is a huge gap between simply accepting stablecoins as payment and issuing their own. Sources said both paths

Starting point is 00:11:45 are being explored by the retailers, suggesting that the reporting might just be getting a little ahead of itself. In other words, if you were one of these companies, you would be literally in breach of your fiduciary duty if you weren't exploring what the possibilities at least would be in actually investing more deeply in stable coin infrastructure. That doesn't mean that you're going to do it, but you kind of have to do the work. Still, anti-Grypto Democrats are using this article to launch another last-minute attack on the stable coin bill. Amanda Fisher of Better Markets and former SEC Chief of Staff argued that the move would be terrible for consumers. She pointed out that Starbucks customers already keep around

Starting point is 00:12:17 $2 billion in unspent funds on Starbucks cards, enabling the coffee company to earn millions in interest. Fisher wrote, Starbucks forces you to add money in increments of $5 and requires a minimum $10 purchase. The result, you can never get the balance to zero and you're always loaning money to Starbucks for free. She argued this effect would be $1,000 X. if Walmart and Amazon adopted the same practice with stablecoin accounts. As an aside, I have never, ever, even once in my entire life, ever seen anyone in real life actually argue or be annoyed with this approach from Starbucks. You can pay it with a card just as you want if you go into a Starbucks store. The people who get the mobile app and download

Starting point is 00:12:52 it and put money on there are going pretty much every day. So even if there is a bunch of money sitting on that card, it's not going to be sitting there for long. Now, Austin Campbell pointed out that the Genius Act already prohibits non-financial companies like Walmart or Amazon from issuing stablecoins. Adding, it would look pretty silly and transparently dishonest to freak out about this when it's expressly banned, wouldn't it? Now, to be fair, large retailers can't obtain a waiver from regulators, but that seems unlikely given the political backlash from allowing Walmart dollars to be issued. Unchained host Laura Shin commented saying, an example of why it's so confusing the Dems negotiated for a ban on yield-bearing stablecoins, which hurts the U.S. consumer and makes the

Starting point is 00:13:27 stable coin issuing companies richer. In other words, if issuers were competing on interest rates, then it would be much less lucrative for Walmart to issue their own stable coins. Honestly, for many, the article felt like a plant to scuttle support for the bill at the last minute. David Talley of ProChane Capital said, did the banks pay for this Wall Street journal piece? Ultimately, the Genius Act is set to go to a final vote in the Senate on Tuesday, so we will know soon whether these arguments resonate. For now that is going to do it for today's breakdown. Appreciate you listening, as always. And until next time, be safe and take care of each other. Peace.

The Breakdown - How Markets Are Reacting to the Middle East

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