The Breakdown - How Real Is Bitcoin’s Rally? 8 Interpretations of the $11k Surge

Episode Date: July 29, 2020

It was a beautiful Monday.  Bitcoin crashed through $10,000 and got all the way up to a new yearly high of about $11,000 before retracing slightly.  As with any dramatic price action, people were quick to start giving their interpretations of why it happened.  In this episode, NLW explains eight of those interpretations, including: Banks stacking due to changes in custody rules Money printer go brrr Stock to flow model Robinhood traders piling in DeFi gain recycling  Buyers exceeding sellers “Perfect storm” Dollar crash, negative real interest rates and the search for a new reserve currency Ultimately, NLW argues that it is this last factor driving up not only bitcoin but gold and silver.

It feels to me possible that we're in one of those restructural reset moments where the connection to digital gold in the context of gold performing so well has a halo effect that really connects the Bitcoin narrative to the macro narrative in a way that completes the circle from something that started to happen in a huge way in March and April. The fact that the odds of some major, major shift in the global arrangement of power around the dollar has increased makes the gold narrative trait look even better, even if that narrative is overstated. Welcome back to the breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. This episode is sponsored by BitStamp and Crypto.com.

The breakdown is produced and distributed by CoinDesk. And now, here's your host, NLW. What's going on, guys? It is Tuesday, July 28th, and today you know we are talking about Bitcoin's massive rally yesterday. We're going to talk about what happened, why it happened, and how real it is. Now, one quick note, I said that yesterday we'd be back to the normal brief schedule, but there's not a brief on today's episode. And the reason for that, as you'll see, is that the story of Bitcoin's rally yesterday, I think is the story of markets much more broadly. So we're going to actually talk about a lot of the different things that we might have hit on in the brief

in the course of the main show. But I promise the brief isn't going away. It just so happens that this episode isn't really well suited for it. Anyways, let's talk about Bitcoin's rally. So first of all, what happened? Yesterday, Bitcoin rallied up as high as 11180, a new 2020 high. This is a move that started over the weekend. I woke up on Sunday to $10,000 plus Bitcoin and blockfolio alerts and all that good stuff. And it did retrace a little, but it was nice to see a Monday surge that went not only past 10,000, but up through 11,000, before retracing admittedly a little bit today. As of this recording, we're between 10,700 and 10,800. But either way, Bitcoin is up something like 57% on the year. And in addition to those new highs, we also saw tons of volume yesterday.

We saw record futures volume on backed, 85% higher than their previous high. We saw CME have 1.3 billion in notational traded, which is the highest of 2020, and we saw the second highest day in aggregate futures. Now, this wasn't an across-the-board rally. This was limited to Bitcoin and Ethereum, and in the same breath, alts were down pretty significantly. You saw a lot of these darling defy tokens that had been rallying themselves for the past several weeks down 20%, 30%, etc. So let's talk interpretations. And first we're going to do a few that I think are interesting, but I'm a little bit less convinced by. A lot of these come from a Twitter thread yesterday where I asked people what they thought was driving the move.

So the first one that I read was banks stacking on the basis of the Office of the Comptroller of the Currency Notice. So this reflects news from last week that U.S. national banks are now allowed to custody crypto. It's a big change that could open the door for a radically larger set of institutional financial actors to get into the custody game, which could have a lot of implications for them picking up the Bitcoin supply. While I do think that these new custody rules are going to make a difference in the market, I don't think that that's necessarily what's driving this. I don't think that we would see such a fast turnaround. The types of institutions that are going to be most interested in this custodying are not the type that we're going to make a move

within days of an announcement. A second interpretation that I heard was the sort of generically put money printer goes burr. In other words, does the Fed prints more, Bitcoin is naturally going to go up. I would agree that there are macro factors at play here, but I think this is a lot more than a meme as well. A third interpretation I saw was some version of the stock-to-flow argument from Plan B. Someone tweeted, the price of any commodity tends to gravitate towards the production cost. My feeling on this one is kind of similar. It's like, sure, yes, that is a part of the macro Bitcoin picture. There's no doubt about it.

However, we're talking about a short-term move. And I don't think the model on its own, even if you believe in the model, is going to explain any sort of short-term move like that. In fact, I don't think the model is trying to tell you or predict short-term moves like this either. A fourth argument I saw was the idea that this reflected Robin Hood-style traders piling in. In other words, these day traders who were taking their gains from the stock market were moving into a new narrative space in the form of Bitcoin. As you know, I am much more interested in this day-trader set as a real market force than a lot of commentators are out there. However, I went and looked and I just can't find any evidence for this. I didn't see any

mention of the Bitcoin move in R-slash Wall Street bets. There was one big thread in R-slash investing yesterday, but most of the people were talking about, frankly, their priors about why Bitcoin wasn't a serious investment. I also have been looking on TikTok for any evidence of increased chatter or a bump, and I just don't see it. So I'm not sure that retail from the stock trading, day trading set is really an explanation that makes sense right now. Five, Defy Gains. This one is a little more interesting. The idea here or the argument here is that people have been making money hand over fist in D5 for the past several months. As we discussed last week, there is this major uptick in total value locked. You're seeing all of this excitement

around yield farming and liquidity mining. The tokens of DFI projects are going astronomical, causing many to wonder if it's a new alt season. And so the interpretation here is that people are taking their money, their gains out of Defi and putting it into those safer base assets in Bitcoin and Ethereum. Frankly, I saw this argument from a lot of salty monkeys who didn't like that the tokens in Defi were down 20 or 30 percent, but I also saw some much more compelling folks say this as well. I asked Meltem Demirers and she put it this way. She said the BTC rally is gains in alts being recycled into ether and Bitcoin with trade. traders chasing implied volatility.

For my part, I think that it may be part of it. I think that this defy move in the last few weeks has certainly created some dry powder and capital opportunity that may be being recycled into this. But I don't think that it's the only explanation, and I think to the extent that there was this new liquidity, it's being connected to a narrative trade, which I'll talk about later. A sixth interpretation is buyers exceeding sellers. This is sort of the hur-her-h-h-h answer you get anytime you ask people why a price action happened, but Dan Held actually had a good version of this, a more nuanced version of this.

He said, Bitcoin had been bouncing in a 9K to 10K range for weeks. Eventually buyers exhausted sellers, and once Bitcoin broke past 10K, asks dried up, clearing the skies for further price appreciation. I do think that there is a technical element of this, but I'm not ready to say that that's the entire explanation. A seventh interpretation was kind of the grab-bag-perfect storm explanation. In other words, why wouldn't it move when there's so much going on in its favor? Robber, aka at 3X Wolverine, did this in the comments of my question,

where he wrote about basically eight or nine factors that altogether showed just how right the time was. He identified the grayscale buys, or as Nick Carter put it, Bitcoin has a coin shortage, too. GBT ate all the coins and we're scrabbling over the few left in the market. He identified global fiat meltdowns, the halving, gold reaching an all-time high, which as you'll see will come back to, hedge funds buying in, anticipation of another round of stimulus, the S2F model going off in the background, FOMO for people who started to see the movement, and finally the Office of the Comptroller of the currency issue as well. I think this is closer.

I think that these are all factors, but I think that there are more specific catalysts that we can look at. Which brings us to our eighth and I believe most important interpretation. The dollar crash and the search for a new reserve currency. Scott Melker, the Wolf of All Streets wrote this morning, Question of the Day. Are gold, silver, Bitcoin, and everything else rising, or is the dollar just crashing? Perhaps it's a bit of both. What he's referring to is the DXY.

The DXY is the dollar index. It is a measure of the dollar's strength. It is a weighted mean of the dollar's value relative. to the euro, the yen, the pound, the Canada dollar, the Swedish crona, and the Swiss franc. On any given day, the DXY, or rather the movement in the DXY, tells us whether the dollar is getting weaker or getting stronger relative to other currencies. In the immediate wake of the COVID-19 crash, the DXY was up significantly. This was due to everyone trying to get into dollars both for safety as well as to be able

to cover dollar-denominated debts. The DXY got as high as 102 during that period. For most of April and May, however, the DXY was hovering between 99 and 100, still a very strong dollar. It dipped a bit in June, but then had a major leg down over the last week or so. It has fallen now for seven straight sessions and is currently around 93. The euro, meanwhile, is trading near a two-year high against the dollar, as the perception is that Europe has gotten its crap together, with both COVID-19 and backstopping the weakest member economies in the union, while the U.S. looks indeterminate at best. So there is a mechanical

side to this. As the Wall Street Journal had said on Monday, a weakened dollar, quote, mechanically pushes up the prices of the commodities invoiced in greenbacks. Weaker dollar, more dollar price, right? That just makes sense. However, there's more going on as well that just that mechanics. There is a narrative question here. And for that, we need to look at some other assets. Gold is rallying in a huge way. From a low of 1475 in March, gold is up at currently 1927, as I'm recorded, up from 1795 just a couple of weeks ago, and yesterday it even hit briefly a new all-time high of 2000. Gold is now up about 28% on the year overall. Silver has also seen a massive rally. Silver's been hovering around 17 forever, basically, going back to last year, with only a brief

dip down to around 11 or 12 in March when everything cratered, and has been on a move right alongside gold since July 16th, going from 19 all the way to nearly 24. For some context, last week was Silver's best in 40 years. And so if people are connecting this Bitcoin move with this move in precious metals and gold in particular, it's really important to understand the interpretations of the gold movement, because in some ways those also are going to be interpretations of the Bitcoin. movement. The two key interpretations and issues here are one, gold as an alternative to treasuries as a safe haven, and two, a crisis of faith in the dollar as a reserve currency. BitStamp is the original global cryptocurrency exchange. Since 2011, BitStamp has been the

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for all crypto purchases. What's more? With crypto.com's MCO Visa card, you can get up to 10% back on things like food and grocery shopping. When you buy gift cards with the crypto.com app, you can get up to 20% back. Download the crypto.com app today and enjoy these offers until the end of September. This is from Bloomberg today. Gold has emerged as the safe haven of choice among investors as the pandemic upends economies worldwide. The spot metal touched 1981, 2026. on Tuesday, about $60 above the previous peak set in 2011. Boosted by a drop in real rates, the recent weakness in the dollar, massive government stimulus and flaring U.S.-China tensions.

Gold is serving as an attractive hedge as yields on treasuries that strip out the effects of inflation fall below zero. So this point is really key. Treasuries have effectively a real interest rate below zero when you strip out the effects of inflation, meaning that you are paying to keep your money in them. This has caused lots of people to look for potentially other safe havens. Dan Tapiero pointed this as well. He's pointed out how institutional investors are massively underweight on gold,

even though it can do the job of treasuries. He tweeted that exposure of these institutions is currently near zero and says no need to own government bonds at 1% or lower when gold can do a similar job plus in the portfolio. Sprott reinforces this writing, the U.S. fiscal picture is horrific. It seems inconceivable that the taxing power of the government will be sufficient to service government debt, unless interest rates remain pinned near zero or less, quite possibly for a decade. A few more years of subpar economic growth, which is a reasonable bet,

would put the exclamation point on that view. Fed Chairman Powell has stated that the Fed is not even thinking about raising rates before 2022. Even a slight raise in rates could trigger widespread credit defaults and severe economic weakness. What rational level is? long-term investor would want to own U.S. dollar-denominated bonds against this backdrop. Mohamed Al-Irean has made this point as well, saying that some signs that the rally in gold reflects more than the usual drivers, e.g., a gradual structural shift among investors regarding the role of gold in long-term asset allocations, as a result of the very low yields on government bonds associated with central bank market interventions. So the point here is that in a world where the

safest assets, the government bonds are yielding not only nothing, but in some ways costing people to park their money there, and gold has similar properties of store of value, why wouldn't you put it in gold where you're likely to get some modest or maybe even more than modest gain? Vijay Boyapati wrote one of his excellent threads on this as well, which I'm going to just read incomplete because it's all about this. He writes, Bitcoin and gold are on the rise, a threat explaining why. All monetary goods are in constant. competition with each other to attract the pool of global savings. They compete primarily on the attributes that make for a good store of value. Fiat monies, while being inferior on the standard

attributes that make for a good store of value, have one advantage over market-based monies. You are paid interest to hold them. This interest can be paid because the sovereign claims seniorage over their money. In effect, a state can pay interest on the money at issues because it parasitically profits from the productivity of the population over which it claims dominion. States also use the interest rate in a counterproductive attempt to keep their national economies growing. When an economy is slowing, the prevailing theory among central bankers is that the interest rate should be lowered to spur demand. It is precisely in these environments that the one advantage fiat monies can claim over market-based monies is diminished or destroyed entirely. It is in an

environment of negative real interest rates that gold thrives. In such an environment, there is a cost to holding fiat money. Your purchasing power is purposefully debased away from you. gold then becomes a very attractive substitute for cash savings. Bitcoin should behave similarly to gold in a negative interest rate environment, with the caveat that Bitcoin is far smaller than gold, and so its price is still denominated by the inflows of new hoddlers and outflows of long-term whales. Eventually, Bitcoin's market capitalization will reach parity with and likely surpass gold's approximately $10 trillion, due to its superiority along the attributes that make for a good store of value. At parity with gold, Bitcoin will react to interest rate manipulations in a similar way to

how gold does today. One thing is for certain, the current environment of negative real interest rates is likely to stay with us for a prolonged period of time. The botched handling of COVID-19 has put millions of people into unemployment. The reallocation of this human capital back to productive purposes necessarily takes time, and likely a long time. Many industries have suffered a long-term destruction of demand. Central banks and nation states will continue to keep interest rates low in a vain attempt to rekindle the economies they have shattered through mismanagement. They have created the perfect environment for a sustainable market in both Bitcoin and gold. So that's one part of the key interpretation of gold, gold as an alternative to

treasuries as a safe haven in this context of real negative interest rates. There is another even bigger narrative play here, though, that has to do with the status of the dollar as the world's reserve currency. Goldman Sachs, in a note dated today, July 28th, wrote, combined with a record level of debt accumulation by the U.S. government, real concerns around the longevity of the U.S. dollar as a reserve currency have started to emerge. Luke Gromman wrote a take on this as well, Thread, many comments on what gold is telling us. Here's a take I haven't seen yet. Let's pretend the currency system is a human body. The U.S. says it wants to decouple from China. 20 years ago,

we could have decoupled and it would have been like amputating a finger or a hand. Even 10 to 15 years ago, perhaps decoupling from China would have been like amputating an arm or a leg from our currency system. However, after 20-plus years of $200 to $400 billion surpluses U.S.D. exports and China's generally savvy reinvesting of those U.S.D. exports, decoupling from China is no longer amputating an arm or a leg off the currency system. It is like cutting out some critical organ like the heart, the lungs, or the liver out of the currency system. Yes, we can do it, and it's probably the right thing to do, but the cold, hard math of the situation,

is that US decoupling from China means the currency system, as we have known it for 50 plus years, will die on the table shortly after the critical organs are removed, unless some entity or entities can provide the financial equivalent of a blood transfusion or kidney dialysis, etc, to the currency system that will be left dying on the table without it. Guess what it is? Yep, you guessed it, and then he posted a picture of the MoneyPrinter-Gosber meme. This is a take on gold as we have been looking at it for our clients at FFTT for some time, but it is a take I haven't read yet. Let's watch. So basically, Luke is saying that there's going to

need to be such a huge amount of monetary injection from central banks as we move away from China, which has been the great sucking force drawing in U.S. treasuries for so long that it's going to mean inevitably a debasement of the U.S. dollar as currency. And in that context, gold, and as I later clarified with Luke, in his belief, Bitcoin, stand to benefit hugely. If you need more evidence that this reserve currency question is a hot-button topic, look at the debate around Judy Shelton as a Fed bank governor. This has caused huge amounts of consternation, and importantly, the debate has two dimensions. One is her politics, and recent comments dismissing the Fed's autonomy from the White House. And second is her policies. In the past, Shelton has advocated for a return to the gold standard

and has even questioned the need for a central bank. And the dissenters to her appointment, including people like Mitt Romney and Susan Collins on the Republican side, plus, as you might expect, all the Democrats, given that she's a Trump nominee, is largely based on both the policies and the politics. Regardless of what you think about each of those things from a political perspective, the fact that there is such a dust-up about a Fed Reserve governor who advocates a return to the gold standard should let you know just how much this issue is growing on the national scale. Now, with all this said, there is pretty significant disagreement about what happens next with gold. J.P. Morgan thinks that the current price is close to a high. Bank of America continues to

forecast 3,000 an ounce over the next 18 months. Goldman in that same report where they said that they're expecting a search for a new reserve currency, gives a prediction of something like 2,300 an ounce. So really, it's not clear that everyone thinks the same thing. One important thought to maybe leave you guys on as it relates to the gold and the dollar question is the dollar is in some ways, I think, increasingly a narrative versus a structural debate. On the one hand, you have the narrative, which is so clearly stacked against the dollar, negative real interest rates, the Fed seeming to need to print ever more money. All of these things put the narrative so badly, even the fact

that Europe has succeeded or seems to be succeeding where the U.S. is failing, questions and insecurities around the U.S. elections later this year. All of these things are contra-narrative for a strong dollar. At the same time, what they're pitted against really isn't a competing narrative. It's a competing structural argument that the size of U.S. dollar-denominated debts makes it so that it doesn't matter what the narrative is. In the long enough run, the dollar is inherently strong and is inherently going to suck in resources from the rest of the world. Folks like Brent Santiago and Jeff Snyder have different versions of this argument, but in effect, they argue that no matter what the narrative says, the Fed's ability to actually shift the money

supply in such a way as it's going to significantly weaken the dollar is just frankly overstated. I thought an interchange between Joe Wisenthal and Oliver Wrenick was really interesting. Joe tweeted, My two cents is that the move in gold and the dollar are both less interesting than the fever dream fantasies a lot of people have going on in their heads. Oliver Renick responded, definitely, always has been. But even if it is very low odds, the odds have been increasing this past year. Even before COVID, with so much at stake, even these marginal increases in probability

seem like a big deal. And this is the essence of the narrative trade. The narrative trade isn't about overall expectations, it's about momentum. And so to Oliver's point, the fact that the odds of some major, major shift in the global arrangement of power around the dollar has increased, makes the gold narrative trade look even better, even if that narrative is overstated. So we get back to the question of, is this Bitcoin rally real? And I think the answer is yes.

I think, of course, that you have to get beyond the day-to-day price action movement to look at structurally whether the next move is likely to be just a short-term burst and then a major retracement back to lower than we're seeing now, or whether there is something structural going on that resets the bottoms. It feels to me possible that we're in one of those restructural reset moments, where the connection to digital gold in the context of gold performing so well has a halo effect that really connects the Bitcoin narrative to the macro narrative in a way that completes the circle from something that started to happen in a huge way in March and April. And in this, I really want to point to another tweet from Scott Melker who writes,

can we stop talking about the correlation between Bitcoin and SPX, in other words, the stock market yet? If you want to discuss something, how about the much more compelling case for an inverse correlation with the dollar? In other words, if the real narrative trade around Bitcoin, is as a hedge against currency debasement, against fiat debasement, it doesn't make any sense that we're looking at it as correlated or anti-correlated to the stock market. You can have the stock market going up, the currency getting devalued, and Bitcoin and gold going up all at the same time. And in fact, that's what a lot of folks, the Dan Tapiero's of the world, believe is the most likely scenario to happen. So a lot of really interesting food for thought today in these interpretations of Bitcoin's

massive rally. I hope that you've had a good time listening. let me know on Twitter at NLW what you think. And as always, guys, I appreciate your ratings and reviews. They're making a huge difference. Keep it up. Until tomorrow, be safe and take care of each other. Peace.