The Breakdown - Is $50,000 BTC the Beginning of a Bitcoin Supercycle?

Starting point is 00:00:00 And even if things start humming, if that humming is still fueled by low interest rates, there are going to be a lot of people with an eye on the long term asking when the House of Cards comes crashing. Even people who have a fiduciary responsibility to make a bunch of money while the duct tape and paper clips hold. Bitcoin has already demonstrated itself to this group and it makes it far more likely that they will keep hold of it as a potential hedge against that eventual reckoning. Welcome back to The Breakdown with me, NLW.

Starting point is 00:00:34 It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, February 16th, and today we are talking about, you know it, $50,000 Bitcoin, and specifically whether it shows that we are in. a Bitcoin super cycle. So first the news. After a week or so of threatening the Rubicon was breached this morning between 745 and 8 a.m. Eastern time, Bitcoin punched up above 50,000. Now, it immediately met a cell wall and had a $600 candle down and is at the time of recording closer to $49,000. But to me, that technical response is far less significant than the psychological barrier of a $50,000 all-time high being breached. So today's special early breakdown is all about that. I reached out to followers

Starting point is 00:01:37 this morning asking what topics you all thought were important for a 50K show. I also popped into a couple of different clubhouse chats to see what people were focused on. And overwhelmingly, across both of those mediums, the thing that people wanted to talk about is whether this is another indicator that we're in a Bitcoin super cycle. I'm going to discuss this. It's going to be the main focus of the show, what the idea of a super cycle is, where it came from, what it might mean, and some different ways to look at it. But first, let's blast through a few of the other topics folks wanted to discuss. Let's try to start with something that, if not negative, is sort of dismissive. To be honest, it's kind of hard to find those when Bitcoin is stomping face, but here we are.

Starting point is 00:02:20 Peter Brandt tweeted, 50,000 is a nice round number that means absolutely nothing technically. Trying to sound smart, just to sound smart, helps to define dumbness. Now, let's contextualize. Peter is speaking to a trading audience and that trader audience are not supposed to, in their own estimation, get emotionally invested in an asset or let narrative shape what they do. So let's give Peter the benefit of the doubt and assume that that's who he's talking to. However, if he is truly arguing that technicals are all that matter about an asset, the easy rejoinder is that markets are by their very definition a constant give and take between narrative, and technicals, and frankly, narratives tend to reshape the bounds that frame the upside and downside

Starting point is 00:03:05 potential of those technical indicators. Either way, for the sake of completeness, I wanted to include something sort of negative, but I think we can move on. Next, let's discuss Michael Saylor, just doing Michael Saylor things. About five minutes before 50,000 was breached, Sailor dropped a new press release from Micro Strategy. Long story short, MicroStrategy is offering another 600 million in debt, and all of the words of the press release are legalese except for this little line. Micro Strategy intends to use the net proceeds from the sale of the notes to acquire additional Bitcoins. Pomp summed it up perfectly when he tweeted, Michael Saylor is carrying out one of the highest conviction investment thesis we've ever seen

Starting point is 00:03:48 in public markets. Incredible to watch. Okay, next, people are wondering how this happened or why? Well, I think the why is a little obvious. We saw an insane amount of positive news last week. Tesla, B&Y Mellon, MasterCard, Twitter, Deutsche Bank, Morgan Stanley. Every show for the last week has been about some type of crazy positive news if you've been listening. It's hard for that amount of positive news to not have an impact. In other words, the specifics of when this $50,000 price was going to happen are for those technicals that I was mentioning above to figure out, but the overall momentum has clearly been in this direction. This actually gets me to another point I was trying to articulate on Twitter. We have this linear time bias that when things happen quickly, we tend to

Starting point is 00:04:39 feel like that the thing that was before, that you were comfortable with, was the correct thing versus the new thing and the new change that happened really fast. In other words, Bitcoin was between 10,000 and 15,000 for a really long time. So 50,000 seems overvalued. But what if, instead, based on what we now know, Bitcoin was in fact radically undervalued for that same very long time. This is the main thing I say to folks when they ask about how fast the price has gone up. It's not necessarily the market being frothy. It could just as equally be the market finally catching up to what has been in front of their faces the whole time, or what's more, the new information that comes out about just how much has been building behind the

Starting point is 00:05:25 scenes. And what's more, just because Bitcoin has gone up a lot doesn't mean it's not still undervalued. Which gets us to the main discussion. Is Bitcoin in a super cycle? First of all, what the heck is this idea of a super cycle? The concept isn't totally unique to Dan held, but the specific term and the current focus on it has definitely been popularized by him. In fact, when we did our fud-busting show a little while ago, we actually discussed also trying to fit in a conversation about the super cycle, but we decided it was just too much for one's show, so that will be happening soon. The idea starts with the regular or historic Bitcoin market cycle. It's typically four years organized around the halving. And while we don't always talk about it in these terms,

Starting point is 00:06:12 there is, in fact, a viral marketing loop built into Bitcoin. Reduction in supply, plus increase in demand equals number go up, aka NGU technology. Here's what Satoshi said about it. Quote, as the number of users grows, the value per coin increases. It has the potential for a positive feedback loop. As users increase, the value goes up, which could attract more users to take advantage of the increasing value. Now, coming back to the super cycle idea, Dan's argument is that this cycle is different

Starting point is 00:06:41 and, in fact, breaks us out of that strict four-year cycle that we've seen three times now. His argument rests on three points. First, a macro backdrop that highlights so clearly why Bitcoin is needed. Second, a singular narrative not competing with other narratives for outside attention. And third, the ability for global value to flow into Bitcoin like never before. So let's look at each of these. First up is the macro backdrop. Frankly, if you're listening to this show, you know that I agree with this, as it's pretty much all we discussed. But to be specific about how the super cycle related to this actual cycle, the Bitcoin having occurred last year at almost the exact same time as mass-scale government money printing in the wake of the COVID-19 crisis

Starting point is 00:07:28 and ensuing shutdowns. You had effective money issuance of fiat increasing everywhere all at once at the same time as this specific alternative assets issuance was decreasing. And now, while we can debate all day long, and we probably should, what exactly constitutes money printing or not, is incidental to the point here. When we talk about macro backdrops, we're talking about perception, and there was no way to get around the fact that in May of last year you had, on the one hand, the banal predictability of predetermined math reducing issuance of Bitcoin as an asset versus the whims of central planners grasping and trying to do whatever they could to flood the system with as much liquidity and support as it needed to stay alive. This is again. This is

Starting point is 00:08:17 exactly and precisely what drove the institutions here, one after the other, from the hedges first like Paul Tudor Jones and Stan Druckenmiller to the larger firms and even insurance companies, the mass mutuals of the world. Which gets us to Dan's second point, the singular narrative. Dan argues that in the 2017 bull run, there were a lot of competing narratives with Bitcoin's Gold 2.0. The two biggest were competing chain forks focused on the payments use case. The two biggest were competing chain forks and Ethereum ICOs. When we talk about those competing chain forks, we have to remember a couple things. First, is that they were talking about an entirely different use case focused on payments.

Starting point is 00:08:56 Second, we need to acknowledge the harm these had on the store of value narrative. A 21 million hard cap doesn't matter if you can credibly fork and attract value because then the cap is just infinite. It's as many forks as there can be. People like Raul Paul have said that this is what freaked him out and pushed him away from the space in a while, is that that 21 million hard cap was diminished by competing chains. This concern has come up again this cycle, but it is so much easier to dismiss because we now have four years of history showing that these chains with huge amounts of money behind them and early supporters of original Bitcoin trying to lead their followers astray,

Starting point is 00:09:40 clearly haven't been able to attract value away in a real credible way. In fact, during that time, the network effect of real Bitcoin has done nothing but increase. Looking for the best way to stay on top of your investment game, nexo.io has you covered in three easy steps with their high-yield savings account for digital assets. Step one, create an account at nexo.io. Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds deposited. step three, sit back, relax, and earn up to 12% compounding interest paid out daily on your crypto and fiat. Your passive income made simple. Get started at nexo.io.

Starting point is 00:10:28 The second competing narrative in 2017-2018 was Ethereum ICOs, and you have to remember that this was both a different vision for the world and an insane competition around actual dollar allocation. That different vision was about decentralizing the web, beating tech giants who had us locked in because of network effects, using early tokens to incentivize early adopters to help bootstrap network effects that could actually allow new types of services to compete. Some of them were about other things. They were about supply chains. They were about, again, tokenizing the world.

Starting point is 00:11:02 That was the cry. And when it comes to that insane moneymaker, ICAO Cantalon effects were profound. This was the shit coin waterfall that so many have talked about. If you had a fund with a great brand, you could get pre-ICO tokens for almost nothing, and then people would use your brand to go sell a set of additional pre-ICO tokens for a 50% discount, and then you would use those set of brands to go sell a few more pre-ICO tokens for a 25% discount, and eventually by the time that you got to ICO, simply by selling their tokens into the market,

Starting point is 00:11:35 these funds could realize incredible gains because they got to buy it such a discount, and of course it was retail left holding the bags. I use that term cantalon effect specifically because this is what we decry in the traditional system. The closer you are to the spigot of money, the more that you benefit from it. It was the same in this industry. But because it was so profound, there was a lot of money that made a lot of money from it. So it was competing not just from a narrative perspective. In fact, in some ways, the narrative was even less competition when it came to the real money. It was just sucking and leaching resources away because it was such easy money to be had if you could get into that

Starting point is 00:12:10 flow. Again, Dan's argument is that this time around, those competing narratives don't exist. The third pillar of his super cycle argument has to do with availability and ease of use. In 2013 and 2017, these previous cycles, the ability for regular people to buy and interact with Bitcoin was fundamentally different. Buying, selling, and holding it was obviously much harder, but also all of the different options based on your size, your risk profile, what you wanted to do, or how you wanted to make yield with it along the way, just simply didn't exist. In 2020, on a consumer level you can buy with Cash App with Robin Hood, now with PayPal, soon with Venmo. And the options, meanwhile, that are actually crypto-native are massively more sophisticated with better

Starting point is 00:12:50 UI than anything in 2017, not to mention all of the institutions that have a full range of institutional-grade options for custody and increasingly things like Prime Brokerage. So, if we're going to explore whether this is truly a supercycle, I think we have to talk about counterpoints or potential future risks to each of these dimensions, and let's do it in reverse order. Back to availability and ease of use then, this is the easiest one to me. It is going to get nothing but easier to interact with your Bitcoin. The race is already on for commercial banks to offer services to retail and institutional customers. There's going to be massive amount of competition, which means that the customers on both the retail and the institutional side benefit. This is a one-way

Starting point is 00:13:35 train that isn't turning around, and I think the only credible threat to this would be the U.S. government doing a total 180 and transforming how people were allowed to interact with their Bitcoin and their other crypto assets. This is, of course, always possible, but it doesn't seem likely to me. In fact, it feels far more likely that even in the draconian regulation scenario, it would make it such that it was only the Bank of Americas and the city banks and chases, exactly the same firms who are spinning up crypto asset services now that could offer them to the public. In other words, get a banking license or get out. But that train too has already left the station thanks to Brian Brooks and the OCC.

Starting point is 00:14:16 These companies, the ones that the U.S. government might, even in a real regulatory tightening, are already preparing that set of services. So this one is a big fat check on the super cycle. What about this singular narrative idea? I guess the question is what would you say is a credible alternative narrative. NFTs are certainly super buzzy right now. They're really hot. We're seeing some crazy prices. But in no way are they even trying or pretending to offer an alternative narrative to digital gold. The only alternative they present is a place to put speculative assets to work as well. So to the extent you think there's a zero sum of money,

Starting point is 00:14:53 especially retail money, I guess you could say that they're competitive. But no one thinks that NFT Topshop Collectibles are a true alternative to Bitcoin as either digital gold or future currency, and that includes the people who are running NFT Topshop collectibles. What then about Defy? This is the one I could see most wanting to jump to, but I just don't see it as an alternative narrative. And that's not because I'm being dismissive of Defy. It's because, frankly, and some of you all might not like this, defy ties the Ethereum narrative closer to that of Bitcoin in a big way. Remember, how much of 2017 and 2018 was about tokenizing random social networks and supply chains. DeFi isn't about that. It's about an alternative set of financial rails. Bitcoin 2, Digital Gold 2.0, is about an

Starting point is 00:15:40 alternative set of financial rails. When we have debates about Ethereum and Bitcoin as it relates to DeFi, it's actually mostly about value accrual of base assets and who will be the big winners there, which frankly is narrative minutia. At that point, we're already clearly on the same narrative wavelength to outside observers. What's more? Just from a functional standpoint, Bitcoin is being put to work as a reserve asset in DeFi. Well, Ethereum remains dominant, still of the $40.15 billion in total value locked in defy, 8.6 billion of that is in some form of rapt or synthetic Bitcoin. That's 21%. The point is that within this industry, even the other biggest thing competing for attention still serves to reinforce Bitcoin's centrality as the

Starting point is 00:16:24 centerpiece of a new alternative decentralized financial system. The fights about it are really for us, the insiders, and the super cycle isn't about the insiders. It's about everyone looking in. Now, I suppose whether Defi could compete for institutional allocations in the medium term is a different question, but right now, every single firm that I've seen touching those big institutions say that it is only Bitcoin that is currently crossed the threshold into their awareness. Which brings us finally to number one, the first pillar of the argument, the macro backdrop. The question I believe, and perhaps the biggest threat to the super cycle idea, is what happens if everything starts to look great in the macro economy? If the macro backdrop has been

Starting point is 00:17:07 printing and deeper government involvement in the economy, what happens if they stop printing and withdraw? I know it doesn't sound likely, but it's worthwhile as a thought experiment if nothing else. Perhaps more realistically, what happens if COVID vaccines become profligate, pent-up demand comes to the fore, the economy surges and concerns about inflation don't play out because we're only looking at CPI, and there's other types of counter-failing forces, deflationary forces, etc. What then? First, it does feel likely to me that this would be the biggest factor causing a retrace even if we stay in a larger super cycle. But there are two big forces that make it feel to me, mean non-lethal. In the short term, Bitcoin continues to have asymmetric upside. Part of what makes Bitcoin

Starting point is 00:17:53 so much more appealing to millennials and institutions than something like gold is that it is an emergent store of value that still has an absolute huge amount of price to go to reach what would be a reasonable market cap just for Bitcoin to match the total market cap of gold. You're talking about 10x gains from here to be on a comparative level to an asset that is far less useful in in an internet age than Bitcoin is. Even in a world where institutions go insanely risk on, at these prices, Bitcoin remains a really powerful asymmetric upside risk on bet. That's the thing that makes it so weird. It has the characteristics of both risk on and risk off at this stage, which pretty much makes it unique. Now, in the longer term, the monetary

Starting point is 00:18:38 policy experiment we're all living within basically comes down to how long can we keep this up. We are in uncharted territory. And even if things start humming, if that humming is still fueled by low interest rates, there are going to be a lot of people with an eye on the long term asking when the house of cards comes crashing. Even people who have a fiduciary responsibility to make a bunch of money while the duct tape and paper clips hold. Bitcoin has already demonstrated itself to this group and it makes it far more likely that they will keep hold of it as a potential hedge against that eventual reckoning. One final thing to recognize about any sort of super cycle is that we don't know yet by definition what it will look like in terms of market cycle patterns.

Starting point is 00:19:26 The biggest part of its thesis is that it may mean that we don't follow the predictable four-year patterns organized around the having that have historically been the case. I think this is the beginning of a conversation, not the end of it. I think you should make of this what you will. I think you should do your own research. And I think for now you should also really be be out there having fun getting rich. I appreciate you hanging out, guys. And until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Is $50,000 BTC the Beginning of a Bitcoin Supercycle?

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