The Breakdown - Is The Bitcoin Rally Over Early?

Starting point is 00:00:04 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 Wednesday, April 17th, and today we are asking, is the rally over? Before we get into that, however, if you are enjoying the breakdown, please subscribe, 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. All right, so let's talk about what we're talking about here. I will preempt anything and say that I am not bearish, I'm not concerned, but this is a topic of conversation, it's an emerging narrative, and so it's worth exploring.

Starting point is 00:00:49 The last six months have seen undoubtedly the strongest pre-having Bitcoin rally in history, price more than doubled to reach new all-time highs, and while there are specific reasons for it, i.e. the ETF, it's still been extremely notable. However, the last month has been choppy and tense. There was no breakout to higher highs, Retail still isn't really there. It's not exactly clear to see where fresh momentum will come from. Bitcoin is now down almost 10% since the end of last week. While bull market corrections are completely normal for Bitcoin, some are starting to ask if this is more than just a correction. Let's talk first about the ETF. Probably the biggest shift in Bitcoin markets over the past month

Starting point is 00:01:25 has been the ETF hype cooling off. During recent months, the market would move on every release of flow data. We saw exaggerated responses to hot inflows while any outflow triggered a huge correction. Now, it seems like most people have moved on from tracking daily flows. Last week, flows were firmly in the red, but that barely rated a mention among a range of other catalysts. This week, most funds have seen close to zero flows, and even the market-defining BlackRock products has slowed down. Bloomberg ETF analyst James Safart said that this is entirely normal. He wrote, On any given day, the vast majority of ETFs will have a flow number of zero. This is very normal. There are around 3,500 ETFs in the U.S. Yesterday, 2,9003 of them

Starting point is 00:02:01 had a flow of exactly zero. Safehart went on to explain that flows. are driven by large mismatches in supply and demand, and anything smaller is simply dealt with using marketmaker inventory. His point being that a lack of inflows doesn't mean no interest, just that interest has dropped to manageable levels. However, that's kind of the problem. Strong ETF inflows were a sign of overwhelming demand. Now that that demand has died down, the market has lost to strong catalyst. Tuesday saw the release of the first round of ownership disclosures for the ETFs. 30 institutions reported holding BlackRock's product, while there were 11 holders for fidelity. Only 0.2% of share ownership was subject to reporting, suggesting the vast majority of holders are much smaller entities

Starting point is 00:02:38 and retail investors. None of the institutions reported a large portfolio allocation, with the largest being 2.8% and most being fractions of a percentage point. The story being told in the data then was that large players are still just dipping their toes into Bitcoin, with no one having made a big splash. The next potential catalyst for the ETF is the arrival of more wirehouses and large institutions. This narrative has been on the back burner for weeks, if not months, but there's been precious little news recently. Some are still optimistic. Samir Kurbidge, the chief investment officer at Hashtex, said, there is surely potential for a resurgence in inflows. Many banks, endowments, and pension funds worldwide are now only beginning their due diligence processes before considering

Starting point is 00:03:17 strategic allocations to Bitcoin through newly launched ETFs. End quote. For this to play out as a major narrative, however, we'd likely need to see a large allocation from a really big institution. And at this point, there's no candidate standing out as having appetite to make that kind of move. For now, it just seems momentum has been lost. The only thing to really keep an eye on is grayscale slowly bleeding out. GBT has now lost 50% of its Bitcoin holdings to outflows. And although those outflows have slowed down, they remain persistent. At the moment, it looks like BlackRock will overtake grayscale in terms of AUM sometime

Starting point is 00:03:48 towards the end of the month. Once again, I want to make a really fine point. I am not in any way arguing that ETFs somehow don't matter. I'm also not arguing that ETFs won't provide a catalyst in the future once again. The only thing that I'm suggesting is that the narrative power of the ETFs in its first incarnation has now played out. Hello, breakers. Today's episode is sponsored by Ledger.

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Starting point is 00:04:51 notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin Development. Thanks once again to Ledger for supporting the breakdown. right, breakers. Consensus 2024 marks the 10th gathering of the biggest event that's devoted to all sides of the crypto, blockchain, and Web3 ecosystems. Join pioneering fingers and builders as they delve into the future of defy and explore game-changing tech, from AI to ZK proofs and everything in between. The event is three days of jam-packed content, networking, and so much more. Some of the speakers at the event include Chris Dixon, the founder and managing partner at A16Z Crypto, Sergey Nazaroff, the co-founder of Chainlink, Kathy Wood, the CEO of Arc, Hester Purse,

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Starting point is 00:06:06 Now, markets are only pricing in a single rate cut, and even that is questionable. During comments on Tuesday, Fed Chair Jerome Powell suggested that policymakers are no longer confident rate cuts will be appropriate this year. He said, The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence. Powell didn't get all the way to talking about the possibility of rate hikes, but added, we think policy is well positioned to handle the risks that we face.

Starting point is 00:06:32 Right now, given the strength of the labor market and progress on inflation so far, it's appropriate to allow restrictive policy further time to work. Until inflation shows more progress, Powell said, we can maintain the current level of restriction for as long as needed. Wall Street responded moderately to the comments with a slight sell-off in stocks. Two-year treasury yields rose mildly, touching 5% for the first time since November. It seemed then that Powell was simply ratifying, an opinion that had already been baked into markets, that rate cuts are deferred until at least

Starting point is 00:07:00 deep into the end of this year. The issue is that rate cut assumptions had underpinned this year's rally in risk assets. Optimism had been tempered along the way as rate cuts were pushed back over and over again, and now the good outcome for the year is that the inflation scare passes quickly and we see one rate cut in Q4. The bad outcome looks a lot more like the 1970s, with a second inflationary pulse. There is a huge gulf between those outcomes and the assumptions of a soft landing and 1995-style Goldilocks conditions which kicked off this bull market. The Kobe-AC letter summed up the headfake saying, this has got to be one of the quickest Fed turnarounds in history.

Starting point is 00:07:32 Less than three months ago, the Fed was talking about how many rate cuts are coming this year. Now it's a question of rate cuts even come at all. Mad money host Jim Kramer says, It does amaze me that people still thought Powell could be dovish, as he is a most pragmatic Fed chief. We must ignore the three and two cuts and question the ones. What evidence warrants any cut? What are the cut are seeing?

Starting point is 00:07:50 It's not exactly related, but here's another story that shows the wobble, let's call it, in crypto interest. Venture capital firm A16Z has announced $7.2 billion in fundraising to deploy across multiple tech sectors. There's billions earmarked for AI, gaming, and even what they call American dynamism, which seems in part a code word for defense tech. The firm's $4.5 billion crypto fund was allocated zero in new fundraising. There are a couple different interpretations of this.

Starting point is 00:08:16 One, one of the big themes that they're interested in Web3 gaming could come through the gaming sector. Two, that $4.5 billion crypto fund was a huge one, and so it may not have been as much of a priority to re-up with this round. Or it could be that the difference is that crypto is no longer a major focus. Van Spencer, the co-founder of Framework Ventures, had some interesting insights, tweeting, there is a compelling case that crypto is the last venture investable vertical. FinTech, effectively dead, consolidating. Consumer, no hits in the past 15 years. Enterprise SaaS, revenue multiples, sub 10x make it non-viable for large VCs, tons of competition, and AI platform cannibalism. American dynamism slash defense interesting but only playable by the largest

Starting point is 00:08:55 funds with unclear outcomes and multiples. AI, potentially the last refuge of gigafuns, little opportunity for early stage huge capital commitments required. Given the dispersion of returns, the owners should be on LPs to prove their existing VC strategies are workable and durable. There is a world where all the old line VCs just turn into funds of funds to access emerging crypto alpha dogs. Like I said, not necessarily directly related to this hype over question, but still a pretty fascinating sub-story. Another sub-story. Yesterday, I read you Travis Kling's tweet about how basically no one has conviction in all coins right now. And part of a big reason that this drawdown has crushed sentiment is that while majors drew down a bit, all coins got smoked. You're listening, of course, to a

Starting point is 00:09:34 primarily Bitcoin and Macro podcast, so most of you didn't necessarily go out all the way onto the risk curve, but there were many who did. The last major narrative was meme coins featuring relatively serious analysis of whether dog coins or cat coins were a better bet. For the many crypto traders who got way out over their skis, last weekend's drawdown was an absolute bloodbath, slashing their portfolio in half. In terms of the numbers, Bitcoin is down around 8% over the past week, while Ethereum is down 12%. If you take a look outside of the top 50 cryptos, it's pretty easy to find coins that are still down 20 and 30%. The easiest way to think about this is through the lens of Bitcoin dominance. During the drawdown, Bitcoin dominance rose to almost 53%. It's highest

Starting point is 00:10:10 level since April 2021. That means that higher risk traders were massively punished for broadening their exposure during a bull market. Chris Berniske put it pretty bluntly, to the entitled new class of bull market geniuses, welcome to reality. Still, reality or not, to the extent that we are talking about fear and narrative pain in the market, this sort of big crush is exactly the type of thing that can do it. These things are showing up in research houses as well. Marcus Thelian of 10x research thinks that risk assets in general could be approaching a crucial tipping point, citing persistent inflation, decreasing rate cuts, and a rising bond yield, Thelian announced the firm had sold all of its tech stocks and most of its crypto on Monday. He wrote,

Starting point is 00:10:45 Most of this 23-24 Bitcoin rally is driven by expectations that interest rates would be cut, and this narrative is being seriously challenged now. On the flip side, Edward Hindi, the chief investment officer at Tier Capital, is constructive on a Bitcoin recovery, but for kind of a terrifying reason. He wrote, Bitcoin remains a viable doomsday asset in 2024, as its correlation to gold recently increased, and investors continue to diversify away from traditional financial assets. The ETF is currently spearheading this doomsday rally, and we should expect $120,000 to be hit in the coming months, his global geopolitics continues to deteriorate, and the middle class continues to find ways to protect their wealth. Indeed, there is perhaps something to be learned from recent activity in gold markets and not just the financial kind.

Starting point is 00:11:25 Over the weekend, Bloomberg covered a rush of activity around pawn shops as consumers looked to cash in on all-time high gold prices. A Brooklyn pawn shop owner reported that sellers had tripled since the beginning of the gold rally began two months ago. He said people are using gold as an ATM they never had. interviewed a customer looking to sell their gold, who stated, prices are high and I need cash. The customer discussed the high cost of rent, groceries, and insurance, and noted they had no savings. On the other side of the market, though, buyers have dried up. The U.S. Mint reported that March sales of American Eagle gold coins came in at roughly

Starting point is 00:11:54 10% of last year's volume. Is it possible that we're seeing a similar dynamic play out at recent Bitcoin all-time highs? There are countless people who bought during the last cycle and have a little Bitcoin stashed away on a forgotten exchange account. The economic pressures are the same, so maybe historically high Bitcoin prices have been enough to encourage sales. For people who may have only experienced a few months of Bitcoin euphoria at the end of 2021, these levels could seem too good to miss out on. Now, I think it's important as we round out here to not overstate how much the narrative is shifted. There is a certain

Starting point is 00:12:22 gloom that has taken hold. It is broader than just Bitcoin, but the next narrative catalyst than the halving is coming up, and Bitcoin is nothing, if not extremely narratively adaptive. As Van Spencer put it, if you're bearish here, you should just hang it up. Chow Wang from Alliance Dow wrote, current base case, we are close. climbing a wall of worry and will go up a lot higher in the next six months. The powers that be need to pump all markets in order to win the election. Comfee and spot, then come November decide whether or not to take profit. By the way, this is a better scenario than my base case from one to two months ago. Back then, I thought we could get a blow off top around having our

Starting point is 00:12:53 ETH-EETF decision. After a blow off top, there's a greater chance that it's over for a while. But this current retrace means we have ammo for a longer, more sustainable bull. Ultimately, this is all just part of it, guys. And in the same way that I encourage people not to get too over-excited when things are going well. I would also encourage you not to get too worried when things are going less well. Enjoy the roller coaster, enjoy the ride because this is Bitcoin, baby. One more big thank you to my sponsor for today's show. Check out the Ledger Bitcoin Nano. 5% of your purchase will go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.

The Breakdown - Is The Bitcoin Rally Over Early?

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