The Breakdown - Is the ‘Bitcoin Supercycle’ Theory Dead?

Episode Date: May 29, 2021

On this edition of “The Breakdown’s Weekly Recap,” NLW looks at what this cycle has taught us in terms of: Who is investing and how it’s influencing markets How market structure and narrative interact to shape price action Why stablecoins could be a dark horse for reducing the duration of future market downturns -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

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. The breakdown is sponsored by nexus.a.o and bitstamp and produced and distributed by CoinDes. What's going on, guys? It is Saturday, May 29th, and that means it's time for the weekly recap. And today, we're looking at the super cycle theory and whether recent price action means that we need to to just banish it to the dust heap of history. There is nothing that people love more than telling you when things go badly that that is real life, that all the excitement, dreaming, and optimism is fake, and that the disappointment is real. By those metrics the last couple of weeks have been the

realest of this cycle, Bitcoin has lilted listlessly along for months since its early to mid-April highs, and it felt even before the parade of Fudd over the last couple weeks that some momentum had been lost. Maybe it was not enough new institutions buying, or at least not buying fast enough or publicly enough. Maybe it was more of the trader and whale attention shifting to Ethereum, defy, and dog coins. Whatever the case, the scene was set for some exogenous force to push the mood and consequently the price even lower. And along that came perfectly in the form of that fickle friend, that Loki trickster himself, Elon Musk. After helping drive the price from the high 30,000s to the 60,000s thanks to Tesla's big Bitcoin buy, Elon effectively took it all back when he announced

that Tesla was reversing course on Bitcoin payments for vehicles due to environmental concerns. That was followed up with China Fudd, insignificant seeming at first when it was just Reuters sensationalizing policy that had been enacted four years earlier, but it became much more significant when it was the vice-premer of China talking about Bitcoin mining bands from the highest echelons. More significance still was when it was miners rapidly disgorging themselves of Bitcoin and even in some cases, mining machines, in order to have capital to swiftly pick up and move operations should things manifest badly. That miner selling drove another wave of price declines over the weekend, although this time it was driven by spots selling, not just liquidations. And man,

did last weekend feel really, really bleak. I was watching on Twitter and I saw desperation, capitulation, just real glumness, none of that fun bravado that crypto Twitter does so well. In fact, I saw a few people comment that it felt like a full bear cycle hyper-compressed in a couple of days, and that's not inaccurate. Sunday night, though, followed a pattern that has held for the past couple of months, where Sunday morning is the worst trading session of the week while Sunday evening into Monday are the best. That played out again, and the week started perhaps a bit hollowed out, but not with the intense dreariness that it might otherwise have been. And then some more interesting things happened. This week was CoinDesk's consensus event, and while we are far,

far away from the days of the consensus pump, the notion that a conference could impact the price of an asset, there were some pretty notable conversations that happened here this week. One that kicked off the week was Ray Dalio, who revealed that he had, quote, some Bitcoin and also preferred Bitcoin to bonds. Perhaps not the ringing endorsement of a Paul Tudor Jones and his great monetary inflation thesis, but this is the founder of the world's biggest hedge fund and one of the most respected voices in economics, a guy who has historically been skeptical or critical of Bitcoin right up until last fall, so it's not an insignificant moment. Fast forward to the end of the weekend, we have a very different type of hedge funder

and Carl Icon going on Bloomberg and talking about how he's preparing. to take a big position, which for ICON enterprises, he says, means one to one and a half billion. As Alex Kruger summed it up, Carl Icon wants to get into crypto in a big way, while Ray Dalio prefers Bitcoin to bonds. Volatility may not be different this time, but everything else is. Yet, the market remains in doldrum. So what is happening? Well, the short answer is, I don't know, but there are a couple of really interesting things that we've learned in the last few weeks. The first is that the combination of narrative and market structure that has shaped price action has been made really plain.

I've discussed a number of times on this show how market structure has impacted the downturns. Specifically, we've discussed the way that leverage in the system makes moves much more severe than they might otherwise have been. I've had a couple people ask for slightly more explanation of this, so here's the really short, overly simplified version of it. A lot of the trading that goes on right now isn't just spot buying or spot selling Bitcoin or Eith. Instead, it's trading derivatives like perpetual swath.

These instruments allow people to bet on the future price of assets one way or another. What's more, they allow people to use leverage, which means that a trader puts down a certain amount of collateral but then is allowed to bet with a much bigger amount of capital than they put down. When these bets go well, they can be extremely lucrative. You're effectively betting with more money than you have, right? But when the market starts to turn, one of the impacts is that the value of the collateral goes down. If a trader isn't able to add more collateral quickly when that happens, those positions might get liquidated, which is another way of saying that the exchanges force-sell the collateral. That force-selling is the thing which

causes such extreme moves as we saw last week. They make the market appear to be overreacting, but in reality it's just a byproduct of the method with which people are trading. One interesting corollary is that in the same way we can recognize the role of leverage in driving the market down in recent crashes, we might need to also revise our understanding of how the market has been going up. Looking for the best way to unlock your crypto's liquidity? I.O. is exactly what you need. Borrow against your digital assets at just 6.9% APR. Earned passive income with yields of up to 12%, and swap between more than 100 market pairs with the instant Nexo exchange. Try the NXO wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io.

That's N-EXO.io to get started today. Secure, regulated, and reliable, BitStamp is the cryptocurrency exchange of choice for more than 4 million. investors and traders worldwide. Since 2011, BitStamp has been a trailblazer in security, head of the class in personal customer service, and dedicated to making buying crypto fast and easy. Whether you are investing on our desktop platform and mobile app or trading on our speedy APIs, BitStamp gives you all the tools you need to reach your crypto goals. Visit bitstamp.net to learn more. BitStamp for all the ways we crypto. If you look at the volume of derivatives trading versus spot trading over this bull market,

derivatives are massively bigger. In other words, just like the story of down moves was one-part news, one-part spot selling based on that news, and something like eight parts for selling through liquidations, the moves up have been similarly shaped by the type of instruments available. It's not, in other words, just institution spot buying that has driven the prices up, although that's certainly a part of it and has absolutely been the main driver of the narrative cycle. If you're interested in more on this, I highly recommend listening to Alameda Sam Trebeco on Luke Martin's Prophet Maximilist podcast. He discusses the folly of the belief that was prevalent a couple weeks ago that the whole

ETH run-up was just driven by spot buying and was thus more durable. I think all of this market structure stuff is really important to keep in mind when we ask the question that frames this show. Is the idea of a super cycle dead? The super cycle is a concept popularized by folks like Dan Held and Suu from Three Arrows Capital that were breaking out of the past patterns of crypto market cycles and entering into some fundamentally new age. This week I saw a lot of people saying that that concept was dead, even Kathy Wood in my conversation at Consensus called it out. But I think we need to break it down a little bit further. One, I think, wrong-headed understanding of the super cycle idea was that the number

would now just always go up. In this estimation, there have been many folks who argued that the idea was that institutions will never sell because they have longer time horizons. Because of that moves down and be less severe. In fact, they would just keep going up. Well, that version certainly hasn't been borne out. We've just had one of the biggest multi-week corrections in Bitcoin's price since 2013. What the Supercycle idea really refers to is a breaking of the pattern of four-year Bitcoin-having-led boom and bus cycles that generally proceed from halving to bull market with a major run-up into a deep multi-year bear before the whole thing repeats. The supercycle theory says that a new set of actors, a new mainstreaming of the asset class as a whole, means that pattern

won't follow in the same way. Suu puts it really crisply. Quote, precision in language matters. Supercycle does not mean number go up every day. It means that adoption steams forward rapidly, and that the odds of a multi-year bear market again becomes significantly lower as institutional and mainstream capital comes into the space. I don't think anyone has the evidence yet to determine how right or wrong this is, but I do think we can start to point out what is different this cycle and how that might impact things. The profile of the buyers is certainly one. I got reports a couple weeks ago from a number of companies that work with institutions that institutions were not only not selling during these recent dips, but were in fact adding to

their positions. If that continues to be borne out, it could shape the relative floors of moves and provide a counterbalance to these big moves down. Another thing that's different, as we've discussed, is the impact of leverage in the system. On the one hand, it seems to be making moves up and down more severe. However, it also makes them potentially shorter. Going back to Sam Trebeco on Profit Maximilist, he discussed Alameda's taking a huge bet on a recovery to 40k-ish, once liquidations pushed us down to 31k or so, because effectively no one wanted to sell that low. It was all forced selling. And so the assumption they had was that there would be a quick revision to the point at which the liquidation started, which is pretty much exactly what we saw.

But here's one more thing that's different that I've been thinking about a lot. In 2017, stablecoins weren't nearly as used as they are now. Tether existed, but it was comparatively tiny. When people wanted to get into and out of cryptos, they had to buy Bitcoin or sometimes eth. That's obviously not the case anymore. Stablecoins are the default on and off ramps for the industry. And it's that off ramp piece that I'm most interested in. When people were getting out of crypto in 2018, for example, they didn't move from high-risk guys. CO coins to Bitcoin. They got out entirely. They moved to Fiat. We have evidence that more and more, when markets are going down, investors and traders aren't moving to Fiat, they're moving to stable

coins. In other words, they're staying in the crypto ecosystem. According to GlassNode, since Bitcoin started going down around the middle of April, Tether added about $14.2 billion in supply, U.S.D.C. added about $9.72 billion in supply. And Dye added about $1.22 billion in supply. In their tweet, GlassNode ponderes whether this growth in stablecoins is a flight to safety or people loading up on dry powder. For example, to be able to make the type of bet that Alameda did when the market went down. I don't know the answer to that, but I do wonder if the fact that people aren't exiting the crypto ecosystem entirely could make downturns less prolonged.

What I mean is, imagine you've invested $10 million in the space and there's a big downturn. In the pre-stablecoin paradigm, if you wanted to take a temporary reprieve from the space, there was the huge pain in the butt of moving that much fiat around. And if you wanted to get back in, imagine the time burden of moving that much fiat from traditional banks to OTC desks or exchanges. In the paradigm we have now, you could simply retreat to cash equivalents like USDC, wade out the storm, and move back in at literally a moment's notice. I don't know if this changes investor psychology, and I don't know if the barriers were so high before that it contributed to prolonging the bare market. But it wouldn't surprise me if the presence of these crypto dollar equivalents smooth out the

market in some ways. Either way, this continues to be the most fascinating industry to be in bar none. Each week, we learn a little bit more, and I appreciate you being on that journey with me. For now, I hope you guys are having a great long weekend. Until tomorrow, be safe and take care of each other. Peace.