The Breakdown - Is the Crypto Cycle Overheating Already?

Episode Date: March 5, 2024

With Bitcoin nipping at new all time highs this week plus memecoin mania, some are starting to ask the question. Today's Show Brought To You By Kraken - Go to https://kraken.com/thebreakdown and see what crypto can be Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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 Tuesday, March 5th, and today we are asking, are we getting overheated already? Before we dive 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.L.Y.

slash breakdown pod. All right, friends, well, just so you guys know, I am recording this on Monday night at around 9.30 p.m. I have a kid's passport appointment, a couple hours down south in the city, tomorrow morning, and so I wanted to make sure the content was ready and waiting to go. However, at the time I'm recording, the price of Bitcoin is around $68,200, in other words, absolutely nipping at breaking through an all-time high. That means, very possibly, that by the time you hear this we will have achieved a new all-time high, and I won't be screaming about it. So consider this your down payment on that scream. Obviously, we will talk all about it.

But it does kind of set up the right context for the question that I always wanted to explore on today's show, which is, are we speed running this cycle? Is it getting overheated already? Just a week ago, the major narrative in crypto was that Bitcoin had crossed $50,000, and no one outside the industry had noticed. Google trends had barely budged for Bitcoin searches, Coinbase was buried deep in the app store with barely any attention. There was no sign of new retail traders buying their first Bitcoin, but then everything changed. On Wednesday, Coinbase broke, citing a greater than 10x surge in traffic, and after an insane 25% gain in Bitcoin's price last week, there is no question that ordinary people are once again beginning to pay attention.

Fear and greed measurements are showing extreme greed. Relative strength indices on all time scales are showing extremely overbought conditions, on a scale that has never been seen, before at these price levels. Within one week, the narrative has shifted completely from when will retail pay attention all the way to the market looks overheated already. So let's look at a couple recent threads that are discussing exactly that. The first comes from Mike Ippolito, the co-founder at Blockworks. Mike writes a quick thread on if we're speed running this cycle. I'm currently at Heath Denver. Lots of people are asking the same question. Has this cycle happened too fast and does that mean it will be shorter? To be honest, it resonates with me. The 2018-2020 bear market was

much worse than this one. It was nearly a full year longer, and the disillusionment was 10x worse. The industry was hanging on by its fingernails, and each day the bear dragged on it got worse. By contrast, 2022 to 2023 wasn't that bad. If you were building an on-chain product, it might not have felt like a bear market at all. Projects still got funded. Conferences still attracted 20,000 people in the heart of the bear. It was a night and day difference from 2019. This has led people to worry that we haven't suffered enough pain. To me, this feels a bit superstitious. I understand the idea that leverage needs to be unwound and that the hype needs to die, but that happened.

Half the damn industry got carted out. As I look around today, I see every hallmark of the early parts of a cycle. We're in the midst of the classic Bitcoin-led spot rally, and it looks like Bitcoin dominance is reaching its peak. This paves away for a monster rally in ETH-BTC, which should come next. There are also plenty of other healthy indicators thanks to Galaxy's Alex Thorne for surfacing them. MvRV, think aggregate cost basis for all Bitcoin holders,

and the ratio of long to short-term holders are both indicative. of very early stages of the cycle. While Coinbase is climbing the App Store rankings, it's still low. As a reminder, last cycle, Coinbase was the number one app in the entire store for two months, May and October 2021. Today, it's number 14 on the finance chart and 156 across all apps. I think the best way to think about the current moment is that the firing gun has been started on the bull market. There's no reason to expect that it will be shorter, longer, or different from any other crypto bull market. Many are saying that this time is different because of the ETFs. There are some compelling arguments to support this idea, but I disagree.

The markets will find a way to introduce leverage, which will eventually blow up. People will take profits and sell. These are timeless truths. That said, I think the ETFs will accelerate the trend of lower highs and higher lows. Over time, they should be volume dampening, as more dips get bought and more rips get sold. This was already happening anyway, though. It's an existing trend, not a new one. TLDR, there's no reason to believe this cycle will be any shorter or longer than past cycles.

The belief that we haven't suffered enough pain and thus the bull will be worse is superstitious at best. Stop worrying and enjoy. This is the fun part. Ryan Selkis from Masari also wrote about similar themes. On March 3rd, he tweeted, There have really only been two things that have ever pulled crypto into new bull markets. ETF hype and new pockets of speculative bubbles. The reason things are moving faster this year is that we have both at our backs.

Aside from its impact as a meme, the 21 million Bitcoin hard cap has been irrelevant since the first or second having. The real driver of the 2013 bubble was the introduction of Grayskills Bitcoin Trust. It launched in September and for the next 60 days, Bitcoin went vertical. 2014-2016 bare market was brutal. Many companies almost died. Bitcoin's future was uncertain. The ascent back was torturous.

Then, in early 2017, ICOs were born. XRP, ICOs and Eath led the 2017 rally. A new speculative asset class was born and Bitcoin rallied mostly as new speculators rotated out of their gains. BTC was a passive beneficiary for most of 2017. not the leader of the pack. The 2018-2020 hangover was similarly brutal. We were playing with all the early defy apps at Masari, but the problem then was that using Defy amounted to picking up pennies, tiny yield, in front of a steamroller, technical risk, security risk, and illiquidity.

The centralized crypto credit markets were also born in this bare market, so you had lenders slowly build up their books on the way down, arguably healthy, before the market began to heat up in late 2020. We had three consecutive booms in 12 months, but they didn't overlap. DeFi headed 0 to 1 thanks to yield farming, incentivizing participation through token rewards, juice the minuscule defy returns, and solve the pennies versus steamroller problem. But that ended by the fall. In the fall, you had the levered grayscale widowmaker trade launch into hyperdrive. Rampant speculation around the GBTC premium juiced grayscale AUM with no corresponding self-side pressure. But again, that ended in February when the premium flipped to a discount. Then in the spring and fall,

with a brief summer correction, we add a double bubble thanks to A, the hot ball of money trade amongst the resurgent L-1s, thanks to ETH's high fees during D-Fi summer, and B, the NFT boom, both for ZERP slash over-leverage slash Ponzi games. Today is different. The L-1s are scaled, and real applications are sitting on top of them. At the same time, the meme coins are cooking and people are losing their minds in an election year. At the same time, the tsunami of Wall Street demand for Bitcoin is here. New D-Gen games and real institutional inflows have never happened quite like this before. episode is brought to you by Cracken. For far too long, the whole financial system has been standing

still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7, 365, and moves at the speed of real life. Not everyone believes it, we've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry, facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by

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Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin development. Thanks once again to Ledger for supporting the breakdown. So this is really interesting and a theme that I'm seeing a lot, that the best comparison to right now is not actually 2020, but back in 2017. Dijan Harambe writes, I really think the meme coin craziness is just going to continue absorbing all liquidity in the space for a while. We're seeing something similar to the ICO craze of 2017 on a much larger scale, at the same time that Majors Bitcoin and Eath received mainstream adoption and integration in a way they never have before. The conditions may not be the exact same with the pandemic and government stimulus checks

giving retail-free money, and a lot of people in tighter positions due to inflation. but this is a double-edged sword that fuels the age of hyper-gambling we are entering. We must now gamble to get ahead, and meme coins are the mine virus that will consume this space and attract retail on a scale that no utility-based project ever could. Everyone wants their lottery ticket. And indeed, there is a lot of meme-coinery going on right now. Glantz at any crypto news source and there's a list of eye-popping numbers for dog and frog coins. Dogecoin is pretty much doubled from a week ago, and it looks like the laggard of the pack.

Lumped together, meme coins are roughly 40 billion in total market cap. that's larger than defy, decentralized physical infrastructure, and exchange tokens as a market segment. It's even twice the size of all NFTs. There's also now seven meme coins that have hit $1 billion in market cap. Right now, it's unclear what type of market signal the memecoin explosion is this time around. During the last cycle, memecoin hysteria peaked for the first time with Elon's notorious May 2021 SNL appearance, which also marked the first Bitcoin top. We had another period of peak memecoin froth in October that year, when Shib hit its 1,000% one-month spike. TLDR, there's not really much history of the dogs running without it being an aggressive

top signal. However, go on Twitter slash X, and you get sentiment like this one from Coin Guru. Someone who hasn't purchased crypto since 2017 is hitting me up asking how to buy meme coins. This used to be a top signal, now it's a green light to go all in. Travis Kling, who wrote another great piece on financial nihilism, which more than likely will end up as this week's Long Read Sunday, tweeted, pretty sure this market is about to shi-coin so hard, it's going to make Cum Rocket look like gold bullion sitting in Fort Knox. And yes, for those of you who weren't here, that was a real token last time around. Now, moving away from the meme side of the cycle to the Bitcoin side,

by all accounts, crypto exchanges are getting slammed by demand for Bitcoin. On Friday, James Van Stratton, the lead analyst at Cryptoslate noted that exchanges serviced a massive withdrawal on Friday. He wrote, I don't think I've quite seen anything like this before. All in all, on Friday, just over 2.3 billion worth of Bitcoin left exchanges, one of the biggest withdrawals in over five years. Severally, another narrative was passed around crypto-twit Twitter over the weekend that OTC trading desks had almost run dry with just 40 Bitcoin available at one price point. This managed to get conflated into the narrative that OTC desks are out of Bitcoin, which is silly, as of course, if there's no Bitcoin available to trade,

then price tends to move up until some additional coins are shaken out. Still, whatever the state of supply? The one thing that is for sure is that demand has been running at sky-high levels for the Bitcoin ETFs. Last week, of course, BlackRock's product Ibit had three consecutive days above half a billion in inflows and notched up $2 billion for the week. Ibit has now accumulated 10 billion in AUM in just seven weeks of trading. To give an indication of how absurd that milestone is, GLD, the original gold ETF took three years to hit that number. Nate Kerasi, president of ETFs wrote, Context only about 150 out of 3,400 ETFs have more than 10 billion AUM. The vast majority of those launched 10 plus years ago. Ibit hits the mark in seven weeks. 10 billion was

considered an optimistic level for all spot Bitcoin ETFs for the entire year. Importantly, other funds are looking just as healthy. Fidelity has reached $6 billion in AUM, with both Bitwise and Arc hitting $1.5 billion. Even the smaller funds mostly have over $150 million in AUM at this point, which would be a smash hit success in any other ETF category. Still, according to some analysts, this is all getting way out of hand, and anyone showing up now is late. The marketeer referenced the 14-day relative strength index, which gives an indication of whether an asset is overbought or oversold. Unsurprisingly, Bitcoin is, as we discussed just a moment ago, currently deep in overbought territory. Analyst for Marketerre wrote, Bitcoin RSI at 88. We have not seen RSI this overbought

and Bitcoin trading at these absolute levels ever. Chasing it here looks like a very late trade. Each time that Bitcoin previously ventured above 60,000, RSI was a little less overheated, but by no means cool. Still, while indicators are all well and good, it is a reasonable question to ask how much they still matter. If what we're seeing after the ETF launch is a categorical shift in market dynamics, then the relative strength compared to other periods very likely tells us not much at all. ETFs are notorious for their popularity among buy-and-hold investor, the kind of investor that just isn't worried about the price, but here to add to their stack every week, every month, and every year. This is what we will learn over the next however many

months, whether the ETFs are such a genuine paradigm shift in Bitcoin market structure that they make all of these old indicators much less useful, or whether the orange coin is just as massively overbought as the indicators are telling us. Still, I reiterate Mike Ippolito once again when he said this is the fun part, so let's enjoy it. One more big thank you today to my sponsors for today's show. First up Cracken, go to crackin.com slash the breakdown and see what crypto can be. Also a big thanks to Ledger. Check out the Bitcoin Ledger Nano, where 5% of all sales go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.