The Breakdown - JP Morgan on BTC and the Debasement Trade

Episode Date: October 5, 2024

NLW looks at the incredible progress Bitcoin has made as a mainstream asset, discussing the latest JP Morgan analysis affirming BTC's role in a period of increased global strife. Unlocking Bitcoin DeFi with ExSat The exSat Network aims to unlock and scale the Bitcoin ecosystem without compromising Bitcoins Ideology. The network has partnered with the largest mining pools in the world, major custodians and exchanges, Cefu, Cubolt, Matrixport, Copper, OKX and aims to have over $200M TVL at mainnet launch on the 23rd of October.  Follow exSat’s Twitter to stay up to date @exsatnetwork or visit the testnet exsat.network 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 Friday, October 4th, and today we are discussing what JPMorgan says about Bitcoin as a safe haven. Before we get into that, however, if you were 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 of the show notes or go to bit.ly slash breakdown pod. All right, friends, happy Friday. I'm traveling today, so we are not doing our normal Friday 5. Instead, I am talking about some interesting recent comments from J.P. Morgan. Basically, with geopolitical risk on the rise, JPM thinks investors will flock back to Bitcoin. On Thursday,

JPMorgan analysts covering global market strategies said in a note, rising geopolitical tensions in the coming U.S. election are likely to reinforce what some investors call the debasement trade, thus favoring both gold and Bitcoin. So there were a few really interesting. things going on with this call. First, it flies in the face of short-term market action. On Tuesday night, as the rocket started flying in the Middle East, Bitcoin plunged while gold soared. The analysts are saying that both assets are part of the same trade, or at least that their client should start thinking of gold and Bitcoin is having a lot of similarities. They even called out the idea that gold was getting a little ahead of itself, adding, this increase in gold prices is influenced by a 4 to 5%

decline in the dollar and a significant drop in real U.S. Treasury yields by 50 to 80 basis points. However, the appreciation of gold has exceeded what these factors alone would suggest, indicating a reemergence of the debasement trade. The note was essentially calling out that, over the medium and long term, Bitcoin will be driven by the same underlying factors that are driving gold higher. Alongside geopolitical risk, analysts referenced ongoing inflation concerns, soaring government deficits around the world, and awaining confidence in fiat currencies. None of these are new themes for Bitcoiners, but this is a research note from one of the largest

banks in the world directed at institutional macro investors. Secondly, the fact that this is coming out of J.P. Morgan shows how strong the consensus has grown that Bitcoin has a key role in the next decade of macro and geopolitics. We are a long way from the days when CEO Jamie Diamond said he would fire anyone found trading Bitcoin, although Diamond himself still hasn't acknowledged Bitcoin as a credible asset class. Indeed, it's not as though Diamond has input on research notes, but the fact that analysts in his shop are banging the Bitcoin drum during a key turning point in geopolitics is still noteworthy. Of course, the shift isn't new. We've had macro luminaries like Paul Tudor Jones, Stan Druckenmiller, and Hugh Hendry, talk about using Bitcoin

as a debasement hedge for several years now. BlackRock CEO, Larry Fink, has also adopted this view over the past year. These JPMorgan analysts have also been calling attention to price action in Bitcoin and Ethereum for at least the past year. What makes this note interesting is interesting note is that it demonstrates just how strong the consensus is now. The analyst didn't wait to see the price action they're getting ahead of it and making a confident Bitcoin forecast for their clients. Another interesting research note comes from Standard Chartered, who took a game theory approach to looking at this week's price action. Their analysts wrote, Risk concerns related to the Middle East seemed destined to push Bitcoin below 60,000 before the weekend.

But positions like the 80,000-dollar call options, and circularity vis-a-vis Trump probabilities suggest the dips should be bought into. That note, by the way, refers to a large influx of interest at $80,000 Bitcoin calls for the end of the year. This circularity in the election result was the key focus of the note. Analysts point out that Trump's odds on polymarket have risen by 1% on fears of military escalation. There are obviously a ton of confounding factors, but analysts wrote, this creates an interesting circularity for Bitcoin. Geopolitical concerns may push prices lower, yet these very concerns seem to increase Trump's odds, potentially improving Bitcoin's post-election outlook. While the standard charter note was certainly bullish Bitcoin,

it didn't go all the way to label it as a safe haven. It stated, gold is a geopolitical hedge. Bitcoin is a hedge against traditional finance issues such as bank collapses or de-dollarization and U.S. Treasury sustainability issues. This is the narrative battle of the moment, with macro-analyst shifting from recession fears to looking for the optimal safe haven asset. There's still a huge number who are writing Bitcoin off based on the short-term price action, Zero Hedge, for example, pushing an article that explains, quote, unlike gold, Bitcoin is not a safe haven, but both standard chartered and JPMorgan are taking much more nuanced views. This episode of The Breakdown is brought to you by XAT Network. As regular listeners know,

one of the things that I think is really exciting right now is all of the new builder energy around Bitcoin, and ExSat Network is a great example of that. Exat Network utilizes a combined consensus mechanism of POW and POS, enabling miners to earn revenue and stakers to earn Bitcoin yield. Their state data index mirrors Bitcoin UTXO data, creating a venue for BTCFI to flourish and a platform to trade Bitcoin assets. ExSat Network partners with Matrixport committing 5,000 to 10,000 NBTC to the network, assisting with DAP development and enhancing security. Ultimately, the goal is for X-SAT network's decentralized asset custody to enable you to earn Bitcoin yield without sacrificing security or transparency.

The X-Sat Network aims to unlock and scale the Bitcoin ecosystem without compromising Bitcoin ideology. Check out X-Sat.network or follow X-Sat on Twitter at X-Sat Network, that's EX-X-S-A-N-E-T-W-O-R-K, and unlock Bitcoin Defi with X-Sat. Hello, friends. Before we get back to the rest of the show, I want to implore. you to join me at Permissionless. Permissionless is the conference for crypto-natives by crypto-natives, and the reason it's so important this year is that despite regulators' best attempts to

push industry founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it. Literally now we are in a major political party's platform, which will lead ultimately to the creation of new financial products, new applications, and ultimately new adoption. permissionless is the conference for those using and building on-chain products. It's home to the power users, the devs, and the builders. And perhaps more importantly, I will be there. The location is Salt Lake City, the dates are October 9th to the 11th, and tickets are just $499. If you want to get $10% off, use code breakdown 10. Go to the Blockworks website, blockworks.co. There will be links to register for the conference, and again, you can use code breakdown 10 to get 10% off. A couple other interesting stories that were maybe a little bit smaller, but still really interesting. Japanese publicly listed Bitcoin holding company Metaplanet is now using a new option strategy to boost their accumulation. The firm sold 223 Bitcoin put options to QCP Capital,

collecting a premium of around 24 BTC worth roughly $1.5 million. The options have a strike price of $62,000 and an expiry date of December 27th. If Bitcoin falls below that price, MetaPlanet will be contractually obligated to purchase $223 Bitcoin from QCP at 62,000 each. The reason this works for all parties is that Metaplanet was already looking to purchase Bitcoin. They recently completed fundraising using a combination of private debt and equity. MetaPlanet have already set aside the cash required and are referring to the trade as a target buy. By selling the put options, Metaplanet is committing to buy in December at a fixed price and gathering roughly 10% up front. This means the deal is profitable unless Bitcoin

falls below 55,000. The trade could also be a poor choice in retrospect if Bitcoin hits new all-time highs into the end of the year. That could leave Metaplanet wishing they had just immediately slam the buy button. The plan only really makes sense because Metaplanet is seeking to accumulate Bitcoin across the extremely long-term and isn't too worried about small price movements. Metaplanet said in a statement, this strategy not only enhances the company's Bitcoin reserves, but also reinforces its balance sheet, aligning with our ongoing financial strategy to strengthen long-term Bitcoin exposure and improve the company's financial position, supporting its path towards profitability. This trade marks a big evolution in the micro-strategy-style Bitcoin Treasury

Plan. Metaplanet was explicitly set up to copy micro-strategy at a smaller scale and in a different market. Last year, the company was just a struggling hotel chain. The only thing it really had going for it was access to capital markets as a publicly listed company. Earlier this year, a group of Bitcoin investors, including UTXO Management and Morgan Creek Digital, approached management to transform the company into a mini-micro strategy. The company purchased its first Bitcoin in April and has now accumulated over 530 BTC worth around $32 million. Until now, their purchases have been funded largely from idle cash and debt financing. The firm's relatively modest size means a little extra juice from selling options can really move the needle. Metaplanet's

CEO Simon Gerovich said, while the majority of our assets will always remain in pure Bitcoin holdings, we recognize that it's advantageous to use a portion of our assets to generate a yield through option strategies. By utilizing both direct holding and yield-generating strategies, we position ourselves to capitalize on Bitcoin's growth potential while maintaining a stable and profitable foundation. Now, this strategy is not without controversy. Yield generation in Bitcoin has, for many, been a dirty word since the collapse of multiple retail-facing lending firms in 2022. A few weeks ago in a podcast appearance, Michael Saylor brought up the prospect of lending out Bitcoin to earn some extra yield. He suggested that 5% would be enough to compensate for the risk of lending

through commercial banks once they're allowed to deal with Bitcoin. Podcasts host Safety and rejected the idea as way too risky. Bitcoin Twitter largely agreed and spent the day dragging Sailor for suggesting anything other than holding Bitcoin. To be fair to Sailor, and to be clear about what was and wasn't being said, he was not suggesting that this is a good idea for small retail holders, he wasn't advocating for another set of Celsius-style lenders, he was specifically talking about Bitcoin lending on the institutional scale. But even with that in mind, still, some people were firmly against it. Meanwhile, Metaplanet seems to be laying out a blueprint for gaining a little extra from their Bitcoin purchases. It's not quite the same thing as getting

yield on Bitcoin that has already been purchased, but the basic idea is there. We could see an entity like Micro Strategy, which already has a large capital stack denominated in Bitcoin, start to look for similar strategies. Outside of a target buy, using put options, we could see MicroStrategy consider selling call options against their Bitcoin stack. The key point with Metaplanet's decision is that they're taking a well-defined risk for a guaranteed price. None of this is revolutionary. These strategies are commonplace across TradFi. What makes it interesting is that Bitcoin companies are starting to think more deeply about capital efficiency. Put differently, Metaplanet might have broken the seal that allows Bitcoin companies to think about taking a touch more risk

in their race to accumulate Bitcoin. Speaking of Bitcoin accumulation, the IMF has renewed calls for Bitcoin accumulator El Salvador to scale back their Bitcoin policies and overhaul recent regulatory changes. Julie Kozak, director of the IMF's communication department, said, what we have recommended is a narrowing of the scope of the Bitcoin law, strengthening the regulatory framework and oversight of the Bitcoin ecosystem, and limiting public sector exposure to Bitcoin. No specific details were released publicly. The IMF has periodically warned El Salvador about the dangers of Bitcoin since it was adopted as legal tender in 2021. In August of this year, they reiterated their warnings. However, they noted that, quote, many of the risks have not yet materialized. These IMF warnings

are starting to become a little absurd given the complete lack of downside that has shown up. El Salvador currently holds around 6,000 BTC, worth around 345 million. Their GDP is approaching 40 billion, ticking along at a 3% growth rate with 0.9% inflation. They're currently carrying around 30 billion in national debt, but recently announced plans to put forward a deficit-neutral budget for next year. When President Buckele took office in 2019, the annual deficit was over $1.2 billion annually. In other words, by all accounts, the financial situation is getting better in El Salvador. So even if Bitcoin falls in value, the public sector exposure seems fairly limited. Over in the world of exchanges, Binance's market share has fallen to a four-year low.

According to a report from CC data, Binance handled 36.6% of overall spot and derivatives trading volume last month, its worst results in September 2020. Spot trading volume fell by 23% since August, bringing Binance's share of the spot market to just 27%. Derivatives volume also fell by 21% bringing their share to 40%. Binance seemed to be on the right track earlier this year. They had seen market share plummet throughout 2023 surrounding their settlement with U.S. authorities. However, since November, market share had slowly recovered to reach 50% of spot volume in March. While that downturn in popularity was about perceived risk, renewed erosion in the market seems to be more about competition. Since August, for example, Crypto.com has grown its combined

spot and derivatives volume by 40%. Year to date, that exchange has gained more than 10 percentage points in market share. It's not exactly clear what is contributing to the change, but I think in general, the less concentration we have here, probably the better. Lastly, one that I think you're going to hear a lot about next week, a new HBO documentary hints that it will expose the true identity of Satoshi Nakamoto, called Money Electric the Bitcoin mystery the documentary will debut next Tuesday. This is the latest project from director Cullen Hoback, best known for his miniseries, Q, into the storm. That docu-series detailed Hoback's attempt to uncover the identity of Q, the mysterious poster at the center of Q&N. It stopped short of making a clear identification,

but explored the evidence around leading suspects. Regarding the Satoshi show, Hoback tweeted, A few of you might have wondered why I disappeared. Well, I was tracking down someone else who disappeared. Curious who's behind Bitcoin? Money Electric, the Bitcoin mystery, drops next Tuesday. It's going to be a rollercoaster. It seems the aim won't be to finally settle the mystery of Satoshi, but simply to explore the various figures who have been suspected over the years. In an interview with Fast Company, Hoback said, we make a hell of a case in the film, and I think that who we land on is unexpected, and it's going to result in a fair amount of controversy. I think that people are going to debate it regardless of how strong a case we made, and that's fine. That's the nature of this space.

We had a lot more evidence than we were able to include in the film. So perhaps, rather than the typical choices of Hal Finney, Adam Back, or perhaps even Paula Rue, it sounds like Hoback might be presenting a relatively unexplored theory. Expectations are a little mixed. Daniel Pico, aka Bitcoin Gandalf, commented, trailer for the new Bitcoin documentary dropping next week. The marketing is very clever because it implies they might reveal who Satoshi is, but if you pay close attention, they never explicitly claim that.

Lots of Bitcoiners in this one, I'll probably give it a watch. Then on the flip side, there is Zach Vol who tweeted, I can't wait to not watch this. Anyways, guys, that is going to do it for today's breakdown. Appreciate you listening, as always. And until next time, be safe and take care of each other. Peace. Thank you.