The Breakdown - Just How Bearish Are the Bitcoin and Crypto Communities?

Episode Date: December 15, 2021

This episode is sponsored by NYDIG. Today on “The Breakdown,” NLW looks at a few explanations for the current bearish sentiment turn, including: A belief that a bubble is finally bursting A larger market shift to risk-off based on inflation concerns and expectations around shifting monetary policy  A normal crypto “micro-cycle”  NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. 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=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: sesame/DigitalVision Vectors/Getty Images, modified by CoinDesk.

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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, December 14th, and today we are digging into just how bearish the Bitcoin and crypto community actually is. There is very clearly a dreary mood on crypto Twitter. and by dreary, I kind of more mean a pissed off, angry, more antagonistic than usual mood, which is always a sign of markets not going the way that we'd like.

Yesterday, I tweeted bare market mood, but how concerned are you really? And basically, this was a poll of me trying to figure out where people's actual sentiment was. I'm always interested to break apart a little bit of the surface layer of crypto Twitter from what's going on actually underneath. and I think that understanding why people are worried or concerned or getting more bearish is super, super useful. So I gave people four options. The first one was one, this is a bubble bursting. Two, this is everything going risk off. Three, this is a normal micro cycle inside something larger. And four, no idea I just wanted to go back up. I'm going to read the results and then we'll

dig into the analysis. Of the 1,500 or so voters, 4.8% said this is a bubble bursting. Now, of course, this was always going to be the lowest, if only because of the confirmation bias of my audience. I'm not followed by a lot of people who think that crypto is a bubble. Number two, risk off macro. 29.1% said that the market currently reflected a broader risk-off move in equities. Micracycle. This is a new normal microcycle inside something larger. 39.2% of you agreed with that.

And four, no idea I just wanted to go back up, came in with a respectable 26.9%. So let's start talking with bubble analysis. And let's look outside of the crypto industry first. Rich Bernstein, who CNBC calls an institutional investor, Hall of Famer, whatever that means, says, on one side we have all that I would call the bubble assets, tech, innovation disruption, cryptocurrencies. On the other side of the seesaw, you have literally everything else in the world. I think if you're looking at 2022 into 2023, you want to be in the everything else in the world side of that seesaw.

He points to things like oil that he recently called the most ignored bull market in the world. Ryan Payne, the president of Payne Capital Management, said of crypto, at the end of the day, it's just more people speculating. It's very analogous to when the tech bubble burst. The reasons for owning it don't make a lot of sense, because really it's not a great store of value, as we know. It's extremely volatile. It's fake scarcity. It's not like gold that has real scarcity.

So what's interesting to me isn't these folks. There are always, as you well know, if you have been in this industry for even a minute, people who are going to have this exact same commentary no matter where in the cycle we are. What I think is more interesting from a narrative shift perspective is to keep track of if these types of voices are being invited onto mainstream media more frequently. That would start to suggest, like I said, a shift in narrative. Now, there are a lot of prominent voices in the crypto industry who are more close to this bubble bursting side as well. Crypto Cobain has written a number of very poignant and pointed threads about just how little people realize how

painful a real bear market could be. Now, of course, there's another variant on this perspective that sees the unwinding of all bubbles, that up only across all markets has really only been a byproduct of cheap central bank money, and that now finally the chickens are coming home to roost. This gets us to the central challenge of the markets right now for the Federal Reserve and this idea of everything going risk off. The market is, of course, pointing in two directions simultaneously. Prioritize fighting inflation through rate hikes, and you risk plunging the price of equities, halting growth, and maybe causing a recession. On the flip side, you don't prioritize inflation and you see continued political rancor as regular people are affected,

but asset prices keep going up. All the signals right now is that fighting inflation is winning that political battle. But so if we're discussing risk off, I think we have to get a little bit more specific in terms of what exactly is going risk off. And so I want to read an excerpt from that's our two Satoshi's from ARCA, an excellent newsletter if you don't already subscribe. They write, Inflation and Amicron have been the main topics on the minds of every investor, driving high levels of volatility and downward price action for most of the last four weeks. Every investor is trying to find the best way to express these macro events. Investors were glued to their screens during the last two monthly CPI prints, certain that higher inflation is now bad and lower inflation

is good. Last week's CPI report was ugly as expected, yet the market reaction was strange. On the heels of too sharp weekly declines the S&P 500 rose 3.8% last week to close at yet another record high, and other U.S. indices rose 3 to 5%. It was the strongest weekly performance for the S&P 500 in 10 months, sending the VIX tumbling back down 39% to 18.7. In fact, just about every risk asset has fully retraced the November-December macro slide driven by Omicron and inflation, almost as if none of the last month's turmoil even happened. But digital assets have not bounced back at all. Over the past 30 days, Bitcoin has fallen 25%, Ethereum has fallen 15%, and most digital assets outside of a few outliers are now down 30 to 50% from their November peaks.

Last week, even as equities bounced hard, digital assets continue to struggle. So, if it's all one macro trade, how you express that view clearly mattered a lot these past few weeks. ARCA goes on to point out that what's really getting hammered is a specific part of the market. Quote, broad equity indices are masking the real carnage in the equity market as the broad market is dominated by a handful of large caps, which are moving higher and subsequently hiding a much more bearish picture under the hood. Perhaps the continued struggles of tech ETFs like ARC, spec, and meme stocks like AMC are far more indicative of the risk-tolerance digital asset

investors are willing to take heading into a more murky macro regime. This is validated by a few other articles out there. Yahoo Finance pointed out that just five giant stocks, Microsoft, Google, Apple, and Vidia and Tesla account for 51% of S&P gains since the market. turned at the start of May this year, so it's these giant stocks that are driving the S&P to new records. Tavi Costa commented on this as well, saying truly remarkable. NASDAQ is just 2.6% from all-time highs, while only 35% of its members are above 200-day moving average. Such breadth deterioration only happened at the peak of the tech bubble. Beware of times when the generals lead but the soldiers don't follow.

NIDIG sponsors this podcast, and they're helping CFOs, traders, and risk managers safely and securely integrate Bitcoin into their operations. Learn more about what NIDIG does and how they do it at NIDIG.com slash NLW. That's NYDIIG.g.com slash NLW. On top of this, there is more than a little historical analogizing. Specifically, we're seeing a lot of comparisons out there of Jeff Bezos as Times Man of the Year in 1999 compared to Elon Musk as Times Man of the Year this year. Tommy Thornton from Hedge Fund Telematry said, as a reminder, Jeff Bezos was also named Time Man of the

year in 1999. The stock dropped from that point 95% over the next 22 months. It's the ultimate sentiment peak. However, again, I want to make the point that this is highly narrative-driven right now, and that there's been this massive shift in the narrative to this sort of bearish bubble-popping kind of moment. So who was out there giving the counter-narrative? Well, let's listen to Kathy Wood on CNBC for just a minute. We are seeing five major innovation platforms. involving 14 technologies, all moving into exponential growth trajectories simultaneously. And they're converging. If we're right that autonomous taxi networks are going to evolve during the next five to 10 years,

then that involves the convergence of three major platforms, robotics, energy storage, and artificial intelligence. And all of them are scaling dramatically. What I like about this period is many, Many people are saying those stocks were in a bubble and they deserve to correct. That tells me we are nowhere near a bubble. In fact, quite the opposite has happened. All of the seeds for what is going on right now were planted in the 20 years that ended in the bubble.

They've germinated for the last 20, 30, almost 40 years. And now they're about to flourish and people are running away. They ran toward them way too soon during the time. tech and telecom bubble, and here we are, we're ready for prime time, and we've got all this fear, uncertainty, and doubt. As a portfolio manager, I actually love that backdrop. Let's sum up what Wood, who obviously Leeds Arc, was saying. In many ways, you could restate it as we're really having two conversations here. The first is how does Fed policy influence valuations and how do changes in Fed policy reshape valuations. The second, the conversation that she wants to have,

is how the fundamentals of these technologies are changing. Her point is that on that second conversation, everything is converging right now. Money might have been flowing into innovation because of cheap rates and the search for yield. But to Kathy, these assets aren't risky. They're inevitable. By the way, Kathy is sticking hardcore

to her 500K Bitcoin price prediction. Every time someone asks, she reaffirms it. I really do want to put a pin in this idea that there are two fundamentally different conversations happening right now and how much media hangs on Fed policy. So much of the conversation in macroeconomics at any given moment is following Fed actions like sports statistics. Now the Fed has the FOMC meeting come up, so we're maybe going to get a little bit more information. However, even with the Fed, there's the short term and the long term. David Sachs tweets, if the Fed raises rates, the stock market tanks hurting the economy.

If the Fed doesn't raise rates, inflation spikes hurting the economy. Hard to find a goldie lock scenario when federal debt to GDP is over 130%. Zero hedge says, Dear Federal Reserve, we all know that your taper and rate hikes will trigger a recession in a market crash. Can we just fast forward to NERP and even more QE that always follow? Travis Kling says the market is currently pricing in 3.5 rate hikes in 2022. I'll definitely take the under on that, primarily because it would be such a stunningly boneheaded move by the Fed that it's almost unimaginable. If they do, the QE they'll do to fix it will make 2020 look like austerity. So basically you have this weird thing where the threat of hawkishness is impacting

risk assets in the short term, but people don't believe that the Fed can stay hawkish for long, that in fact they're going to have to overcorrect in the other direction. Basically, that we've long past eclipsed a fundamental secular shift towards dovishness in monetary policy, which of course gets into a larger discussion of needing to inflate away the U.S. debt, but that's for another show. Let's close then with discussing this idea of the microcycles. Basically, there have been two ideas competing around crypto market cycles for the last, call it 18 months. On the one hand is the four-year having cycle, where everything, to some extent, is shaped by the supply reduction of Bitcoin that happens once per four years, and you can map that and see how these four-year cycles play out again and again. One manifestation of that four-year cycle theory is Plan B's stock to flow.

On the other hand, for the last year, we've heard chatter of a super cycle, which really means at core a breaking of the four-year cycle and a show. shift to micro-cycles, or something I've called shorter cycle theory before. The idea here is that we're going to move between mini-boles and mini-barrs a lot more quickly, that everything won't be shaped by the four-year having, at least not exclusively. Part of the logic for that is different types of actors getting involved that have different types of mandates. And that's not only institutions keeping us up only, by the way, but the fact that new actors like institutions could be misaligned or differently oriented with traders and long-term holders in both directions, both positive and negative. There are also more parts of crypto markets that are semi-distinct and now flow into and

out of one another. In other words, it's not just Bitcoin fuels Altcoin fuels total horseshit anymore. There might be NFT profit-sustaining Bitcoin in some parts of the market right now. There are a lot of folks out there who clearly think that we need to shift our mindset to this microcycle thinking. Onchain College writes, if you go by Twitter alone, we fluctuate between a Bitcoin bearer and a bull market every few days. William Clemente says, think we need to get rid of this binary concept of traditional Bitcoin bull and bear markets. Too many people are trying to project the past onto the future instead of imagining what the future looks like. There's also an interesting notion that some have that this pullback has been driven by traders who are disillusioned

with the failure of the stock-to-flow model, basically short and medium-term holders who are counting on some sort of 100K peak by the end of this year following that four-year cycle theory. But one thing I want to close on is the idea of correlation within the crypto markets, and I want to turn back to ARCA. ARCA has pointed out for most of the year that they're seeing more and more what they call sector dispersion, as in not all assets move together. But then this week, they wrote, over the past few weeks, all of the sector dispersion within digital assets that we've experienced year to date has been completely thrown out of the window, with most digital

assets now being lumped together as one giant trade. Instead of dispersion of halves and have-nots, like we're seeing in equity, the entire digital assets market is being treated as a have-nots. Perhaps those selling digital assets are just flat out wrong again, as they were in July and September. The last two times negative sentiment reached this low of a level. Back in the summer of 2021, it was quite easy to debunk all of the ridiculous bare market narratives that were dominating price action. Today, it's more challenging, largely because there isn't a solid broad-based bare-market thesis to break down.

It's been our thesis for years that there will be no broad-based market crashes or broad-based market rallies anymore, as investors are now able to distinguish between different types of digital assets, some of which will perform better than others in different environments. Many now agree with us, but these past two weeks have tested that thesis. Most investors seem to be taking profits after a banner year, or to pay taxes, or just flat out scared without being able to articulate what it is they're actually scared of. So the question becomes, where do these sellers put their money when they stop being scared or need to reinvest their proceeds? I think that line, just flat out scared without being able to articulate what it is they're actually scared of super resonates with me. If I had to

describe what I'm feeling looking at these markets, it's that. And I don't know how to put my finger on it yet. So let's circle it off. What do I think? It's clear that there's a macro component of this. For the part of the market that is correlated with equities, which is a growing part, given that over the course of the last 18 months, we've had so many new institutions flow in, this insecurity and this general weakness in risk assets is flowing into crypto as well. well. I think that macro component is also flowing into end-of-the-year weakness in terms of profit-taking, tax preparation, and just generally thinner liquidity. There's no real narrative source of momentum right now, nothing that people are pointing to. But on the flip side,

the industry is so well capitalized, both in terms of the fund raises that I've described on the show pretty frequently, as well as just in the average net worth of long-term holders. There are so many more people who have the personal war chest to weather something down as well to view it as a genuine dip-buying opportunity. So I don't know. I think I'm still pretty firmly in the microcycle camp, although I think microcycles can be driven by a lot of different things. Whatever the case, I will continue to keep an eye on it, and I appreciate you hanging out as I do. Until tomorrow, be safe and take care of each other. Peace.