The Breakdown - Kraken’s Dan Held on What’s Different About Bitcoin At $10k This Time

Episode Date: February 7, 2020

Bitcoin is on a 7 week upward trend. Having already smashed through its $9,000 Vegeta memes, it is now inching closer towards $10k.    On this episode, @nlw is joined by Kraken’s Dan Held to discuss how bitcoin has changed in a number of ways since the last time we were at the $10,000 price level last year. They look at: Narrative - Speculation around bitcoin as a safe haven and the role of the halvening continue to shape the conversation Infrastructure - The tools for how people can interact with bitcoin - from lending to derivatives - have never been broader  Audience - Institutions are no longer just around the corner but actively participating in the market  

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Friday, February 7th, and today we're doing something a little different. So we're recording a day early, so I'm not exactly sure where the price is today, as you're listening to this on Friday. But for the last month, we've seen steadily increasing Bitcoin prices. and we are now nudging up against the edge of 10,000. We got up as high today at the time of this recording as 9,800. And I think that that barrier of 10,000 is a really interesting psychological barrier.

It's a really interesting context, I think, in which to look back at the last year or so since we previously saw 10,000, and ask what has changed, what has evolved, what is different about the crypto markets and the Bitcoin industry specifically since the last time we were here. And so I invited Dan Held to join me in that conversation. Dan has been around the block with Bitcoin. He has started multiple Bitcoin businesses, including recently Interchange, which was acquired by Cracken. He is now in BD at Cracken and thinking about Bitcoin in that context. And so we talk about a few things, all in this, how Bitcoin has changed since the last time we were at 10,000 lens. We talk about first how the narratives have changed, whether Bitcoin is

a speculative store of value asset, a speculative macro asset, and what that means. We talk a little bit about the having narrative and whether it's priced in or not and what that means. We talk about the new entrance in the market since the last time that we were here and what it means to have this sort of price point and the happening coming up in the context of institutions actually being involved in the industry in a meaningful way. We talk about the infrastructure and the different things that you can do with Bitcoin, including a pretty deep conversation around options and derivatives, which is obviously a growing part of the market. Finally, we touch on briefly the biggest change, I think, in some ways, in the larger part of the industry, which is that since the last

time Bitcoin was at 10K, we saw the introduction of Libra and the response of governments around the world with their own central bank digital currency efforts. So I have to be a lot. asked Dan if he thought that that mattered to Bitcoin at all. Either way, I think it was a really fun conversation. I love talking to Dan about these things. So I hope you enjoy it too. Please let us know I'm at NLW on Twitter. He is at Dan Held. And now let's dive in. All right, we are here with Dan Held, the infamous, famous Dan held. What's going on? Dan, how are you? Doing well. How about yourself? Things are great. Thank you so much for taking the time to be here. The Bitcoin market reflects prices in an interesting way, right, that each different price

milestone going up or going down is a context to explore where things are, right? And so, you know, things have been going up consistently throughout January and now into February, and we're creeping. We're creeping on 10,000. I was joking the other day on Twitter. I asked what the official meme of 10,000 should be, because we obviously have the meme for 9,000. And so I thought what might be fun because it's Friday and I just think it's interesting to do something a little bit different. Maybe to use this, again, creeping and who knows, it could turn around tomorrow. It probably will now that we've jinxed it with this podcast. But to use this to almost look back at like what's changed since the last time that we were at 10K, which is roughly a year ago.

What has developed, changed, iterated, and is different about the Bitcoin market now than it was the last time we're here? So that's kind of what I'm thinking. What's really interesting about Bitcoin's price is that it largely reflects, you know, pure emotional sentiment. Bitcoin isn't a classic equity where you can go and analyze cash flows and come up with all sorts of modeling to come up with what, you know, might be an appropriate price for the asset. You know, Bitcoin being Gold 2.0, the value of it is, could be, you know, immense. but the aggregate belief in what that value is currently is somewhat of a subjective thing. And so that's why we see such volatility in Bitcoin. And what we see, too, is that the fear and greed is really manifested in the price.

Like, for example, when Bitcoin was $3,000 at the bottom of this last cycle, what was your feeling about buying it then? Like a lot of people were very afraid. Like, oh, what if it goes to $1,000? What if it goes lower? But right now, if someone were to sell you a big, Bitcoin on the street for $3,000 of Bitcoin, you would take out as many loans as you could get to go buy that. So it's really interesting to see how, you know, the price dipping really pulls in that fear and

people get more fearful. And then as the price moves up, people get more speculative and they like to buy Bitcoin because they, you know, perceive that it will appreciate. So more of a FOMO cycle. And what's interesting about 10K is that, you know, we've, we've tested this before. In 2017, I actually remember when Bitcoin broke $10,000 for the first time. I was at Consensus Invest in New York. I was at a party at a club that was an after party and it was full of crypto people. And I remember looking at my phone and watching Bitcoin break 10,000. And the next day when I went out and I had a couple of meetings at Starbucks, every single person in the Starbucks was talking about Bitcoin. And these weren't bitcoins, these weren't crypto people. These were just everyday people.

The price very much reflects the aggregate sentiment of what everyone believes in Bitcoin. Like, is it bullish or bearish? And then that price is a signal to the rest of the world of Bitcoin's legitimacy. And that legitimacy, as the price goes higher, pulls in more and more people to take advantage of that increasing value. Bitcoin at 10,000 now is really interesting because we've got a lot of infrastructure that has been built. The bottom has already been printed.

We've seen Bitcoin defend price dips down to $6,500. If we look at on-chain data, we've kind of seen an exhaustion of buyers. If you look at how many Bitcoins have moved in the last X amount of months. So all the on-chain data, a lot of what we're seeing on the price movement, we're seeing a very, you know, very strong buyer market. And we see this reflected on like OTC research reports as well. So I think, you know, Bitcoin is very much at the start of a new bull run. These bull runs can take a very long time and they're very, very choppy.

I published a video about a year and a half ago. It's a time lapse of Bitcoin's price since it was listed on Gox. And a lot of people look back and they look at the journey from $1 to $10,000 of Bitcoin. And they're like, oh, well, you know, it's not that hard to huddle. Well, along the way, there's a whole bunch of 40% dips. So, you know, it's a pretty wild ride. There's a lot of surges and there's a lot of dips. And so, you know, I think we're about to see that kind of the beginning of a new bull run,

but that doesn't mean that there won't be big, you know, big retraces, you know, negative 20%, negative 30%. I think now Bitcoin is well-poised in the macro environment, fundamentals in terms of like on-chain data, volume, and everything else looks fantastic. And then, you know, finally, like I mentioned earlier, the infrastructure is so much more robust than any other bull run we've had before. You know, now institutions can trade on various venues that are. fully legal, compliant, and have complex financial instruments like options, futures,

margin trading, et cetera. Okay, so I want to get into the infrastructure actually a little bit more because that's frankly, of all the things that I will ask you about and we'll talk about today is the one that's the most knowable versus totally friggin speculative, which is where a lot of the fun stuff is too. But let's actually start. You and I share a penchant for narrative analysis, right? I'll put you on the spot a little bit.

what do you think the sentiment is right now in the context of this 10,000? Why do you think the market is improving right now? Is it a single knowable factor such as reaction to the macro markets, right? Is it a combination of factors? Is it speculation that people think it's reacting to the macro markets, even if it's not actually? What do you think right now this latest kind of bump up over the last, you know, 45 days or whatever is attributable. And if that answer is just too unknowable, where do you think people's sentiment? What do you think the narrative is around it, even if you're not sure that that narrative is correct? Yeah, so, you know, determining what a catalyst, like which catalyst move the market is very difficult. Sometimes it's very clear. We have a,

you know, if you look at timestamps and we find that Bitcoin's price surged with the bombing of Iranian generals, you know, that very much reflects that Bitcoin is starting to become a safe haven asset or a risk-off trade where, you know, in that exact example, we saw gold moving in the same function. It's a combination of things, though. I mean, that one was more clear cut, but it's harder to say, like, Bitcoin moved up because X, Y, or Z when, you know, we may not see that actually line up when we go look at the trade data. So I think it's a combination of, like, Bitcoin exhibiting a speculative store of value. or a speculative safe haven asset characteristics.

It's that combined with the having. The having, of course, is a very, very strong part of this cycle where we have the block subsidy, which is the newly minted bitcoins, the production of those drop in half, which reduces the overall amount of supply that's hitting the market. There's quite a bit of intense debate as to whether that means very much or very little. But needless to say, it's a net positive sort of event. We've got that going on.

We also have like, you know, we printed a low. that low we haven't retraced and felt that again. Bitcoin has defended higher lows of like $6,500. And so I think that really reflects a floor. And that floor, you know, builds this sort of barrier in our mind where if Bitcoin goes back down to $6, you know, everyone's backing up their bank accounts to go buy Bitcoin. And so I think we've set some really important psychological levels. In breaking $10,000, I think is an important psychological level on the upside. I remember back in the 16-17 bubble, I remember when we broke a thousand again. That was a big deal. Breaking a thousand again, I think really shifted the mood. And so we're on the precipice of that happening

where you have higher lows. We have a halving new cycle. And there's a positive on-chain reasons why that's a good thing with the reduction of supply hitting the market. And then we have Bitcoin in the macro world exhibiting some safe haven't asset sort of characteristics. One of the things that I find most fascinating about the debates around things like whether Bitcoin is a macro asset or is just people are speculating that it's going to act like one is that I'm sitting here. And of course, I think about it from the perspective of narratives and self-fulfilling prophecy. And it's like, well, if enough people are acting like a thing is going to exhibit the signals of acting like a macro asset, then at what point is it just speculating that it's going to be a macro asset versus it actually is? They're interesting debates, but in practice, they kind of amount to the same thing. And this is something that Travis Kling actually did this really, really cool five-minute walkthrough almost on the show last

year about how exactly this happens, right? You start to see if every single time there's an interesting big kind of demand shock type event, you know, like the stuff that happened with Iran a month ago. And there's some number of portfolio managers who say, hey, you know, this thing. has occasionally in the past, or maybe more like consistently in the past, shown some interesting countervailing properties. Maybe I'll hedge a little bit into that. Then all of a sudden, everyone else, you know, like it creates its own, again, self-fulfilling prophecy. So I always think it's interesting. We're having the same conversation now a little bit around the happening, which is like, how much is it priced in or not? Well, it's like if there's some percentage of people who are

making bets that it's not, then functionally doesn't that mean that it's not? You know, so There are important debates and interesting debates, but I do think that net net, they amount to something pretty similar in terms of the behavior that we see. Yeah, I've got a couple thoughts there. You know, one, I think, you know, touching on your point that this is all reflexive, like it all feeds upon each other. You know, I kind of liken Bitcoin becoming a safe haven asset to how maybe life has started in the universe, where it was a random collision of different particles, and then it birthed,

you know, life. And so Bitcoin can randomly move up with gold on some days where there is a risk off a sort of event like Iran. And if that happens enough times randomly, and we then assign the narrative that it's a safe haven asset, then it becomes that. It's a more, even in a pure random function, enough randomness in the world, where Bitcoin will move up on days where the world is afraid. And if that happens enough times randomly, and then if we propagate that narrative, then it becomes the narrative and then people buy in anticipation of that narrative. So that, that I think is really interesting to see kind of play out. I'd very much agree with Travis in terms of how he describes this all playing out and

basically share this exact same feelings with, you know, how Bitcoin will kind of mature in this space. And, you know, I've been kind of saying the same thing back in 2019 on CNN that Bitcoin, you know, has shown a glimmer that it can become a safe haven asset. So I think that's super interesting in terms of how this all. all, you know, is reflexive upon each other. And then when it comes to the havinging, a lot of people will say that, you know, due to an efficient market hypothesis, that the happening is priced in. And I think they're right, but I think they're also wrong as well. I think the having is priced in for those who care, which is a very few, a very small number of people in the world,

approximately 30 million hoddlers in the world. And those people have factored in the reduction in supply. The other, was it 6.5 or 6.9 billion people in the world have not, or 99% of the population. So, you know, I think the Havony is priced in for those who care about it and has not at all been priced in for those who will find out about it. All right. That is a very admirably succinct position on a very contentious issue. We talked a bunch about now the narratives of Bitcoin in this time around. But now I want to talk a little bit more about this idea of of infrastructure. What's different about either A, what people can do with their Bitcoin or B, who are actually seeing participate in this space, right? For the last two years, we've had this

conversation about institutions coming in and the institutions coming in. Are they here? Is there a different composition of the people who are actually participating in their market? And are they doing different things with their Bitcoin now than they were again a year ago, or at least can they be doing different things? Yeah, that's a great question. With all the other bubbles in Bitcoin, there has never been institutional money that has flown in. And that is a huge, huge chunk of money. So this next bull run will be, you know, very different than the other ones. And I think in a very positive way, you know, these previous bull runs were fueled by a very small amount of capital flowing into Bitcoin. Now we've got much bigger pipes connected. These bigger pipes are built for

institutions. So the amount of liquidity that can flow from these institutions is huge, very, very large. So this will be a dramatically different sort of boom-bust cycle. Tens of trillions of dollars in the world can now flow into Bitcoin in a way that was not possible before. And in addition to those pipes being built, you know, there's different types of pipes, you know, different types of financial instruments that retail and institutions can use to interact with Bitcoin. You know, part of that is the lending and borrowing market, which, you know, I've kind of been very vocal about. I think it's super interesting. It's the start of a new Bitcoin banking system where you can borrow against your Bitcoin for dollars. And you can use that to either buy more Bitcoin or buy a house or something

else that you'd like to do with that. And Bitcoin as collateral is a phenomenal collateral. If you think about other asset-backed lending like homes, you know, if you have a mortgage, the collateral is your home. But that home isn't fungible. You can't go on to an order book and sell that home immediately. It might take it. take months to get ready to go sell. Real estate is a largely kind of illiquid market compared to Bitcoin where if a lender is holding Bitcoin as collateral, they can instantly go sell that if a margin call occurs. So I think Bitcoin as collateral for borrowing is phenomenal, and that's a really exciting new type of asset back lending. On the other side, you know, you've got lending

out your Bitcoin to earn a yield on that with companies like BlockFi and Genesis. And that's super awesome as well. A lot of times these crypto hedge funds or crypto businesses need working capital. They don't want to use their own working capital, so they borrow coins from these lenders and then use that to perform functions of their business. And you can earn a yield on your Bitcoin. I like to joke, if you hoddle long enough, you may never have to sell because you just lend out your Bitcoin and earn a yield on that. And so it's kind of the ultimate way to hottle. Now, of course, you're taking on risk when you do that. There is significant counter-party risk, and it's somewhat unknown and opaque.

But that's why this industry is kind of fun. It's a little bit of the Wild West. There's other things too that, you know, the financial instruments that are critical for institutions and I think also provide opportunities for retail investors to earn a yield. You've got futures and you've got options. And options, I think, are a really exciting new space. On the option side, you know, for Bitcoin hoddlers,

writing options or, you know, selling options can be a really exciting way to earn a And I think a lot of people are a little bit afraid of doing that. When people first approach Bitcoin, they feel like it's everything they don't understand about money with everything they don't understand about computers. And I feel like options for almost 99% of the population feels like that as well. It's like options. You're like, man, I just see I see like calculus on a whiteboard sort of thing. And once you kind of boil it down, they're actually not that complex.

They're pretty complex, but the fundamental principles are kind of simple. And there's a few really cool ways that, like, Bitcoiners can earn yield and institutions can hedge their bet. For example, if you own Bitcoin, there's something called a covered call. A covered call is you are selling someone the option to purchase your Bitcoin from you at a certain strike price. So hypothetically, let's say I sell someone the option to purchase my Bitcoin from me at $50,000 a Bitcoin. I have Bitcoin under custody at the options platform to cover that. That's why it's called a covered call as you own the underlying asset. And what's really interesting is that purchaser of that option, they will pay you a premium.

So that's an immediate cash in your bank account. And so they'll pay you for the opportunity to buy that Bitcoin from you at that price at the expiration. So whatever expiration date that may be, that could be one month out, two months out, six months out, one year out, etc. And what's really cool about that is Bitcoiners, you know, while the tradeoff here is that you're sacrificing some upside. So, you know, if Bitcoin moves past $50,000 of Bitcoin, I don't earn any more money. However, let's say you have a life event. I know, you know, you and I were just chatting before we started this podcast that you're looking at maybe purchasing a home sometime soon. You know, hoddlers can't holl forever.

We do have physical things in the real world that you have to buy, right? So I think, you know, in those moments where you have to sell some coin, writing a covered calls a really interesting way to juice, you know, get a little bit of extra premium on top of that Bitcoin you already had to sell. Alternatively, you could sell really out of the money covered calls. So, for example, you could sell covered calls right now with a strike price of Bitcoin at $100,000 a Bitcoin. You're not going to earn a lot of money.

But the probabilistic event of that occurring is very low. So on the flip side, another really cool way to earn money is you sell puts. So selling puts essentially is a discounted limit order, discounted limit bid on the order book. So a put is you're selling someone the option to sell Bitcoin to you, which you have to purchase, if Bitcoin is below a certain strike price. You know, right now you could go on and you could write this put option where you agree to buy Bitcoin from someone at $5,000 a Bitcoin. If Bitcoin is below that, you still have to buy it at $5,000 a Bitcoin.

If it's above that, the option expires worthless and you collect your premium and get to keep that. So that's kind of cool because that's kind of a, you know, it's kind of a hoddler of last resort mentality. You know, you're essentially placing bids on Bitcoin, you know, essentially being the hoddler of last resort, being the buyer of Bitcoin at these low prices. And you're getting paid to be that buyer. You know, you're putting your hand down there at $5,000 of Bitcoin. If you're writing a put option for an extra strike price of $5,000, you're like, okay, I'll buy at that price. You know, of course, the risk there is if Bitcoin moves further down, then you would have to

buy a Bitcoin from this counterparty at $5,000 at Bitcoin, regardless of how low the price went. But if you're a really long-term convicted, you know, sort of like really strong believer like I am in Bitcoin, you might not care about that. you're like, I'm a hoddler of last resort. Sure, I'll buy it at $5,000 a Bitcoin. And I'll be getting paid to do that along the way. So these are really cool things, you know, both for retail to earn yield on their Bitcoin and as well, institutions or retail can hedge their bet. So, you know, you could always take the other side of that where you buy the covered call. You buy the call option, you buy the put to sort of hedge your portfolio. But I think that allows for much more sophisticated

participants in the market. And you allow miners to smooth out their cash flows, which I think lead to more predictable hash rate, more predictable game theory. So I think that's all really, really awesome and definitely a demonstration of the maturity of the market. Okay, so we have gone through changes in narratives, changes in infrastructure, and changes in market participants. The one last question, and it could be quick, and I don't even know if you actually have a strong opinion about this, but the other significant thing that has changed in the last call it year, whatever it is, is the experience. of interest from governments around central bank digital currencies in the wake of Libra.

Do you think that that impacts Bitcoin at all, or is it right now at this stage, mostly more kind of macro-level noise that is to be sorted out where Bitcoin fits in it? Yeah, central bank currencies, you know, fundamentally, these central banks cannot offer this currency. I feel like it's impossible that they could offer this to retail. Because if I'm retail, that would destroy the commercial banking industry. If I can have my counterparty be the Fed, then why would I keep my money at Bank of America? So I think it's sort of like, kind of like your uncle doing the macarena. It's just like a little bit funky.

You know, you've got these corporate types and bureaucrats who are going, well, how do we seem relevant? Let's talk about blockchain tech. Let's talk about central bank currencies. And it's like, okay, but the Fed is already all digital. Not really sure what incremental sort of performance gains or, you know, risk management that'll provide. I think it's mainly them just trying to mean that they're relevant and new, but ultimately I don't really see much efficiencies gained from it. Well, Dan, thank you so much for taking some time today. Really fine. I could definitely keep asking you questions, but it's going to be interesting. I mean, we don't know yet even if we'll touch up over 10K this time, but inevitably we will. And I think obviously all of these changes will still be a part of that. So thanks again for hanging out. It was a pleasure. Had a great time chatting and looking forward to seeing you again in person some time.

So there you have it. To me, the most interesting part of that conversation with Dan was just how much has changed since the last time we saw 10,000. You're talking about new narratives, new market participants, and a fundamentally new infrastructure for how people actually interact with Bitcoin. I think that whether or not we've hit 10K by the time this goes live and whether or not it happens in the next couple weeks, what's clear is that this market continues to evolve and this asset is spawning just a huge amount of activity that is inevitably going to bring more and more people in with more and more creative uses. So it's an exciting moment to reflect on how much is happening and how much has happened. So thanks as always guys for listening. I hope that

whatever your plans are, you're getting ready for an awesome weekend. As usual, I'll do a full week recap episode tomorrow and then on Monday we will be back for another round of the breakdown. Cheers, guys.