The Breakdown - Macro Jitters Roil the Crypto Markets

Episode Date: January 10, 2025

Fresh off starting the year at $100,000, Bitcoin (and the rest of crypto) tanked. Some thought it was all about concerns of USG selling their Silk Road stash, but it appears to be more rooted in broader macro concern of returning inflation. NLW explores. Sponsored by: Ledn Need liquidity without selling your Bitcoin? For 6+ years, Ledn has been the trusted choice for Bitcoin-backed lending. With transparency, security, and trust at our core, we help you access your BTC’s wealth while HODLing. Discover what your Bitcoin can do at ledn.io/borrowing. 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 Thursday, January 9th, and today we are talking macro and what it means for Bitcoin. But before we get into all of that, 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.ly slash breakdown pod. Well, friends, macro shocks are roiling the Bitcoin market as traders fear the cycle could be over.

If you've spent any time on crypto Twitter over this week, you'll have noticed that sentiment fell through the floor recently. Yesterday, Evan SS6 tweeted, would say there's a 20 to 25% chance the cycle topped. In response, Ansem chimed in, adding 75%. Most people are merely responding to price action, which has been dismal this week. Bitcoin is down 9% from a peak on Monday, trading at 93,000 for the first time since New Year's day. Ethereum was down 8% in the same period, and if you're still holding a basket of highly speculative meme coins, the pain was even more severe. But the crypto drawdown seems to be more

about macro conditions hitting an inflection point than anything going on in the sector. So today we're going to sift through those changes and try to figure out if this is a short-term correction or the beginning of a premature end for the fourth Bitcoin cycle. The event that set off this macro shift happened on Tuesday, with the release of the job openings and labor turnover or Joltz report. it showed that job openings had surged in December to hit a six-month high. This was the first major uptick in almost a three-year downtrend. Quits and actual new hires didn't change much from the previous month, suggesting this was just a spike in job postings rather than an acceleration in hiring.

Still, most analysts believe this was a sign of renewed business sentiment heading into the Trump administration. Why this matters so much is that the Joltz report has been Fed Chair Jerome Powell's favorite macro indicator for inflation over his term. During the hiking cycle, he used job openings per unemployed worker, as a solid gauge of labor market strength. Core PCE inflation, the Fed's main inflation gauge, has also moved in lockstep with the Jolt's number for several years.

Tuesday also featured the release of the ISM Purchasing Manager's Index for the service sector, which measures input costs for manufacturing businesses. This reading also spiked up, reaching the highest level since February 20203. The data points are then both leading indicators for rising inflation. They're not quite enough by themselves, but the readings would be consistent with another wave of inflation about to hit the economy. economy. The Tuesday data caused a rapid repricing and assets all across markets. The U.S. 30-year bond yield moved up 4.9 percent, the highest level since 2007. Bond rates have been rising since the Fed began

its cutting cycle, a completely unprecedented reaction. But this week's move put an exclamation point on the price action. The dollar index reversed a brief downtrend and is now back at multi-year highs. These big moves forced risk assets down, with the NASDAQ losing 2.3% on Tuesday and the S&P 500 following 1.4%. The move was amplified and, and the new cost of the market. market-leading stocks, with NVIDIA being the prime example. That company's share lost 7.8%, their worst day since September. With such a notable response to macro data, expectations of Fed policy for this year have shifted dramatically. The Fed was already expected to pause at the meeting in late January, but it's now much more possible that the cutting cycle is done. The following meeting is

in mid-March, and markets are only pricing in a 40% chance of a cut. In fact, there's only a one-thirds chance we see another cut by June. Looking right out until December, the market's base case is two or fewer cuts this year, and more likely that there's only one. If the Fed is done with cutting, then this would be the smallest easing cycle in almost 30 years at just one percentage point. The only example that looked similar was in late 1998, when the Fed cut rates three times only to turn around and hike them much higher the following year. David Stockton, the Fed's chief forecaster at the time has since acknowledged that those cuts were a policy mistake, stating, part of our mistake in 1998 was a failure to appreciate just how strong the U.S. economy was as we

entered that period. Adding a little bit of color to the Fed conversation, yesterday the Fed released the minutes from their December meeting. This gives us some insight into the deliberations ahead of that rate cut. We already knew that it was contentious with one Fed president dissenting and preferring to hold rate steady. The meeting said that some committee members said that there was merit in keeping rates unchanged, while a majority said their judgments about the rate decision had been, quote, finally balanced. The minute said, almost all participants judged that upside risks to the inflation outlook had increased. However, the substantial majority of the majority of the rate. participants believed policy remains restrictive despite the four rate cuts. Fed staff presented modeling

on Trump's economic policies to the extent they can be known at this stage. Their opinion was that growth would slow marginally and inflation would remain firm. Several passages really stood out along this theme, with the committee stating that they are concerned that, quote, the effects of trade policy changes could be larger than the staff had assumed. In other words, the Fed is bracing for an upside surprise in inflation due to tariffs, and that issue is front of mind. Bloomberg economist Anna Wong gave her one sentence reaction to the minutes stating, The Fed is asking for it, and by it, I mean trouble. In the comments, she elaborated that she's concerned the Fed has gotten too political

by getting ahead of Trump's policies rather than merely reacting to the data. There isn't a ton of new information in the minutes other than the political discussion being a little more extensive than Powell had led on during the press conference. The big takeaway is that the committee is primed to react to inflation risks, and that's exactly what's starting to show up in the data. One committee member who doesn't seem too concerned is Governor Christopher Waller. In a speech on Wednesday, he made it clear that his base case hasn't changed, commenting, as always, the extent of further easing will depend on what the data tells us about progress

towards 2% inflation, but my bottom line message is that I believe more cuts will be appropriate. Waller noted that most of the inflation readings that are still hot come from prices that are imputed or estimated from data rather than measured in the real world. He said imputed prices are, quote, a less reliable guide to the balance of supply and demand across all goods and services in the economy. Waller discussed tariff policy stating, if, as I expect, tariffs do not have a significant or persistent effect on inflation, they are unlikely to affect my view of appropriate monetary policy. The general sense from Fed speakers this week has been that the economy is in a good place to

slow down policy changes. However, most committee members still seem biased to cut further. On Monday, Fed Governor Lisa Cook said, I think we can afford to proceed more cautiously with further cuts. One possible interpretation for the rise in longer-term rates is that the Fed will be too slow to react to another round of inflation. That's especially true because they're still looking for reasons to keep cutting. Nick Timmeros of the Wall Street Journal tweeted, Chris Waller says he expects inflation to continue declining to 2%, and doesn't sound at all like someone ready to declare or even hint at an end to cuts. If you've been around Bitcoin for long enough, you've heard the term hoddle and the name Leden.

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Check out Ledin's trust pilot or their reviews on social media. And to learn more about what your Bitcoin can do for you, check out leaden.io-borrowing. That's LEDN.com.com. Please visit leaden.com slash legal for product terms and disclosures. Product availability varies by jurisdiction. Treasury Secretary Janet Yellen was also on the speaking circuit this week to give her reaction to rapidly rising treasury bond rates. Speaking with CNBC on Wednesday, she said,

when we see strong data surprises to the upside on indicators to the performance of the economy, that suggests that the path of interest rates going forward is going to be a little bit higher than people expected. However, she was somewhat dismissive of the level of longer term rates, characterizing it as a return of a healthy term premium. Term premium refers to a higher rate that investors demand for locking up their money for longer. Until recently, term premium has been at historically low levels close to zero. Regarding Trump's economic policy, Yellen was skeptical that large-scale deficit reduction was feasible. She pointed out that defense and entitlement spending dwarfs all other government expenditure. In fact, Yelan believed quite the opposite would

happened under Trump, stating that she hoped he would take the fiscal deficits seriously, adding, I would hate to see it come to the bond vigilantes. Investors around the globe count on the U.S. to be responsible in managing its fiscal policy and not to rely on market responses to produce deficit reduction. Bond vigilantes are a somewhat apocryful explanation for movements in U.S. Treasury bonds between the 1970s and 1990s. The belief was that bond traders were extremely alert to government deficits and would force market rates up in response to higher spending. There's no real evidence this was the explanation for high interest rates during that period, but the story has been in the back of the minds of policymakers ever since. The Bill Clinton White House

was famously afraid of the bond vigilantes, so much so that it ran a budget surplus for several years. Memoirs have revealed that this was explicitly done to appease the bond market, so Clinton could pursue his policy agenda without disruption. There's a growing sense that Trump will need to tread carefully and carry out his policy in the correct order for that same reason. A strong and rising dollar combined with rising bond yields could be a recipe for disaster. Still, there's the potential that this week's market action has been a vast overreaction to limited data points. On Wednesday, ADP Research published their labor market report for December.

They found that 122,000 new jobs were added to the economy, the slowest paced in four months and much cooler than forecasts. Education, health services, and construction were some of the industries adding jobs at the fastest pace. This report seemed to contradict the Joltz report released earlier in the week. Although job openings boomed in sectors like professional services and finance, they don't appear to have converted to new jobs being added. ADP also found that wage growth had continued to slow, another sign that labor market demand is not yet on the rebound. This isn't the data

you would expect to see at the start of an inflation spike. Bond yields didn't budge on the report and stocks traded relatively flat for the day. The BLS non-farm payrolls report released on Friday will likely be taken to settling the issue of whether or not the labor market is beginning to strengthen. So, as you can probably tell the macro data is a little muddy. There's enough in there to be concerned about the return of inflation, but not enough for the Fed to act upon it. The labor market could be in the early stages of an uptrend or it could be continuing to soften. The Fed has already signaled that they won't take any action at this month's meeting, and that that pause will likely last well into this year unless the data changes dramatically. Does that mean it's over for this

crypto cycle? Joe McCann of asymmetric capital doesn't think so, but he also doesn't like the look of markets at the moment. He wrote, my tactical short-term trading bias is lower. Don't get it twisted as higher as my meme forever, and we will resume our march towards new all-time highs soon. But it's looking dicey to me until the inauguration. The dollar's strength is a problem for risk assets, especially Bitcoin. Bibib shift. With no expected catalyst for Bitcoin until inauguration day, it's difficult to see a reason to get short-term bullish. But McCann doesn't think it's time to pack it up and prepare for another crypto winter. He also doesn't think the Fed has lost control of the bond market, adding, the yield curve continues to steepen with many FinTwit mouth breathers

claiming that the Fed has lost control, yet they fail to realize that a steepening curve suggests the market is more focused on growth than inflation, and the U.S. economy is ripping. Indeed, this is another possible explanation for rising rates at the long end, the idea that the bond market is pricing in strong U.S. growth for the first time in decades. McCann also noted that global liquidity continues to tighten, with another trillion dollars removed over the past week. His entire threat is worth reading for a holistic view on macro conditions and why they are a major headwin for Bitcoin right now, but that headwind could be temporary, and McCann still believes we could see new Bitcoin all-time highs by the end of the

quarter if the situation changes. Economist Alex Kruger sees the situation in a fairly similar light, tweeting, people are way too bearish now. Time frame issues, in my opinion. Yes, most crypto-natives are tired and many even traumatized. Under normal conditions, that can actually create a top. This time, TradFi is here buying Bitcoin, it is not Sailor alone, and they could not care less about crypto-natives trauma. So you ask yourselves, is the equity's top in? That's the key, as ETF should ensure correlation stick around. And to answer that, you have to ask yourself another question. Is the Fed cutting cycle over? I don't think so. We just had the Fed announce a temporary pause, which by now is mostly priced in. Temporary, not permanent. Read what Fed officials are saying.

They all still advocate for further cuts. And the market is barely pricing a little over one cut for 2025. This was seven three months ago. I think the narrative will soon change again away from a hawkish Fed and the sell-off in long-term interest rates. Trump is around the corner. Yes, we do have smart money like Howard Marks now calling this an AI bubble, but he's been saying so all of 2024 and self-admittedly does not understand AI. Meanwhile, given the bearish economic data we just had and the chart, I would not be surprised if Bitcoin trades into the 80s, but in my book, that it'd be short-term noise requiring short-term risk management. Do think traders will now be selling Bitcoin more actively above 100K, slowing things down,

especially up to 105K. Do think macro matters a lot once again, and I'm not expecting easy mode going forward. Easy money is over, but I'm still expecting new all-time highs. We have a very long year ahead. Lastly today, as if there weren't enough reasons to be bearish, it appears the U.S. government has been cleared to sell $6.5 billion worth of Bitcoin. The news splashed over crypto Twitter last night, driving another leg lower. According to Arkham Intelligence, it doesn't appear that any Bitcoin has moved from government wallet so far, but that did little to calm the nerves on crypto Twitter. These coins were originally seized from the Silk Road hacker and were subject to a legal dispute with a private firm that bought recovery rights. That lawsuit has now been

resolved. It's a little unclear what the timeline for an actual sale would be. Kuhn wrote, This allows the DOJ to sell, but they have one to two weeks before Trump is in. They have to either OTC sell the whole thing or dump on the market if they want to get it done. Trump isn't going to sit around and do nothing. He will bring further awareness and take action. This is nothing like the Germany drawdown uncertainty. This is the type of news that gets all traders liquidated, but not the type of news that is bad for spot holders. You basically have a defined two-week window opportunity before it's flipped on its head. Great to have moves like this to wipe out leverage in tourists. If the government does end up liquidating the Bitcoin, it would be a pretty clear affront

to Trump's Bitcoin Reserve policy, which began with pertaining the government's Bitcoin. The U.S. government has about $18 billion worth of Bitcoin at current prices. Around $12 billion of that is a seizure from the Bitfinex hack, which could well be ordered to be returned. That means the news relates to the last major tranche of Bitcoin the government owns free and clear. David Bailey, the CEO of Bitcoin Magazine, wrote, The flip side of this is the DOJ just ensured we get the strategic Bitcoin Reserve. If DOJ thinks they can steal America's Bitcoin Reserve and deny the U.S. President his policy priorities, just so they can line their own department's pockets.

Got news for them. What a middle finger to the voters. Ultimately, I think that the macro conditions are a much more interesting cause for concern than the short-term selling pressure of the U.S. government. But remember, we've got the jobs report on Friday that should help fill in the macro picture. Trump's inauguration is 11 days away, and ultimately everyone is all bummed out at $93,000 per Bitcoin. Not a bad state of affairs if you ask me, but of course we will continue to keep an eye on it. For now, 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.