The Breakdown - Not the BTC Decoupling We Were Looking For

Episode Date: November 16, 2023

In the midst of an "everything rally" after a pleasant CPI surprise, BTC and crypto went the other direction. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown 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 Wednesday, November 15th, and today we are talking about a decoupling. Before we get 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.ly slash breakdown pod. All right, friends, well, we are picking up right where we left off yesterday, which was, of course, that cold inflation print that had such a dramatic impact on the stock market.

Yes, the S&B 500 rallied 1.9% while the NASDAQ notched a 2.4% gain, closing in on year-to-date highs. In other words, stocks responded well to news that inflation was continuing to moderate and that the Fed's hiking cycle had likely come to an end. Crypto markets, however, not so much. Bitcoin plunged below $35,000 for the first. time this week. Now, although it recovered slightly into the evening, the 4% drawdown was still painful for bullish traders. Ethereum shared a similar fate falling by 6% and dropping below $2,000. That pain was shared broadly across the entire crypto market, with the total market cap retracing

by 4.6% in one swift move. Now, some of this retraced overnight, but the volatile price swing seemed to have spoken to how overextended the recent rally had become. Now, as is wont to happen, and the gigantic price plunge forced a huge liquidation of long positions. Bullish leverage traders were flushed out of over $300 million worth of positions, marking the largest long liquidation in three months. This plunge in crypto prices stood in stark comparison to traditional markets. Bonds and stocks both rallied hard putting in one of the most impressive single-day gains so far this year for a traditional 64y portfolio. Gold also caught a tail when moving up by 1%. Indeed, crypto markets really stood alone as the only asset class with a lackluster day.

Now, if market conditions were broadly supportive of assets across the board, one possible explanation would be a flailing narrative. The past few weeks have, of course, been all about the inevitable approval of spot Bitcoin ETFs, but with no major progression on that front, that narrative could have gotten a little bit stretched. Scott Melker from the Wolf of Allstate said, Stocks up big, Bitcoin down. Tell me again, Grandpa, about the days when they were correlated. Now, let's examine this idea of ETF enthusiasm being a bit overstretched and see what the chatter is like in that area. Arkinvest CEO, Kathy Wood, continued to speak publicly about Bitcoin and the pending applications for spot ETFs. In an appearance on CNBC on Tuesday, she laid the blame for delays squarely

at the feet of SEC Chairman Gary Gensler. Wood referenced fears that Bitcoin could be easily manipulated and said, this is a decentralized transparent network. You can follow all the activity. It's highly unlikely to be manipulated. Squawk box host Joe Kernan, who has been banging the Bitcoin drum extremely hard on CNBC over recent months, added that. He taught at MIT, so we understands that it's not a Ponzi scheme or a be beanie baby, so there has to be something else. Wood responded, I don't know what it is. There's speculation that he's interested in the Treasury Secretary position at some point. What does the Treasury Secretary do? They're very focused on the dollar. A boisterous current interjected, protecting Fiat for the government,

he understands so there's something else. Would agree, there's something else. Now, during an interview on Bloomberg, Kathy said, we're looking at a change in the SEC's behavior. When we put in our first few filings, they were rejected out of hand. We got no questions. We had no interaction. That changed this year. The SEC asked some really good questions. We know that the SEC research staff is highly sophisticated in terms of understanding what could go right and what could go wrong. So that was a change in behavior and we believe other firms had the same experience. Kathy reiterated her belief that multiple ETFs will be approved as a batch by January 10th, which is the final SEC deadline for the ARC application. She noted some rumblings that the

grayscale ETF conversion might not be a done deal and could be a problem for other applicants, but added, I think we're getting close. So a couple notable things. about this. One, it is interesting to me that someone with an active application is now getting into the politics surrounding Gensler and whatever his political ambitions may be. Obviously, those of us on Twitter have never had any problem talking about this, but it certainly is a new narrative tact and one that I can't imagine isn't extremely considered by Kathy and her team at Arc. The other notable thing about this set of interviews was the degree to which the tone is shifting in the cable news set. Now, not that Joe Kernan has ever, for example, really gotten off the Bitcoin train once he got on,

but he has certainly become more boisterous and loud and put it front and center over the coming months. Assov Kvvoli tweeted, CNBC anchor is spot on. SEC is stalling. Why? Scared? Pressured? Blind? Bad for investors?

Industry, money. Bitcoin is unstoppable. You need to spot ETF. Now. Gensler, you know Bitcoin. You taught it. You praised it. You said pro-innovation.

Time to prove it. Now, perhaps a little less bullish was the fricacy around XRP this week. On Monday morning, a filing appeared on a Delaware corporate race. registry for an entity named the I-Share's XRP Trust. The filing mimicked the naming convention for the Ethereum Trust, which was registered by BlackRock last week, shortly before they filed an application for a spot Ethereum ETF. The filing was even registered under the name of the BlackRock executive who had appeared on the Ethereum Trust. The filing was picked up by Bloomberg ETF analysts and repeated across crypto media. However, BlackRock quickly confirmed

that the filing was fraudulent and that they had no plans to launch an XRP ETF. Their brief delay, however, still allowed enough time for XRP to pump by more than 20% on the fake news before retracing the entire move. In the aftermath, questions are being raised about how easy it was to make the fraudulent filing. It appears that the verification process failed, allowing a fraudster to copy credentials from a previous BlackRock filing. The Delaware Department of State did not comment substantively on the scandal, only noting that the matter has now been referred to the Department of Justice. However, the registration had not been removed from the website by Tuesday night, adding more confusion to the situation. Bloomberg's senior ETF analyst, Eric

Bacuna said, we doubt this will impact the situation with spot Bitcoin ETFs. There's no doubt it is a bad look that arguably validates the fraud and manipulation that the SEC used as grounds for past denial. Still, Michael Bacena, a partner at law firm, Piper Alderman, said he would be surprised if the SEC used the incident to postpone ETF applications. He said, it's unlikely and isolated rumors such as this would provide a legal basis for delaying ETF applications already being considered, particularly when they are subject to deadlines. Lucas Kiley, the CEO of Wealth Management platform Yield App said, overall, this is a keep calm and carry-on moment for the industry and likely a mild amusement for BlackRock.

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To round out the fake ETF news for the week, one prominent crypto-twitter account posted on Tuesday that BlackRock were warning that, quote, stable coins pose risks to Bitcoin. While there was some basis to this, the headline was deeply misleading and led numerous people to believe that this was a new statement from BlackRock. The account posted this as breaking news, but that is far from accurate. Now, the kernel of truth here is that BlackRock had disclosed that the price of Bitcoin may be affected by stablecoins, the activities of their issuers, and their regulatory treatment.

This statement was, of course, from their S1 filing, which includes a comprehensive set of risk disclosures that was last updated in mid-October. All of the current ETF applications have similar S-1 filings which have been updated throughout October. These updates are now confirmed to be related to questions from the SEC, related to risks which they viewed as material. Notably, S-1 filings always contain every possible. risk imaginable to ensure full disclosure. They aren't intended to be read as giving any assessment

on how serious those risks are, merely acknowledging that those risks exist. The BlackRock filing contains three paragraphs and focuses on the major events which have temporarily destabilized USDC and Tether over the past three years. The section was introduced by stating that, quote, while the trust does not invest in stablecoins, it may nonetheless be exposed to risks that stable coins pose for the Bitcoin market and other digital asset markets. In other words, in no universe is this S-1 saying that stablecoins are some sort of existential risk for Bitcoin markets, but simply that major staple coins have had a long history of issues which have introduced market volatility. And most importantly, this is not some recent update, nor is it news to anyone that has been

involved in crypto markets for any length of time. British Hoddle tweeted, what BlackRock did was highlight a risk factor to the underlying asset of its proposed Bitcoin ETF, and stablecoins do pose a volatility risk to Bitcoin in the short term. For example, if USDT has a lawsuit or USDC has an unpegging moment again, this would affect the value of Bitcoin in the short term. They have to submit a risk factor analysis in their filing. This is normal. As usual, Bitcoin Twitter has taken this completely normal risk analysis submission that must be filed with their ETF application and ran with it. Stop getting distracted. Now, still, I don't think any of this can explain why the ETF narrative has started to run out of steam, but what I think can or at least have a part of that is that the window for

a group approval of all applications is closing. If you had missed this, Bloomberg analyst had pointed out that over the past week, the public comment period had been closed for all pending Bitcoin ETFs. The SEC doesn't typically approve products while comments are open, so this week gave an opportunity for the agency to approve all of the ETFs at once. The speculation had been that the SEC could provide a partial approval of necessary rule changes this week and then continue scrutinizing product disclosures into next year. The speculation has also been that the SEC is going to want to approve all the ETFs at once, rather than play favorites, and give someone a de facto lead by letting them list first. Now, the brief window of no comment period is set to close on Friday,

with the first deadline to approve or delay the hashtags and Franklin Templeton applications. If the SEC chooses to delay these filings, it will begin a public comment period for those products, meaning it's unlikely that the SEC would include them in a batch approval. ETF analyst James Safart from Bloomberg said, OK, we're nearing in on the deadline dates for three-spot Bitcoin ETF applications. I want to get ahead of it because there's a pretty good chance we'll see delay orders from the SEC. delays would not change anything about our views and 90% odds for 19B4 approval by Jan 10th, 2024. My base case for what it's worth has remained the same, that the SEC will drag this out

as long as humanly possible until I never really gave it any credence that we'd see approvals, even if this period looked like a good one to actually get out ahead of things. Now, one more note on the SEC before we close out, they have reported their statistics for the 2023 fiscal year and have congratulated themselves on a, quote, highly productive and impactful year. A total of 784 enforcement actions were filed by the agency, which is a 3% increase from the year prior. Crypto was, of course, a clear focus. The regulator sued multiple crypto exchanges with pending lawsuits against finance and Coinbase,

alongside settlements with Beeksy and Bitrex. This year, the SEC also made a controversial move by extending its enforcement efforts to NFTs, settling cases against stoner cats and impact theory. SEC Chair Gary Genser said in a statement, The investing public benefits from the Division of Enforcement's work as a cop on the beat. last fiscal year's results demonstrate yet again the division's effectiveness, working alongside colleagues throughout the agency in following the facts and the law wherever they lead to hold wrongdoers accountable. Consensus lawyer Bill Hughes tweeted,

The yearly SEC enforcement victory lap. Fiscal year 2023 was another highly productive and impactful year. I agree. SEC versus ripple was hugely impactful. Funny that it wasn't mentioned in this administrative pat on the back. Now, one more quick follow-up note given that yesterday on the macro show we were looking into some of the machinations happening over in the U.S. Congress and what it means for a potential shutdown, well, it appears that a government shutdown will once again be averted after a temporary government funding bill was

passed in the House on Tuesday. The proposal from recently elected Speaker Mike Johnson had been criticized by GOP hardliners for failing to cut government spending or change border policies, but Johnson was bailed out by support from Democrats after failing to gather enough votes from his own party. 209 Democrats voted for the proposal along with 127 Republicans. 93 House Republicans rejected their leader's plan along with two Democrats. The measure was expected to sail through the Senate after they signaled bipartisan support earlier this week. The president has not threatened to veto, and Senate Democrat leader Chuck Schumer said after communications with the White House that they, quote, agree that if this can avoid a shutdown, it will be a good thing. Once again,

the bill will fund some parts of the government until January 19th and the remainder until February 2nd. Fittingly, this would set up yet another shutdown deadline for Groundhog Day. Anyways, friends, that is going to do it for today's episode. We will have to see from here whether the crypto industry can pick back up some momentum, whether that momentum will come from ETF news or something else. I, for one, am certainly not stressed about a little consolidation period after a big rally, and I hope you are not either. Thanks one more time to my sponsor, Krakken for supporting the show. Go to crackin.com slash the breakdown and see what crypto can be. Until next time, be safe and take care of each other. Peace.