The Breakdown - Questions about Bitcoin and Macro to Start the Week

Episode Date: June 11, 2024

NLW looks at the end of last week where we saw a market shift in traditional and crypto markets. Here's what happened, and why. 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 Monday, June 10th, and today we are catching up on basically everything, a Friday sell-off, roaring kitty. It is a big catch-up episode. But before we get into 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. All right, friends, well, after a week of strong performance, Bitcoin stumbled on Friday. There was a sharp 5% sell-off on Friday morning before price stabilized into the afternoon.

Throughout the weekend, Bitcoin traded in a fairly tight range, slightly above 69,000, failing to show meaningful momentum. The most prominent trigger of the sell-off was a much stronger than expected jobs report. On Friday morning, the Bureau of Labor Statistics reported that non-farm payrolls had increased by 272,000 in May. Consensus estimates only called for 190,000 addition. job, so this was a vast outperformance. Main numbers were also a significant turnaround from the prior month, which featured a very soft 165,000 added payrolls. The hotter than expected numbers drove a

morning sell-off across all markets, but equities rebounded much more strongly than Bitcoin. The big takeaway on the street is that the strength of this jobs report pushes back fed rate cuts. Economist Mohamed El-Eurion said, it does close the door on a July rate cut. Ira Jersey, chief U.S. rate strategist at Bloomberg Intelligence said, if you look at SOFR futures, we've actually priced out an entire cut for the cycle just on this report. After the Bank of Canada and ECB delivered their first cut last week, there was growing expectation that this week's Fed meeting would be extremely dovish. A Fed rate cut this month wasn't on the board, however, it was entirely possible that Chair Powell will deliver guidance to prepare market participants for the first rate cut in either July or

September. This strong jobs report seems to restrict how Dovish Powell can be on Wednesday. Below the headline numbers, there were also a lot of areas of concern bubbling to the surface. The second component of the jobs report, the household survey, showed a large drop in employment. According to those survey results, 408,000 jobs were lost in May. Those numbers caused the unemployment rate to take up from 3.9% to 4%. Now, over the last few years, there has been a ton of ink spilled about the accuracy of the non-farm payroll report. Many economists have pointed to confounding factors like gig work being miscategorized and a

plummeting survey response rate. We've also seen downward revisions to initial data over the past two months. Bloomberg economist Anna Wong has been following issues with payroll data close mostly over the past year. She is now so convinced of data errors that she is referring to the true and false numbers to forecast the diverging statistics. Seeing payroll growth alongside rising unemployment is confusing analysts across the board. Holger Shappitz of Welk magazine wrote the U.S. labor market looks completely schizophrenic. Michael Liebowitz of Simplizer said, This is the worst best jobs report I have ever seen. Nick Timrose of the Wall Street

Journal looked past discrepancies in the data to focus on the big picture, writing, what the May jobs report means for the Fed. Not a whole lot. Schools out. We were already looking at a summer holiday with September as the earliest possible cut. The latest data doesn't really change the story. For some time now, there's been an asymmetry to employment data and the Fed's reaction function. Weakness can influence the timing of a cut more than strength can derail a cut. That isn't true on inflation where disappointing readings will postpone cuts. That seems to be the big takeaway. That absent a conclusive and profound deterioration in the labor market, the Fed has no reason to cut rates during the summer. There are plenty of individual data

points showing a deterioration in the U.S. economy, but at this stage, they're just not conclusive enough to force the Fed's hand. And thus Friday's price action seems to have been partly about market participants deferring their rate cut expectations for a few months. While Friday's Bitcoin drawdown was a relatively mild 3.5% once the price stabilized, reactions across Twitter implied a lot of damage to portfolios. One potential reason is that traders have been heading out on the risk spectrum. With Ethereum ETFs expected over the next few months, many have used this window to get extremely long eth. There's also a range of extremely risky Solana and memecoin-based positioning that has grown in popularity.

All of those positions saw amplified downside moves. Ethereum lost 4% on Friday, Solano was down 7%. Looking across the larger and more popular meme coins, it's easy to find 10 and 20% drops. It also appears that a huge amount of leverage was in play by the end of last week. Coinglass data showed 450 million in liquidations across all trading pairs, the largest flush of leverage since mid-April. For Bitcoin traders, the liquidation wave was relatively sedate. Only 56 million in long Bitcoin positions went bust, around a fifth of the largest liquidation day so far this year. Once you get deeper into all, Alcoin territory, it looks more like a significant portion of the market was wiped out on Friday.

Many experienced traders noticed the dire vibe shift. Flowhorse wrote, Get this, Bitcoin is down less than half of the average daily range for almost all look-back periods. And you would think it would hit 40K based on the timeline. This is what happens when you diversify into vapor. Iceberg he tweeted, stop blowing up your account and losing it on the timeline. If it is really mid-cycle, then every dollar counts. If it's over, then crypto didn't die post-FtX and there will always be more opportunities. Ten Delta wrote, A run-of-the-mill leverage wipeout and CT changes their entire macro outlook. CT is missing the banana forest for the banana trees. Although around a billion dollars in Bitcoin futures open interest was wiped out on Friday,

that's nowhere near enough to be viewed as a leverage reset. We're still at cyclical highs and steadily rising. Looking at position data, the de-leveraging was most from the tightest high-risk positions getting stopped out. There's still a lot of leverage remaining in the system at wider price ranges. Liquidation heatmap data shows that a massive amount of shorts betting that Bitcoin won't be able to break 71,000. This could fuel a reflexive move to the upside on any breakout. More broadly, there's a sense that tight ranges in leverage trading don't make for sustainable price action. Analyst Willie Wu tweeted, Bitcoin won't get nice things until the last minute Digen longs give up chasing the price.

Others are taking a more structural look at where we are in the cycle. Zach Vol tweeted, Everyone is scared and miserable. Bitcoin closed its second highest week ever. Ignore the noise and stay bullish. Chris Berniske of Placeholder Ventures is taking that advice, adding, When we look back in a few years, we'll remark at the similarity between Bitcoin's test consolidation and breach into price discovery of former cycle all-time highs of 20, and 69K. One of the biggest question marks about market structure has been huge Bitcoin ETF inflows without

a meaningful impact on price. Last week saw $1.8 billion worth of net inflows the biggest week since March. The ETFs have now had positive inflows for 19 days straight, their longest streak ever. There was a price pop early on in the week, but the impact of ETF flows have clearly weakened. The weekly commitment of traders report showed that institutional short interest is still growing in the regulated futures market. This position has been steadily growing all year, but keeps making new all-time highs. Zero Hedge tried to push the idea that this positioning would make for a massive short squeeze once price starts moving, tweeting, big jump and new record high in Bitcoin hedge fund net shorts. When this snaps, it will make Volkswagen and GameStop look like amateur hour.

Active market participants were more skeptical, with CMS holdings responding, I love a good conspiracy to blow up Bitcoin shorts, but this ain't it. It's entities buying the ETF and selling futures to roll down basis. Some primes are letting entities net that. This is also why ETF inflows are high, but spot is relatively unchanged. To translate that a they are suggesting that prime brokers are allowing hedge funds to net out their long and short Bitcoin positions without getting a call from the risk department. That basis trade is currently getting around a 9% annualized yield, which can be levered up. Flowhorse pointed out, as long as the yield from the Bitcoin basis trade is returning more than the risk-free rate, funds will continue to slam it,

especially with less counterparty risk now. This market dynamic suggests that ETF flows won't necessarily have a ton of signal as long as the basis trade keeps growing. It also implies we'll need to see a lot more organic and unhaged spot buying before the price can head higher. Continuing our theme of following up from Friday, we have to talk Roaring Kitty. Of course, Friday saw Keith Gill, aka Deep Effing Value, aka Roaring Kitty, show up for his first live stream in over three years. The original meme stock trader entered the month with a nine-figure GameStop position which captured the attention of financial media and regulators alike. GameStop had surged in overnight markets on Thursday, boosting Gill's position over a billion dollars on paper. The euphoria

was cut short, with GameStop making a surprise Q1 earnings announcement before the Friday open. earnings showed reduced sales and a larger loss than had been forecast. With earnings out of the way, the company was free to announce 45 million in additional share sales. Based on Friday's trading, it's likely the GameStop took in around $3 billion in additional cash from the stock issuance. This adds to a $1 billion war chest accumulated from issuance last month. The stock plummeted at the opening, falling by more than 40%. Undeterred by that morning price action, however, 700,000 viewers waited for the live stream to begin, with Gill running half an hour late. Gil finally appeared wrapped in bandages and wearing his arm in a sling. He proclaimed, oh,

that was a close call. Am I okay? That was no doubt a reference to the billions in share issuance that had been dropped on his head pre-market. The stream featured a live stock ticker in the background, which showed just how painful the day had been for GameStop traders. The rest of the stream featured multiple references to the regulatory scrutiny that had surrounded his return. Most importantly, though, this was confirmation that Gil is still behind the roaring kitty accounts and that he was operating the publicly disclosed position. Gil seemed painfully aware of the regulatory attention his actions had drawn, asking early on, Do I have to be careful about what I say here?

He asserted that he hadn't taken any outside money to fund his position. This was one of the few clear ways he could have been pursued by regulators for failing to disclose outside funding. Gill also showed his position in real time, taking care not to reveal the information while trading was halted. Moments like this clearly demonstrated that Gil had studied up on the legal issues surrounding his big play. As for Gil's fundamental thesis, it was maybe a little lacking to some.

He commented on new CEO Ryan Cohen, who took over the company in September, stating, he seems to be taking the right approach given this unique situation. Let's see where it goes from here. Gil also poked fun at the claims of market manipulation. After speaking for almost an hour, Gil said that he would end the stream while pointing at the stock ticker. It plunged as he said those words and nod to the algorithmic traders moving the price in response to Gil's words. A Twitter user called Rugshark commented, Roaring Kitty showed how the algos dumped the stock based on keywords. High-level poker, dressed as a clown drinking beer to make people think it's over. It's not. On the surface, the stream was fairly uneventful, but underneath it was packed with

interest. We got answers to many of the big outstanding questions, but nothing groundbreaking was revealed. It had a touch of the absurd and really gave a sense that we're living through a bizarre time in market history. Once the stream was over, the sluice began sifting through the video for clues. If you are a tinfoil hat enjoyer, feel free to look into the Game of Thrones and Uno references. The more technically minded are looking into positioning data. The best theory going around is that there is a huge pile of short exposure still sitting around after the 2021 memestock mania. Dario CPX tweeted, I wonder if this is what Roaring Kitty figured out about GameStop. Because of a 2023 degree related to the Arcaghost bust, UBS now has a strict cap on risk exposure

to single counterparties. What does this mean? It means that if Credit Suisse now part of UBS truly allowed its clients to extend the equity swaps and other derivatives, they were using to short the stock, then they aren't in a position to roll those forward anymore for the full size. Considering it is nearly impossible to roll such a toxic exposure with another bank, if all the above is correct, the big losses of the first GME squeeze in 2021, assuming they were hidden in Credit Suisse's belly, are about to surface and this time hedge funds and market

makers will be forced to cover their shorts. Trying to summarize that, the main takeaway, if you will, is that there is a handful of operators who think Gil's plan is far deeper than just liking the stock. What is undeniable is that the game is far from over. Gil's massive options position expires next Friday. If the theory is that the options need to be exercised, then Gil will need to come up with 240 million by then. His stock holdings are pretty close to that size, but exiting the position without nuking the market is either difficult or impossible. On Sunday Roaring Kitty left us with another movie reference meme, this time the Joker about to rob a bank at the beginning of the dark night with a cat mask in hand. I will save my full meta-analysis for another time when maybe this is all

through, but it's pretty clear that at least part of this is Roaring Kitty trying to hold up a mirror to complex markets that don't operate the way that we've been told they do. A couple last stories today before we get out of here, similar scientific has doubled down on the micro-strategy playbook. The medical devices company made headlines late last month when it purchased around 40 million worth of Bitcoin, representing most of their cash on hand. markets rewarded the move with a 30% jump in the stock price. The company said at the time that they believe that Bitcoin is a, quote, reasonable inflation hedge and safe haven amid global instability. They explained that they had, quote, decided that holding Bitcoin would be the best use of their

excess cash. Although the move had echoes of micro strategy, it wasn't clear if the purchase would be one and done or part of a bigger move. Semler has now signaled that they are leaning all the way into becoming a mini micro strategy. The company purchased an additional $17 million in Bitcoin essentially zeroing out their cash holdings. They also announced $150 million in debt issuance that would be used to fund the purchase of more Bitcoin. While Michael Saylor made a big show of his Bitcoin Treasury strategy, this is the first time we've really seen it followed. There have been other companies dabbling and adding Bitcoin to their balance sheet, but no one has taken the plan to its logical conclusion. Now we have a second company that is going short the dollar by issuing

corporate bonds and using that to fund the leveraged Bitcoin Treasury. Many critics have pointed out just how risky the Sailor Playbook is, but now that we're out of the bare market, some of those criticisms have fallen away. Micro Strategy still has the problem of whether they will be able to roll over their debt, which has maturity's beginning next year. presumably Saylor has already figured out what he intends to do and has a plan to deal with higher interest rates. Sailor has been very clear that he viewed Bitcoin as a necessity to revive his struggling software business. In contrast, Selmer seems to be using Bitcoin to bolster an already functioning company. The company has slowing revenue growth, but incomes are still positive

and until recently the company was debt-free. We could be seeing a new type of Bitcoin company, where cash flow is used to fund reasonable Bitcoin purchases with carefully managed debt issuance. Or this could be the start of a mini-micro strategy, where the entire company is transformed into a leveraged Bitcoin bet. Lastly today, Bloomberg reporting suggests that Cracken is considering another funding round as it looks toward an IPO. Sources say the exchange could raise more than $100 million with the round completing by the end of the year. Crackett did not comment directly on the rumors but said, we are always exploring strategic paths towards Cracken's mission, accelerating the global adoption of crypto. We remain fully focused on investing in this goal.

Sources told Bloomberg that Cracken is aiming to go public as soon as next year. We also know that Circle is aiming to go public as soon as possible, so 2025 could be a big, year for crypto stocks. So friends, that is going to do it for today's breakdown. Lots of interesting things to kick off this week. Excited to see what comes. For now, though, appreciate you listening, as always. Until next time, be safe and take care of each other. Peace.