The Breakdown - Slouching Toward Crypto Winter

Episode Date: June 25, 2022

This episode is sponsored by Nexo.io, NEAR and FTX US.    In this edition of the “Weekly Recap,” NLW argues that this week saw the crypto community settling into the bear market. He looks at why both the macro landscape and crypto’s recent string of problems could be the beginning of a longer lull.  - Nexo is an all-in-one platform where you can buy crypto with a bank card and earn up to 16% interest on your assets. On the platform you can also swap 300+ market pairs and borrow against your crypto from 0% APR. Sign up at nexo.io by June 30 and receive up to $150 in BTC. - NEAR is a blockchain for a world reimagined. Through simple, secure, and scalable technology, NEAR empowers millions to invent and explore new experiences. Business, creativity, and community are being reimagined for a more sustainable and inclusive future. Find out more at NEAR.org. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - 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. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “Catnip” by Famous Cats and “I Don't Know How To Explain It” by Aaron Sprinkle. Image credit: gece33/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

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 nexo.io, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, June 25th, and that means it's time for the weekly recap. Before we look back at the week that was, however, a quick housekeeping note. There are two ways to listen to The Breakdown podcast. You can find the show on the Coin Desk Podcast Network feed, which features the breakdown alongside other great Coin desk shows,

and that comes out in the afternoons. Alternatively, you can listen to the Breakdown-only feed, which comes out a few hours later in the evenings. Wherever you decide to listen, if you are enjoying the show, I would so appreciate it if you took the time to leave a five-star review or a rating. I really value each and every one of them. Lastly, a disclosure as always. In addition to them being a sponsor of the show, I also work with FTX. So, if you are a regular listener, you know that there are two types of weekly recaps. The first is a true weekly recap where I actually look at what has been and try to make sense of it all.

Or two, what amounts to basically a regular show where I get at a topic that I just didn't have time to cover in the week. This is going to be in that first zone, a true weekly recap. And I think the theme, of this week has been on some level one of acceptance and settling. It is felt perhaps like a slow, steady slouch towards acceptance that we are in some new version of a crypto winter. I think it's worth reflecting on that term for a moment as well. Winter, where does it come from? Well, the period in 2018 and 2019 in Bitcoin and crypto is widely described or considered crypto winter. The term, I think, is meant to convey more than just a bear market. Bare markets and traditional markets mean technically 20% price declines from recent highs,

but also the dip in sentiment that comes along with it. I think the difference between a bare market and a quote-unquote winter is the sense that comes with it of simply not knowing or being able to see when it might end. Winter conveys a lack of having clear catalysts back in the other direction. It reflects not just people being shocked at crashes, but in fact, simply being apathetic about the whole enterprise. It reflects people leaving. If quantitative tightening is liquidity leaving the financial system, a winter is energy leaving the crypto system. Now, in no way am I guaranteeing we are headed towards some long protracted winter or anything that even resembles 2018 and 2019.

As I've said before, the fact that projects and funds in this space are so well capitalized means that I think there is a much, much better chance of new products coming to market that get people excited and excited to build more and be here versus just relying on narrative shifts to get us out. But I do think that people are really starting to grok that we might be here for a while. How come? Well, let's look at the macro side first. The truth of the matter is we are just not making progress. Last month's inflation numbers in the United States came back as a bad surprise to the upside, hitting 8.6% inflation instead of the economist estimate of 8.2%. Now, it's not like 8.2% would have been all bells and whistles, but at least it would have been plateauing or flat or trending somewhat

in the right direction. The fact that inflation has just kept going up shows how intractable it seems to be. In Britain, the inflation figure was at 9.1%. And in fact, the Bank of England said it could jump to 11% or higher this fall, as caps on domestic energy there are lifted. Now, this, of course, creates a scenario where there is even more pressure on central banks like the Federal Reserve to be even more hawkish. And that's exactly what we saw last week. After having telegraphed a 50 basis point hike for weeks, right? If you remember, for most of the weeks leading up to the FOMC meeting, it was supposed to be a 50 basis point hike in June and a 50 basis point hike in July, and then we'll see in September based on the new data that we get over the

summer. Instead, when that 8.6% inflation print hit, a few days later, when the FOMC meeting happened, the Fed decided to raise rates by a larger than expected 0.75%. The question, of course, is are those rising rates having any impact, and they certainly seem to be cooling some areas of the economy. Equities in the United States are officially in a bare market. Some categories like tech that are farther out on the risk curve are down much, much more than the 20% threshold for a bare market. I've seen statistics suggesting that tech stocks are down around 60% in aggregate. Over in the formerly white-hot housing market, mortgage rates continue to climb. This week, the average 30-year fixed mortgage hit a rate of 5.81%, with many lenders

quoting over 6%. These numbers may not seem high in absolute terms, but they are the highest rate since before the global financial crisis. What's more, based on the way that mortgages are structured, these rates are having a significant impact on affordability. The monthly cost of purchasing a home has, in some case, doubled because of how much of the interest you pay up front. The net result is that even more folks are priced out of this market, where many were already feeling priced out based solely on the high cost of homes.

Raising rates also means lower demand, lower demand for first-time mortgages as well as lower demands for refinancing. News came out this week that hundreds of JPMorgan employees who work in lending are being laid off, and hundreds more are being moved to other positions. All of this together heightened inflation, stock prices going down, housing prices staying high while mortgage rates go up, and it's not hard to understand why, according to a benchmark survey of consumer sentiment from the University of Michigan, consumer sentiment is currently at its lowest level since they began collecting data

in November of 1952. The closest lull in consumer sentiment that we've seen to these new record lows came during the 1980 recession. A perhaps not unsurprising comparison given how much the Fed is raising the specter of Paul Volcker's inflation fighting from that same time period. In the University of Michigan study, 46% of consumers laid the blame on inflation, which makes sense why this is such a hot-button political issue heading into midterms. This week, Fed Chair Powell testified before the Senate Banking Committee and then the next day before the House,

and for the first time, he admitted that the rapid increase in interest rates, the most rapid increase, by the way, since 1987, could tip the economy into a recession. And indeed, that's where much of the market discourse is now. There is a strong sense on the macro side of the House that a recession is on the way. Analysts and commentators are noticing the Fed shift its language to reflect this reality in numerous small ways. It seems like they're giving themselves outs if something in markets break or if a painful recession really sets in even before inflation happens. The Fed has even gone so far to suggest that they'd accept some increase in the unemployment rate to get inflation down. Still, it seems like the lessons of the 1970s are very, very top of mind for Powell and the Fed. In the middle part of that decade, despite what seemed like aggressive rate raises at the time, it wasn't enough.

inflation stayed high and it took Volker coming in and driving the federal funds rate above 20% in 1981 to finally start to see an impact. Nexo lets you easily buy crypto with your bank card and earn industry leading interest rates. Earn up to 16% on crypto and up to 12% on stable coins. Nexo makes passive income easy with interest paid automatically and daily. With Nexo, you can also borrow against your crypto at 0% APR and exchange over 3%. 300 pairs. Receive a welcome bonus of up to $150 in Bitcoin until June 30th at nexo.io. That's neexo.io. This episode is brought to you by NIR, a climate neutral, high speed,

and low transaction fee, layer one blockchain platform. Near is a blockchain for a world reimagined. Through simple, secure, and scalable technology, Mir empowers millions to invent and explore new experiences. Business, creativity, and community are being reimagined for a more sustainable and inclusive future. Reimagined your world today at nere.org. The breakdown is sponsored by FTXUS. FTXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors.

There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S., FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. Here you've got a Fed that is cranking rates, moving to quantitative tightening, not seeing enough of a shift in inflation, and simultaneously seeing a recession hurtling towards them. And all of this is happening in the context of the very, very real possibility

that none of what the Fed is doing can actually really even make a dent in what's causing inflation, namely supply chain problems and energy crises stemming from war. So if you take the perspective that the great repricing that we're experiencing now across all risk assets is driven by these macrodynamics, then what is there, if anything, that's positive on the horizon? The thing the market seem most excited about right now is the acknowledgement on the part of the Fed of the possibility of a recession. Why? Well, because they believe that will force the Fed to go back to easy money mode again.

That's the state of it. Markets are most excited about the possibility of a recession. A little bleak, but there we are. So that's the macro side of the slouch. And then there is crypto. It has been just a non-stop slew of interrelated bad news. In fact, a month or so ago, we did actually decouple from equities, but to the downside. In other words, we've been sinking farther, faster. It's not particularly hard to see why. First, while it's tempting for those of us who weren't directly exposed to Tara, to view it as over and done and a painful lesson to be relegated to the past, that doesn't, of course, take into account those who lost big on it and who are still dealing with those losses right now. It doesn't take into account the way that it will shape

regulatory discourse, especially as that discourse is heating up in the U.S. And it doesn't take into account the investigation still swirling around it. Lawsuits have started in earnest. a phenomenon that's likely to continue. One reported by Coindus came on June 18th from a plaintiff in Illinois. Still, the biggest news this week on that case is that Terraform Labs employees have been barred from leaving South Korea. South Korean prosecutors want people who are involved in the company to stay in the country, and it extends to employees who left the company in 2019 and 2020.

Daniel Hong tweeted on Monday, Stop asking me why I couldn't make it to NYC friends. This is why. The Korean government imposed an exit ban for all X, Terra employees today. Obviously, Daniel is frustrated and reasonably so. He continued, People being treated as potential criminals like this is absolutely outrageous and unacceptable, that anyone who are willing to cooperate would no longer want to after this madness. The point of course relative to our discussion now is that this is still very much an issue.

Then there is Celsius. Celsius has been quiet this week, so much so that Frank Chaparro from the block tweeted, so is Celsius's strategy to ghost the entire industry, lull, but some of their compatriots in the crypto lending industry this week were busy getting out ahead of more potential issues. BlockFi announced that they had signed a term sheet with FtX to secure a $250 million revolving credit facility, saying today's landmark announcement reinforces BlockFi's commitment to serving its clients and ensuring their funds are safeguarded. Now, outside of that just normal market volatility, what might have been pressuring BlockFi? On June 16, Zach Prince, the CEO of BlockFi wrote, BlockFi can confirm that we exercised our best business judgment recently with a large

client that failed to meet its obligations on an over-collateralized margin loan. We fully accelerated the loan and fully liquidated or hedged all the associated collateral. Zach and BlockFi didn't name names, but it was clear to everyone in the industry that they were talking about Three Arrow's Capital, and boy, has this week been all about really settling into everything going on with Three Arrow's Capital. There is still so much rumor that I continue to be hesitant to share almost anything, but by and large, the picture that sort of keeps coming into focus is one in which it's frankly very unclear how much actual capital they had, versus how much they were just taking on loans from one source to provide loans and yield to others.

A couple folks summed it up really well. Frank Chaparro writes, so did 3AC actually not have any money themselves? Just borrowing from Peter to pay Paul? Anthony Sasano says the real sci-op was 3A.C. convincing everyone that they were some mega-rich gigafund that won on every trade. In reality, they just borrowed everyone's money, went D-Gen long, and blew themselves up in the process. DC investor says the details of the 3A implosion now firmly in fascination of the abomination territory. How the hell did perhaps the biggest LARPers in crypto history become the standard

bearer crypto fund? Unbelievable. Whatever the case, it seems pretty clear that we still haven't seen everything. On Thursday, CoinFlex announced that, quote, due to extreme market conditions, they were pausing all withdrawals, to which Larry Sermak from the block responded, due to extreme market conditions, equals we use 3AC for yield, lull, sorry. The point here is that reality is settling in this week. But it's Saturday, it's a weekend, it's a beautiful summer, I guess, at least if you're in the northern hemisphere, so we have to end on what the optimistic side of all of this is. Here are a couple things that I think one could find enthusiasm.

and optimism within. The first is NFT, NYC. I have to say this is one of exactly two things. Either this shows the continued sustained degeneracy of this space, a willful denial that just doesn't get the new market conditions that we're in, or these folks are genuinely excited about their proto-metaverses, and they aren't just in it for pictures with numbers that go up. Moon Overlord tweeted it's crazy how much more successful NFTs were than Defi this cycle, but Defi was most people's pick to get adoption. Imagine an entire week-long festival with people showing up to talk about Defi, LMAO. Udi Werthheimer says, I love it when Crypto Boomer's tweet about how NFT, NYC is cringe. We were never able to inspire this level of enthusiasm, so sit down. Sure, I too remain unimpressed by Goblin

cosplay. But the entire point is that these are new audiences. They were never going to be exactly like us. Reenforcing this on Thursday night, Eminem and Snoop showed up to drop their new Bored Ape theme song, so I don't know, man, maybe it really is entirely its own world. Second optimistic thing. There is a lot of capital remaining and a lot of building still going on. Great example from this week is the Salana Mobile Stack, SMS, and their phone, Salana Saga, that they announced on Thursday. I have no idea if there is a need here or a demand, or if their approach is right, but goodness knows that some number of people are going to try and explore and focus on building for this instead of just sitting around on Twitter complaining.

Whether it's for Solana or Ethereum or Bitcoin or something else entirely, they might discover new things that shape whatever we build next and the next set of people that come in because of it. Optimistic thing number three. Speaking of Bitcoin, Bitcoiners are fired up. Bitcoiners are always, to some extent, validated during bare markets. They might not have been correct to call everything a scam, but their skepticism always rings true and converts a lot of people in this moment. What's more, their focus on fundamentals and

long-term convictions around the way that Bitcoin intersects with the world, draws people in when there's less hype and noise to distract it. Now, the more important thing than Bitcoin is just getting to take a victory lap is that these times focus more attention on building things on Bitcoin, things that might really matter. There's energy that might otherwise have gone elsewhere that could flow to lightning, to other Bitcoin infrastructure. I've got an interview coming up with Alex Gladstein early next week, where he talks about some of the things that are being built right now that are really exciting him.

And last optimistic thing is that bare markets just inevitably create space. Chow Wang writes, this week I was able to have meaningful technical discussions with people on crypto Twitter. This was not possible in the full-on bull market. Genuinely miss this. Whatever version of space you need and whatever reflections, it enables you to have, there are gifts that happen in these bus times as well. I hope that you find the ones that keep you here, keep you focused, and keep you excited.

For now, I want to say thanks again to my sponsors, nexus.io, near NFTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.