The Breakdown - Something Big Is Brewing With Bitcoin

Starting point is 00:00:00 You have the macro landscape, which Bitcoin seems tailor-made for. You have a rush-in of institutional investors who seem to be excited about this potential for a Bitcoin futures ETF. You have, if I'm right, the contrast of that approval of Bitcoin, that institutionalization of Bitcoin as opposed to some other areas of crypto assets, which are likely in for a rougher time in terms of regulations. And ultimately, you have number go up, the single greatest technology for boosting the Bitcoin narrative and attracting new people that has ever existed and will ever exist.

Starting point is 00:00:33 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 Nidig and produced and distributed by CoinDest. What's going on, guys? It is Thursday, October 7th, and today we are talking about something big happening with Bitcoin. Simply put, there is a lot of buzz and excitement about Bitcoin right now. Obviously, this is reflected in the price. I don't think I really have to tell you about the price. It has gone up significantly in the last few days,

Starting point is 00:01:11 including a monster candle yesterday on Wednesday, and there are so many quotes to the effect that something is happening with Bitcoin. Barry Silbert, the founder of DCG, the parent company of CoinDesk, among many others, writes, Bitcoin knows something. Suzu from Three Arrow's Capital writes, there's some confluence of Middle East, soft bank, Latin America, high oil, stock stump, Bitcoin Moon, that have my spitey senses tingling, to be quite honest. Intergalactic moves occurring at the moment, truly dynastic stuff. So what has investors taking notice?

Starting point is 00:01:47 Well, it's the decoupling from the stock market more than anything. Scott Melker, the Wolf of All Streets, tweeted yesterday, stock market got absolutely hammered today, but Bitcoin is up. beautifully uncorrelated asset. The Bitcoin Archive wrote Nasdaq down, Dow Jones down, Bitcoin Up, uncorrelated asset in a class of its own. It is not, however, just Twitter folks who are commenting on this. Bloomberg writes yesterday Bitcoin unshackles from stocks, bucking trend, and cheering

Starting point is 00:02:17 bulls. The first paragraph reads, whenever traditionally minded investors think they finally have their heads wrapped around cryptocurrencies's role in financial markets, the digital asset class always seems to prove them wrong. So basically, in September, Bitcoin and stocks moved together in a pretty meaningful way. And of course, that movement was down. I've discussed a couple of times on this show why September is historically such a bad month, or at least why people speculate that it's such a bad month. With the biggest argument tending to be something around just that's when investors come back

Starting point is 00:02:49 from the summer, and that's when they want to sell positions they want to clear out of. Either way, Bitcoin and stocks were both down. But since then, obviously, Bitcoin has some. surged into October. Since September 2nd, the S&P 500 is down 5% while Bitcoin is up 10%. This importantly is reviving one of the biggest narratives that drove Bitcoin last year coming into the beginning of 2021. As Bloomberg puts it, quote, that Bitcoin can, quote, serve as a hedge to protect investment portfolios when equities sell off during times or turmoil. That's a function that is highly in demand now, with many worrying that treasuries can't be relied upon to perform that role during a period of ultra-low yields and accelerating inflation. J.P. Morgan Chase makes a similar point

Starting point is 00:03:33 in a research note this week, speculating that institutional investors could be returning to the asset class and maybe seeing Bitcoin as a better hedge than gold. The narrative is definitely about uncorrelation, not anti-correlation. In other words, Bitcoin just not doing the same thing that any markets are doing versus it doing perfectly opposite of whatever the markets are doing at any given time. What's more, it's clear that this is at least in part a macro narrative. Bloomberg again writes, it's possible that is part of what's driving Bitcoin's latest like higher, as uncertainty builds around the ramifications of the U.S. debt-sealing brinksmanship and Federal Reserve policy. While politicians can drive the government to the brink of default

Starting point is 00:04:11 on its debt, and central bankers can grow or shrink the amount of money, the supply of Bitcoin is limited and predictable because it's all been written into its software code. Brian Mossa from either Capital Corp reinforces this, saying this is a moment when the new world steps in and says there is a reason why these are core functions and core value propositions to the design of this asset class. Investors are slowly saying maybe it's not such a crazy idea, and that's why capital is trickling into this space. Yield Farmer Joe takes this back to the Twitterati and gives a great example of the take that

Starting point is 00:04:43 I'm seeing a lot there. He writes, I'm not sure people realize how big a decoupling from the stock market is for BTC. If you can prove it to be an uncorrelated asset, the big boys will FOMO in. When you're accumulating money, concentrated bets. When you're the monopoly man rich, wealth preservation equals diversity. That's why you got them big boys out there buying classic works of art, huge baller wine collections, watches. They buy all sorts of weird, super expensive shit to diversify their wealth. Now crypto might be uncorrelated. Retail moves markets, but so do billionaires. They won't even need to understand it. They just need to understand that it's uncorrelated and that it never goes to

Starting point is 00:05:21 zero. So we've clearly got a lot of narrative making happening, but is there other actual evidence out there in markets that something big is happening? Well, a lot of folks are watching what's happening with the CME futures. Galaxy's Joshua Lim tweeted a chart and said shows CME futures, U.S. institutional, overtaking deribate futures, overseas retail. This is the real flippening that everyone should be focused on. CoinDesk gives some more explanation. Front month Bitcoin Futures contracts based on the Chicago Mercantile Exchange, CME, are trading at an annualized premium of 12.8% to the spot price. That's the highest level since mid-April and marks a significant rise from the discount of 0.36% seen a week ago. On-chain analyst Dylan LeClair gives even more color, saying CME futures basis, which is the

Starting point is 00:06:10 annualized spread between spot and futures price, is skyrocketing. CME is a cash-stress. CMEA is a cash settled futures contract and the only one accessible by U.S. investors. Deribit is offshore and Bitcoin native, so the futures basis most always trades higher than CME. That just flipped. This podcast is sponsored by NIDIG, an institutional Bitcoin firm that sees Bitcoin as a gateway to financial security for people around the world. Find out more at Nidig.com slash NLW. That's NYDIIG, forward slash NLW. So now we've got narrative. We've got the CME product that is focused on U.S. investors that's seeing a big jump in demand.

Starting point is 00:06:59 The next question, of course, is why is that CME product getting more demand? And there's pretty much one big clear line of speculation here. Dylan LeClair again, writes CME futures basis widening meaningfully. Good chance that players in the know are front-running a Bitcoin Futures ETF announcement. Crypto Ed NL reiterates this, saying massive buying. of CME futures, Bitcoin price for futures is $500 higher than spot Bitcoin. Seems something is brewing. Mike Buchella of Block Tower writes CME futures basis in Bitcoin blew out over the last 24 hours. My guess? One, folks are front-running a futures-based Bitcoin ETF. Two, shorts are getting

Starting point is 00:07:38 margin called, and likely both. Allowing Bitcoin to break from other risk assets, driving the inflation and gold narrative at just the right moment. Now again, it's not just crypto folks who seem to be betting on this Bitcoin Futures ETF. From CoinDesk again, according to Eric Balcunis, Bloomberg Intelligence Senior ETF analyst, there is a 75% chance of a futures-based ETF approval this month, most likely the ProShare's Bitcoin Strategy ETF on October 18th. Of course, the question is, if everyone is betting this way, aren't we just already pricing in the successful approval of a Bitcoin futures ETF? Not necessarily, as Alex Kruger explains. He writes, say 50% of market participants believe an ETF will pass in Q421, and 50% believes it won't.

Starting point is 00:08:22 The former 50% suffices to send the market roaring. By the time the SEC makes the announcement, an ETF would be halfway priced in. Positive news would then still be a buy at market event. There is, of course, one of the wrinkle to this ETF speculation, which has to do with the psychological barrier that once again was breached yesterday, which is the $1 trillion market cap for Bitcoin. You'll see many tweets out there saying, the asset class has to be that $1 trillion size for the U.S. to even consider. And while I don't

Starting point is 00:08:51 strictly think that that's true, it certainly is a profound psychological barrier, something that makes Bitcoin, as Bank of America put it earlier this week, too big to ignore. Now, there is one other possible explanation for optimism that's worth noting that came from Pentoshi that has to do with upcoming earnings reports. He tweets, could you imagine? All it takes is one to two more companies to disclose that they bought over the summer. Since then, we know some private companies bought like SpaceX, a country adopted it, and banks want to offer it. Let's circle with a few thoughts here. I've shared before that I think the narrative lines up really well for Bitcoin this fall. First, other assets in defy and stablecoins are in the hot seat while Bitcoin continues

Starting point is 00:09:32 to be held up as a paragon of decentralization. For all those institutions that started to dabble outside of Bitcoin to go deeper down the crypto rabbit hole, that could push them back into the Bitcoin spot. On top of that, you have numerous officials saying, that there's no ban that's likely to follow the China bans in the U.S. They may have big concerns about stablecoins and defy and tokens that are securities, but that's not the same as having an outright ban. There's more that's lining up well for Bitcoin this fall, though. The farther away that we get from the China banning events,

Starting point is 00:10:04 first the Bitcoin mining ban and more recently the crypto trading ban, the more bullish it's going to be. Hash rate shifting away from coal-fired plants in China and just away from the control of the CCP is going to, increase many investors' confidence in Bitcoin as an asset. Having less trading centered in China again is likely to be an encouraging, not a discouraging thing, especially as the U.S. reinforces that it's not going to follow a similar path. A fourth factor that lines up well for the Bitcoin narrative this fall is just the resilience in the face of a summer full of fud. Remember, every time Bitcoin goes

Starting point is 00:10:38 through some big period of fud and then comes out fine on the other side and doesn't lose all its value, it doesn't go to zero. In fact, it goes right back to where it was before. It gets more lindy, and as it gets more lindy, it attracts more buyers. Every time it doesn't die and in fact thrives, it gets more people who say, all right, I can't ignore it any longer. So even before we get to this ETF stuff, there are just tons of reasons to be bullish about Bitcoin this fall from a completely market perspective. What do I think, though, about this Bitcoin futures ETF? I personally am skeptical that it matters as much as some want it to. There are simply other ways to get this type of exposure now. It matters less on the face of it than it might have in the past.

Starting point is 00:11:18 Someone asked Ari David Paul about whether he thought a possible ETF was significant and he said no. A Bitcoin futures ETF isn't that important IMO. We already have Bitcoin ETFs around the world and lots of other easy ways for institutions to access. At this point, it's pretty marginal fundamentally. Now, I do have a tweak on that. I think that he's right in terms of institutional access, but I also think that from a narrative perspective, it's still significant. The SEC approving a Bitcoin ETF while at the same time going after other digital assets would put the lens of anyone interested in crypto squarely back on Bitcoin versus those other assets. I think it would and will contribute to a king Bitcoin narrative that actually makes

Starting point is 00:11:59 difference in terms of fund flows and allocations. And finally, there is something else I want to discuss briefly and go back to, which is the macro. Returning to that Bloomberg piece and questions of correlation, there was a great quote from Stefan Wolette, CEO of Front Financial. In discussing Bitcoin, he writes, sometimes you may say it's correlated with more speculative equities like tech, other times a store of value-type mentality takes over and it's correlated with gold. In major liquidations, the space tends to correlate with risk assets generally.

Starting point is 00:12:26 While for periods, these relationships are relatively consistent, they tend to change at a moment's notice, and that appears to have happened here. Now that it's unlinked from equities, we appear back in some kind of inflation hedge, hard asset correlated window. The point is about Bitcoin correlations and the fact that it's correlated to different assets in different market circumstances. That means, overall, it's fundamentally different and fundamentally uncorrelated in a general sense.

Starting point is 00:12:51 When people appreciate that, they like it because it's different and they start to get a feel for how to trade it. And in our specific situation, the reality is that even though Bitcoin trades like a tech equity when things are booming, it also, just by its very fundamental nature, by its very fundamental design, by the mythology around it, serves as a stark contrast to other types of assets in periods of insecurity. So what is our current period of insecurity? We've had intimations about it throughout this episode, but I want to excerpt a section from Arcas, that's art, to Satoshi's by Jeff Dorman. He writes, it seems we've been climbing a wall of worry since late last year, and it is

Starting point is 00:13:29 getting larger by the minute. We have an energy crisis, supply chain issues, higher inflation, signs of weaker growth, and lots of talk about stagflation. Today, the market is once again focused on what-ifs as it pertains to political theater. Last Thursday, President Biden signed a nine-week stopgap funding bill that avert's a government shutdown, but the U.S. could still default in a few weeks if we don't raise the debt limit. Virtually no one thinks the U.S. will default on its debt, and yet we kind of have to assume that they will in order to push markets into a temper tantrum that will ultimately give politicians the ammunition they need to do what is inevitable anyway. What has changed this time around relative to other episodes, however, is the complete lack of

Starting point is 00:14:06 trust in governments and financial institutions around the world. And while this may not actually be new, there is more public data available to the masses that point-blank incriminates the establishment and a much faster public court of opinion system that quickly spreads this information. Robin Hood and Citadel were caught red-handed in a case of trading on material non-public information. Two-fed governors were forced to resign over insider trading scandals, and congressmen are being heavily scrutinized for lack of ethics. Just yesterday, we were also thrown the Pandora papers, which shows a level of corruption that we already suspected,

Starting point is 00:14:37 but confirms our collective instincts. If you're wondering why digital asset participants are so eager to fight the establishment, this is a big reason. ARCA's newsletter is always a great read, and PS, congrats to them on their recent seed fund raise. But going back to the point of all of this, doing the TLDR for the show, We are in juicy narrative territory for Bitcoin. You have the macro landscape which Bitcoin seems

Starting point is 00:15:02 tailor-made for. You have a rush-in of institutional investors who seem to be excited about this potential for a Bitcoin futures ETF. You have, if I'm right, the contrast of that approval of Bitcoin, that institutionalization of Bitcoin as opposed to some other areas of crypto assets, which are likely in for a rougher time in terms of regulations. And ultimately, you have number go up, the single greatest technology for boosting the Bitcoin narrative and attracting new people that has ever existed and will ever exist. I think that we're starting to get a little bit of how this fall might play out, and it's looking pretty bullish. So I appreciate you listening. I hope you're having a great week. And until tomorrow, be safe and take care of each other.

Starting point is 00:15:43 Peace.

The Breakdown - Something Big Is Brewing With Bitcoin

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