The Breakdown - The 5 Most Important Stories in Crypto This Week

Episode Date: January 6, 2024

Recorded live with Scott Melker on Friday January 5th. 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 Saturday, January 6th, and that means it's time for the weekly recap. 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. Hello friends, welcome back to a new year, new year of weekly recaps. On these episodes, I talk with Scott Melker. It's a live show that happens actually on Friday mornings, and we basically count down

the most important news of the week. And it's a chance for me to add a little bit more subjective opinion and hot taking to what is otherwise a fairly objective, or at least I think it's a fairly objective show. Today we discuss a little bit of the news that we missed over the holiday break, including Sam not going to a second trial, including Barry, leaving Grayscale. And of course, we spend a bunch of time talking about the ETF because, like it or not, that is where everyone's minds are at. It's a good conversation.

I know you're going to like it. So let's not waste any more time and dive right in. ETF madness is upon us. Every single day, every single stream is when ETF and will it happen today? And maybe fake news that it won't happen. and wow, what a roller coaster, man. I almost feel rugged that it didn't happen for this show. Like, I kind of had, like, hyped myself up thinking that it was going to slide right in right before we went live.

So I also agree. I thought we'd get perfect timing that they would definitely approve it off hours so that it didn't affect the market, that they would do it on a Friday so that we'd have all kinds of suspense through the weekend. But it seems like they're still tying the bow on a few things. I mean, this thing is inevitable, right? regardless of Matrixport, I think I had a hilarious comments, by the way, some guy responded to me, they said, when will mattress sports give their opinion? And for some reason, that just made me laugh. But yeah, I mean, you know, we saw the Matrixport thing a few days ago, absolutely somehow rocked

the market. But this thing is inevitable. Well, you know what's interesting? Because we didn't really put Matrixport as one of our topics. So let's have an honorary honorable mention here just because we won't spend too much time on it. One of the things that I thought was interesting about that, and maybe the more sort of telling part of the story, you know, the Matrix Port analysts never promised that this was anything other than his opinion. He was basically just like, there's no political reason for them to do it. So he was kind of like off on this, you know, it's almost like a thought experiment more than anything else. I think what's telling is this sort of, one, how much leverage it built up in the market, right?

And it was a sort of a release valve for that. And two, how much we have clearly pinned our, our whole. about this thing. I mean, this has become a narrative magnet in a way that I think is probably even more powerful than we all recognized. And I think that the fact that this was sort of, you know, able to have that type of dramatic impact is more telling than the report itself in some ways. Yeah. To me, it tells you exactly what will happen if this thing does actually get rejected. Yeah. Which is an absolute massive bloodbath, right? But I think what everybody really is thinking about is if it's priced in, what the expectation is. Obviously, we're starting to see that it's a

sell-the-news event because it's priced in and people giving, you know, conjecturing that maybe all of the buying that there would be for an ETF has already happened in anticipation. I would tend to disagree. I'm sure you saw the bit-wise, the bit-wise survey that came out. Financial advisors want a Bitcoin ETF, but less than half expect approvals from Juan Leon, who's one of their analysts that wrote this, is really, really good. They do this every single year of our RIA is obviously registered investment advisors. But there were some really, really telling statistics in this, I think, about what people are anticipating with the ETF.

The biggest, obviously, 88% of advisors interested in purchasing Bitcoin are waiting until after a Bitcoin spot ETF is approved. So that gives you the clarity at least on the RIA side and recommending to their clients, they are not buying yet. And also, less than half of all advisors expect a Bitcoin spot ETF in 2024. In a surprising development, only 39% of advisors believe a spot Bitcoin ETF will be approved in 2024. By contrast, Bloomberg UTF analyst pegged the likelihood of a January approval at 90%. I do not think this thing is priced in if all the RIAs are still on the sidelines.

Yeah, I mean, listen, we've had this conversation before. The priced in question is always going to be about on what time scale we're talking about, right? You know, if the question is, have the existing market participants position themselves for the anticipation of the approval, at this point, the answer is yes, right? That sort of movement got us to this $40,000 to $45,000 level. That's pretty clear. And so to the extent that we're talking about priced in in the sense of, you know, our existing market participants getting ready, then yes, it probably is.

Now, are we going to see a huge inflow the first day that this thing launches? Or maybe even a better question is, could it possibly hit the inflated expectations that we have? The answer is probably not. And so you have to think that some number of people who have ridden this thing up, even from 33 or 35 or 38, are going to take profits. And there's going to be some amount of short term dissipation. But then we get into the larger, longer term, which is, you know, gets more into the statistics that you were just sharing, which is that there's this huge untapped market. You know, I can't remember who it was. So, so forgive me for, for, for, for sort of misquoting,

but someone wrote, it can't possibly be priced in when a huge portion of the, the buying audience doesn't have access to the asset yet. And I think that that's true. It's just, it's going to be based on the time scale that we look at. If you stretch this out over the course of 2024, I think it's obviously not priced in. I think if you look in in the context of just, you know, the, the, the, all of us sort of sitting around waiting for. this thing. We're probably a lot closer to that. But, you know, one of the things that's pretty remarkable and is a great reminder of is how insular our community really is in terms of talking to each other. I mean, it feels so loud. And we do punch above our weight class in terms of

dominating Twitter slash X conversations. But it's still, we are so disconnected from the sort of average, even investor public that it's hard to remember sometimes that most people just aren't paying attention to this in the same way that we are, waiting with bated breath on every sort of move. I 100% agree with that. Our echo chamber is exceptionally loud and most people have not even heard of Bitcoin and certainly are not tracking the progress of the Bitcoin spot ETF approval. They don't care. They don't even know. They haven't seen the commercials. It's not on their radar. So I don't think that it's priced in in that regard, as you said. I think it's important to note kind of as you hinted at, it's going to be the success of the ETF versus whatever the

expectation is, not in a vacuum. Just like when Jerome Powell gives a speech, you may know what he's going to say, but it's the way he says at first expectations, or if inflation numbers come in above or below expectation, it's not the number in a vacuum that matters. It's what we expect. What I've been trying to get to the bottom of is what AUM and how fast would people view as a success or a disappointment, right? Because if it's unsuccessful, say they get a hundred million and we're expecting a billion in the first week, I think that's a selling event because people will say there was no interest in this short term, they'll freak out. But I still haven't really been able to parse what that number is. I asked a Wall Street guy yesterday on Twitter space is Peter

Cheer. And he was like, yeah, this is going to be massively disappointing. I don't even think it'll get to 30 or 50 billion in the first few weeks. I was like 30 or 50 billion, dude, if we're there in two years, I'm going to be super excited. So there's this just very wide range and scale of expectations and what people are looking for out of this in the shorter term. I think the one, the one number that I would peg around because it's sort of, you know, relevant from a narrative-making perspective is does it outperform the pro-shares futures ETFs that launched, you know, at the height of the last bull market? If it can't get over that, I think it's going to be a lot of sort of, you know, busted expectations. And it may not be, you know, just kind of limping over that line

and beating it slightly, still also may not be a ringing endorsement. But that feels like a minimum threshold needed to keep really excited sentiment up. And that's a pretty high bar because Biddo was actually the most successful ETF launch in the history of all ETFs, crypto, and otherwise. So yeah, it could be disappointing. And the Bloomberg analysts, I think they've been very measured in talking about what they expect, but they think tens to low hundreds of millions in the first week and Biddo did a billion in two days. So I do think people need to be cautious of that.

I mean, honestly, I don't give financial advice, but I would say, man, hold whatever you got and don't try to trade around this event. Just chill and see what happens. It's, I mean, it's very unique in the context of this market. It is something that is distinctly outside of what crypto traders have dealt with before, because it's sort of the coming to fruition of a thing that has been, you know, attempted for going on a decade now. And the thing that makes it extra complicated is that it's the collision of two very different

types of investing audiences. You know, the crypto crowd who moves 24 hours a day, seven days a week, 365 days a year, at the slightest sort of idea of movements, and now on a whole new buying public where my anticipation is that I don't think that the RIAs out there are spending a ton of time counseling their clients in advance of approval because it's just a waste of breath until the thing exists. I don't think that people are so concerned with getting in at you know, sort of whatever the minimum price floor is at the beginning of an ETF, that they're going to have prepared their clients. I think that once this thing gets approved, all of a sudden Bitcoin becomes, you know,

the seventh agenda item in the next meeting whenever that happens to happen, whether it's a week or a month away. And that's sort of a slower, more, you know, kind of linear dissipation in that, that that's sort of my, you know, expectation, I guess. Yeah, I like it into the having. I think it's just a slow burn. You get the big event. It's a big news story.

but then it takes six to nine months before we actually start to see that inflow or in the case of having the actual effects of that reduction in supply. So maybe we're not going to get the ETF during or right before this show. Balchunis and Safer, it's still saying eighth to tenth. So I think we're looking at Monday. Oh, man, I think we can wait three days. But at the end of the day, really exciting after 10 years or the seven years I've been here to see this coming to fruition.

And that really, to me, is the headline. Absolutely. It really does not matter ultimately what the what happens in the hours following this thing. The fact that it exists is the transformational event and it's going to have big implications when it happens whenever that is. Well, yesterday my wife said that we had to do a shot every time we said ETF. So you and I would be extremely drunk already. But story number two moving on from the ETF. New crypto tax reporting obligations took effect on New Year's. Day. Now, it's been Jerry Brito from Coin Center screaming about this from the top of a mountain top. I haven't been able to get much clarity. I've asked three different accountants what this means. Maybe you can break down the basics of it. Then we can actually dig into what it means for the average investor in crypto. Sure. So the root of this goes back to the infrastructure battle.

And if you guys remember, if you were around back then in 2021, the infrastructure battle was the first moment that the crypto sort of policy advocacy groups really had to coalesce and come together because at the last minute, you know, it was this key must pass bill and a crypto broker shift, a shift in the definition of broker was added at the last minute as part of what's called a pay for provision. So basically when there's a bill, the people who are writing the bill have to explain how the government's going to pay for it. And one of the ways that they were going to pay for this big, hefty infrastructure bill was by which, winning back something like $17 or $18 billion of crypto tax revenues that they said they were missing.

And they were doing that by changing the definition of a broker. That was a huge catalytic event for crypto policy and crypto advocacy groups. We actually were successfully able to stall the progress of that bill for about two or three weeks. It was a really interesting moment where there were Democrats and Republicans on our side and there were Democrats and Republicans on the other side. it really sort of showed that there aren't clear partisan battle lines when it came to these issues. It revealed how much the Treasury is actually against us because basically everyone thought at first that this was just them misunderstanding. And it turns out it wasn't. It turns out that they were kind of actively trying to give themselves the ability to de facto shut down crypto whenever they

they so choose. And ultimately, we didn't win that fight. Procedurally, you know, Chuck Schumer eventually just push the thing through. And as this was happening, there was quietly another provision in that bill, which we weren't paying attention to, which was around the part of the tax code called 6050I, which was basically a provision around reporting requirements for transactions above $10,000 in crypto. So effectively what this says is that anytime you receive $10,000 or more value in crypto, So you have to report it within 15 days. And by reporting it, you also have to include the Social Security number of the person who's sending it to you and all this personally identifiable information.

And importantly, theoretically, the penalties for not reporting this are they're actually felony, up to and including felony charges. So it's a significant penalty. Now, there are a lot of questions about this in practice. right? It isn't exactly clear. You know, when it comes to that broker provision, the Treasury has basically said that they're not going to enforce it until they have actual sort of a rulemaking process that goes around it. They haven't been clear on whether that sort of applies to this one as well. And so the issue with this is not necessarily that anyone who gets, you know, a $10,000

transaction right now is on the hook for a felony charge if they don't report it. It's that we just don't know, and we could, and they could apply it retroactively. And so we're once again in the situation where people are just guessing they're basically having to do their best sort of good faith efforts. By the way, there's no paperwork that specifically for this reporting. So you'd have to kind of take a cash-based reporting requirement and modify it in some way. It's just, it's an absolute mess. And I think it's emblematic of this administration's just lack of clarity. when it comes to sort of, you know, soft imposing new rules without explaining how they're going to be applied or how we're supposed to comply with them. Yeah, there's no clarity on how the law

will actually be enacted, who it applies to. And certainly logistically, it's a nightmare because if you told me right now, hey, you just received $10,000. You have 14 days to tell the IRS about it. Well, how do I do that? I don't think that your average person knows a way to get in contact with the IRS or has a plug over there that's going to give them access, right? And so I think was a lot of fear that this applied to literally everyone. They sort of clarified as I spoke to accounts, this was for businesses and professional traders, but there's also no definition of what makes you a business or a professional trader if you're just an average crypto investor who's moving money around. I think it's important to note these laws exist for KYC AML purposes at the

$10,000 threshold in other markets, right? You know that you, if you have to report, if you bring $10,000 cash into the United States, if you even withdraw $10,000 cash from your own bank, account, the bank is going to report it to the IRS. So that aspect of it, I don't think is surprising. We've seen crypto laws catching up to existing laws for other tradfai in other places as well, right? We know that the wash sale rule, for example, will probably disappear from crypto and we won't be able to get that tax benefit. Biden's even spoken about that. But to your point, this is just massively confusing. I don't think it's going to affect the average person. But the worst nightmare is three years down the road, they, you know, push a button on a tracker

that they've built from coin analysis and go back and say you've received $10,000 from your cousin and all of a sudden you're on the hook for a felony. Yeah. And it does seem, so I was trying to dig into this a little bit with my researcher for the show. And the penalties are, we're potentially overstating them a little bit. So you have to basically, the IRS, I think would have to prove like a willful intent to not do this rather than just sort of like benign. neglect and the sort of the penalty for benign neglect is $50 not a felony.

But it's, again, it's sort of like where are those lines drawn? You know, like it's not that fun to be figuring out how to fight that battle or thinking about having to fight that battle years down the line. Yeah, Jerry Brito had a couple great examples. There was one, I believe, where he said, I see a professional trader and you do a transaction directly OTC with someone, and not on exchange, obviously. And it's over $10,000.

Then in theory, you would each have to report each other. Because $10,000 went each way. You maybe sent USDT. They sent Bitcoin. They're both in the amount of $10,000. And you're reporting each other for the same transaction. It's just broken. Yeah.

All right. So I think that we can move on. I don't think this is something that people should be terrified about, but I do think it's something that we should be paying attention to and trying to be compliant. At the end of the day, my feeling with all of the tax laws and nonsense surrounding crypto is just report everything and pay your taxes. Yeah, 100%.

Don't really leave it to the court of public opinion or to the government to decide whether what you've done is legal. The next story, obviously, that we just never got a chance to talk about, even though I think it's about a week and a half ago. Barry Sobert resigns as Grayscale chairman to be replaced by Mark Schifke. Why do you think that this is happening? Obviously, the feeling is that Grayscale is getting in line for their ETF conversion. want to make sure they're compliant, but why does Barry have to go for them to be compliant or able to get this approved? Well, clearly we don't know the specifics, but, you know,

Barry is subject to ongoing actions with the New York Department of Financial Services. And, you know, there's all sorts of reasons why, without there being any one specific thing, the SEC, you know, signal to them that this is a shift that needs to happen, you know? And, and ultimately, this is sort of of of the blood sacrifices that we've seen this bear cycle. If this is all that happens to Barry, he's coming out the most unscathed, you know, it's just a leadership position removal. It's not like he's divesting himself. It's not like gray scale has to spin out from DCG. So it's relatively minor if this is sort of the only thing. But, you know, I think it's notable in the, that, the sort of cleanup has now come to really, you know, most of the big actors at this point.

The Sam, CZ's, you know, Barry Triumvirate has all had sort of some meaningful get out of the way type action for the industry to move forward. Do you think this hints at larger problems for DCG and for Barry Silbert specifically? Not that we haven't. I mean, we've already seen. There's all sorts of ongoing issues there, you know. They've sort of been raised. I don't know or have a strong opinion on whether we're going to see more than sort of the New York actions when it comes to DCG.

You know, certainly the DOJ is probably looking at everything, but I don't think we have any sort of the rumor mill hasn't kicked anything up on that front. Let's put it that way. And, you know, the rumor mill likes to kick things up. Yeah, I'm sure that this won't particularly affect Barry's financial status or connection in that regard to gray scale. So it seems like more of a symbolic move for them to, like I said, show the SEC and the government that they're doing what takes to get it done. Right. And speaking of other people who had big news this week, those bad actors you talked about, Bankman Fried won't face second trial on remaining charges. Now, there's been so many, I don't know if bad takes or conspiratorial takes around this, but we kind of knew that this was likely to happen in context of the first trial.

The government told U.S. District Judge Lewis Kaplan in a letter Friday, then the interest of expediency, it would drop plans to try bank and freed for conspiracy to bribe forward officials, commit bank fraud, and operate an unlicensed money transmitting business among other charges. A lot of this has to do with the extradition rules with the Bahamas, who have not given them permission to do this. And the guy's already facing 110 years in jail. Do we need to go after more?

But the flip side of that, obviously, is he illegally gave a lot of customer money to a lot of politicians. And that's clearly not going to be litigated right now. And I think that rubs people the wrong way. Yeah, I mean, listen, I think that this comes down to a question of where the public interest really lies. The government's argument is that the public interest is in not doing another repeat trial, which is just going to have additional charges, which would have concurrent sentences.

You know, so it's sort of just a waste of time. and resources. The flip side is that because of the particulars of which charges are being dropped, we don't get good information about who knew what. And so I think that without donning the tinfoil hat, you have what looks like a very convenient, if legitimate sort of dropping of a case where because it was broken up in this way, they were able to avoid a thing which would have put a lot egg on a lot of people's faces in the name of not spending or wasting taxpayer dollars on a redundant trial. And I think that you don't have to have a conspiracy theory mindset to understand why that would have been seen as convenient by the powers that be. Yeah, there's been a lot of people

who have responded to me when I've sort of calmly laid out the fact saying, you said that SBF, you know, who's going to go to jail forever, now he's not. Clearly it's a cover up. They're protecting him. I don't think they're protecting him. No, they're not protecting him. They're protecting themselves. Yeah, I mean, we would see $100 million in clawbacks, the names of hundreds of politicians, including some of the leading members of the largest committees in Congress and the Senate. I think on both sides of the aisle, that's not coming out anytime soon. I'm disappointed that it won't, but I do understand that it's a waste of taxpayer money and resources at this point if it's only to put him away and not to go after those people.

Yeah. I mean, it's a frustrating situation. I think that the public interest would, my, my position is the public interest would be better served by a full accounting for, for sort of what those political relationships were. But at the end of the day, you know, this is a battle that was probably not going to be won. More than anything, they should at least claw back all of those donations to give it back to creditors.

I mean, that money is literally the most. money that people deposited into FDX as an exchange and believed was theirs. 100%. Yeah, and our number five, which is just funny, man, Jim Kramer. Let's play him. Let's look at what Jim Kramer had to say about eight hours before the market went from $45,000 to $40,000. Ahead of the open, which is about two minutes from now, take a look at Bitcoin.

About $45,000. That would be the first time since April of 22. since April of 22. You can see, and obviously it had a great year last year. Yeah, we got that clearing event of Sandbanking Freed going down, and that seemed to make people feel, you know, what, we're safe, and then the ETF. We continue to wait for the ETS.

Endless ETF. Look, it's very rare that I've ever seen that this way, it could it be a waiting for Godot? I mean, no, there won't be an ETF. But I do think that the people who are in it for that are going to use that as a chance to sell. But this thing is, you can't kill it. No, can't.

And the late Charlie Munger, who was so brilliant on so many things, was blind to this. Now you can say, wait a second, maybe it's all going to come around. Jamie Diamond has not spared any negative words. No, but look, I mean, it's a reality and it's a technological marvel. And I think people have to start recognizing that it's here to stay. The SEC's been against it almost the whole time. Yeah. Now, that doesn't mean that every one of these is here to stay,

but I do think that it's about, this is a remarkable comeback that was unexpected, except for all the bulls who it turned out to be right. Gensler does a lot of jawboning. Didn't work. A lot of job boning. A lot of jawboating. So do we give Jim Kramer credit for having strong opinions loosely held

and coming around, you know, because he's right. You know, I think we agree with what he does. just said, or is this just political style flip-flopping of the highest order? I think the best way to look at Jim Kramer is as a boomer barometer, right? It is, he is the voice of sort of a boomer investor class who, you know, he's the leading indicator for them in many ways. It's a group of people who actually listen to what he has to say. And I think that, you know, hold aside his particular opinion and sort of the lack

humility that he showed. He didn't, you know, he used Charlie Munger as the, as the fall man. He is Munger. Like, that's you, man. But, but, but, you know, I think that I think that it's representative, though, of a broader shift in opinion. And, and listen, it is one of the things that is the strongest argument for Bitcoin is that it just keeps surviving. You know, it's, it's trite to say, because we say it all the time in the crypto space, but, you know, no other. bubble has ever come back from from being a bubble really, you know, unless you want to call dot coms and sort of the internet, you know, an example of that. But when it comes to real pure, you know, financial speculative mania, it's, it just gets harder and harder every single time

it doesn't die to, to ignore it. And so I think it's a, it's positive in the sense that I think that he's not the only one who is having that set of thoughts right now as, as we're sitting here watching and waiting for this ETF to be approved. That's right, because once again in our echo chamber, we know that he's easy to counter trade and it's become a meme, but there are millions of people who listen to him every single day, and he just gave it the stamp of approval that maybe many of them were looking for. And when there's an approved spot ETF and their RAs are also talking about it, this can only lead us in the right direction.

It's just hilarious that it happens the day before price crashes, and I'm literally dying on the inside of your boomer barometer. We'll call him the thing we're going to have to trade my boomerometer. Yeah, exactly. He's the boomerometer. Anything else that we might have missed that you want to touch on before I let you go? Everything is just anticipation right now. And, you know, listen, I think that what we'll have to do next week if this thing gets approved as we anticipate is a top five contenders for the next narrative.

Because we're going to need a new one. I'm putting my hat in the ring for ETH. Yeah, get your real world assets ready. Get your ETH comeback ready. you've come back. That's mine for sure. And I think that once this gets approved, we're going to very quickly start hearing about the Ethereum Spot ETF. Yeah, 100%. All right, man. Well, everybody, listen, follow NLW, obviously on X, but the breakdown every single day, the best podcast, frankly, in the crypto space.

If you want to get this kind of insight and updates every single day, that's the place I go for it. And you should as well. We will be back next Friday. don't foresee any huge breaks coming. So we should be back on a relatively consistent basis here, hopefully. No more holidays. So, Matt, thank you. Great to be back. And we better be talking about an already approved Bitcoin Spot ETF by next Friday.

Are I'm going to lose my mind? Yeah, it'll be certainly a shock if we're not. All right, man. Thank you guys. Have a good one.