The Breakdown - The Biggest Stories in Crypto and Macro in 2021

Starting point is 00:00:00 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 CoinDesk. What's going on, guys? It is Saturday, December 16th. And instead of doing the traditional weekly recap, as I usually do on Saturdays, instead I'm going to do something that's a little bit different. So tomorrow I have my last long read Sunday of the year. I'm reading one of the most popular pieces from CoinDesk's op-ed section for the year.

Starting point is 00:00:44 But after that, through the end of the year, it's the breakdowns end of year extravaganza. This is a chance for me to interview people that I think are super interesting about the year that was in 2021 and about what they expect to come in 2022. And as part of that, I write down a whole slew of questions that I find interesting and then sort of bob and weave through them based on whoever's in the interview. I thought it would be useful, at least for myself, to kind of wrap my head around what I think about these things is to actually go answer these questions in something of a similar order. So what I'm going to do is I'm going to go rapid fire through this set of questions that I have that are the pool that I draw these end-of-year questions from. And I've done no prep for this. So the goal really isn't to interview myself for anything weird or indulgent like that. I kind of just think it's

Starting point is 00:01:32 fun to answer these questions in rapid order, and it will also give me a chance to not spend too much time on my own point of view when I'm interviewing everyone else. So let's dive into this barrage of questions from the end-of-year question pool. What was the most important economic story of 2021? I think you can take this in a couple different ways, but the way that I'll take it is what was the most significant economic story of 2021, and I think the year was largely characterized when you look at the larger market view, at least, buy the debate around inflation. Was inflation just transitory? Was it just a byproduct of dislocations as the economy came back online after shutdowns? Was it just supply chain issues? What did people leaving the labor force

Starting point is 00:02:14 have to do with it? How bad was it going to be and when was it going to go away? For most of the year, there was almost a battle of wills between the Federal Reserve, which said that inflation was transitory, and markets which said, we don't buy it and we think that you're going to have to do something about it. Now, as we end 2021, everyone is on team not transitory and something we have to do something about, and that was reflected in the recent FOMC meeting where we heard that there were going to be something like three rate hikes next year. Now, I will note just to round out this answer that I think that we probably spend altogether too much time giving a crap about what the Federal Reserve is going to do. If you listen to

Starting point is 00:02:51 someone like Jeff Snyder, that's in fact the exact capacity that they've developed. In his view, monetary policy itself is not a particularly effectual tool. However, shaping the narrative through media is. Next up, what was the most significant event in the Bitcoin or cryptocurrency industry? Gotta give this one to the great hash rate migration out of China. This was the year that China actually finally smashed through all the skepticism to actually target crypto in a big way. I still remember what it was like just before the mining ban. Many people had dismissed it as just more China bluster as they reiterated policy that they had made before. But then, when the vice premier of the CCP got up there and said that Bitcoin mining was done, everyone moved fast.

Starting point is 00:03:36 Within a month, Bitcoin's hash rate had cratered by about 50%, and what's powerful is what happened next. Bitcoin never stopped working, the difficulty adjusted down. Miners moved to other places that were less hostile and more open, sometimes when they couldn't move their mining machines did. hash rate redistributed to a bunch of different places, including notably the United States. And in one fell swoop, not only was a major source of fud eliminated, but a major new opportunity to point out how much greener Bitcoin's hash rate had become emerged. There are a ton of other big events as well, but I think that's the one that will stand out when all is said and done. It is both geopolitical and it is an affirmation of the Bitcoin network. When the future looks back on

Starting point is 00:04:21 2021 NFTs, what will it think? I think it will be a combination of two things. On the one hand, insane mania hype in the way that only the wonderful crypto industry can do where things that you can't believe could have even spare change value have tens of thousands, if not hundreds of thousands of dollars of value. But at the same time, I think it will be the beginning of an era. While many, many things will go to zero, while there will be entire categories of use cases and explorations that people don't follow through on, I think that these things are more than a flash in the pan phenomenon. I think they're going to find their way into culture. I think they're going to find their way into new types of use cases. And I think 2021 will be seen as the beginning,

Starting point is 00:05:04 with Top Shot in late 2020 kicking off the whole party. NIDIG sponsors this podcast and they're helping banks, corporate treasuries, and fintechs integrate Bitcoin into their products and balance sheets. See why Bitcoin means business at nidig.com slash nLW. That's nydig.com slash nlw. When the future looks back on 2021, Dow's, what will it think? I think these will be viewed as even earlier, even more nascent, even more experimental than some of what we saw in NFTs. But I also think that these proto experiments, Pleaser Dow buying the Wu-Tang Clan album, Constitution Dow almost buying the Constitution, and this absolute Cambrian explosion of funding Dao's that are now

Starting point is 00:05:56 starting to emerge, they'll be seen as a really important early step in something that, again, like NFTs, I think are here for the long haul. What was the thing you thought was going to happen this year that didn't? More discussion of central bank digital currencies. I thought this was going to be an absolutely massive year, and it really wasn't. China was very quiet relative to what I expected, given how much they had put into being loud about the digital yuan last year. In the U.S., when it comes to the digital dollar, I think that a lot of the energy that might otherwise have gone to a digital dollar discussion was in fact focused on the rise of stable coins, U.S.D. denominated, but not ultimately digital fiat. In many ways, I think that stablecoins have

Starting point is 00:06:40 driven the regulatory focus certainly of the entire year. And I think that we're in the very beginning of a period in which stable coins will either become critical parts of the future of the U.S. dollar infrastructure, or they'll be pretty aggressively shunned to the side. What's something that happened this year that you never would have predicted? I, like I think many others, did not see sovereign adoption of Bitcoin coming in 2021. El Salvador was a surprise, a fascination, and a revelation, and it is still continuing to play out right now. To me, at the moment, the jury's out on whether the biggest impact of El Salvador will be in being some first domino for other states to consider Bitcoin as a sovereign option, or whether ultimately it will

Starting point is 00:07:23 actually matter more in terms of some of the infrastructure that's going to spring up to support this nationwide experiment. I feel like in particular the Lightning Network got a massive new influx of energy, and I'm really excited to see what happens there. What's something that you're paying attention to that you think more other people should be as well? This is kind of a regulatory issue, but one of the things that I think is incredibly important for the future of the crypto industry is that it remains a nonpartisan battle. There are some encouraging and less than encouraging trends at play here. To watch the Senate is to watch these issues get much more shunted into clear, calcified political categories. But if you watch Congress, it's an entirely different story.

Starting point is 00:08:05 People from the right and the left are coming to Bitcoin and Crypto with completely different ideas for why it's valuable, what it might mean, and I think that that creates much more momentum and powerful space to have a good, strong conversation in the U.S. about how to regulate crypto and how it can fit in a larger policy framework, as well as continue to just, innovate on its own. I think, frankly, the emerging interest in these areas of crypto by the political left is a key part of this. So that's something I'm keeping a strong eye on. How mainstream is crypto now? I think this will also be one of the legacies that we look back on 2021 for. More than any other year we've had, the crypto industry as a whole had more doors for

Starting point is 00:08:47 people to walk in than ever before. Many came to Bitcoin through questions of censors. censorship resistance and the inflation trade. Many traditional finance folks came to defy because the type of arbitrage available to there is so fascinating and interesting if you come from a finance background. Many in culture came to the crypto industry vis-a-vis NFTs, which created this entirely new and interesting artistic landscape. I think there is significantly more mainstreaming to happen, but I think that crypto is firmly outside of the idea of a bunch of crazy anarchists running around on the far corners of the internet now, and is something that's going to be a cultural force, a political force, and an economic force for years to come.

Starting point is 00:09:28 Supercycle or four-year halving cycle? I'm pretty firmly in the camp that the four-year having cycle, as time goes on, will be a less and less significant driver of the overall crypto market cycle. That's not to say that I don't think that supply reductions in Bitcoin, however programmatic, won't have a continued impact on Bitcoin market structure and on price. What I think is that there are now a huge number of factors, a huge number of different types of people involved in this industry, and there will often be countervailing forces that are just as strong in the shorter medium term as any sort of supply constraints based on the Bitcoin network alone.

Starting point is 00:10:05 We've already seen the separation in many ways of different micro-assets cycles within crypto. Sure, there were periods where everything was going up altogether, but if you look over the last 18 months, defy, NFTs, Bitcoin have all had different moments in the sun. And by the way, I don't think that's just driven by profit cycling from one to the other to the other. Whether that's super cycle or just a shorter cycle, I'm not sure. But I think that whatever you call it, it's more likely that we get shorter cycles with a smaller band from peak to trough and less crazy runups. What's one prediction you have for next year? I think that we've barely scratched the surface

Starting point is 00:10:43 on the power of crypto as a political constituency. I think with midterms coming up next year, it's going to be a major, major story. Who the crypto industry wants to throw their weight and their resources behind could have a deterministic impact in the shape and nature of Congress. I think that the era of sovereign experimentation with non-sovereign currencies is also just beginning. As I'm recording this, the official government of Myanmar has switched its dominant currency to the yuan, but the shadow government of Myanmar has switched its official currency. to tether. I think we're going to see more and more of that type of thing play out, and I think it'll come as early as next year. I think the institutionalization and normalization of Bitcoin is

Starting point is 00:11:23 going to get more and more entrenched, even if based on nothing other than the stupendous efforts of the breakdown sponsor Nidig over the past year, to find ways to get Bitcoin into bank accounts, credit union accounts, all the places that normal people interact with their money. And I think, as I alluded to before, that there's going to be an absolute Cambrian, explosion of people experimenting with Daos. I think that the ones that make the most sense are going to be focused on getting a group of people together to allocate a pool of money in some way. And I wouldn't be surprised if some of the Taos that represent the pillars of the next era of decentralized institutional life spring up over the course of the next year.

Starting point is 00:12:01 But who knows? Like I told you guys, I thought CBDCs were going to be a big thing in 2021. So what are you going to do? Part of what makes this industry so fascinating and so fun is that we just don't know. Hell of a ride to be on, though, and I'm glad you're here with me. Like I said, these interviews will kick off on Monday. We've got about a dozen of them. They're really fun. Some people that you're going to love to hear from. Lin Alden is back. And until then, guys, be safe and take care of each other. Peace.

The Breakdown - The Biggest Stories in Crypto and Macro in 2021

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