The Breakdown - The Bitcoin Whales Won’t Stop Buying

Episode Date: January 26, 2021

Today’s grab-bag episode looks at five different topics: Bitcoin whales kept accumulating during last week’s dip Jim Cramer advises Powerball winner to put 5% in bitcoin Previewing the first FOMC meeting of the Biden Administration Earnings week on Wall Street looks good for Big Tech An insider’s look at the state of crypto venture capital -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- 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=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

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 and produced and distributed by CoinDesk. What's going on, guys? It is Monday, January 25th, and today we are talking about why the Bitcoin whales just won't stop buying. First, though, a little bit of housekeeping. I am actually. actually in the process of moving this week, so it's going to be a little crazy on my end. Because of that, I have a couple great interview episodes coming up tomorrow and Wednesday, but I wanted to let you know just in case something insane happens and I don't mention it,

that's why. Today's episode is a little bit different. It's a little bit more of a grab bag episode, kind of like an extended brief with a little bit more for each topic, but with five topics instead of three. I also wanted to note for the YouTube listeners slash viewers, I'm really going to try to start doing chapters pretty soon to make it easier to get right to where the different topics start. So if you find yourself interested in one of the topics or two of the topics but not all of the topics, I apologize that I don't have chapters yet. They're coming and I appreciate you watching

and listening. With that, let's get into our extended brief and we're going to kick off with the main topic that I mentioned right at the top, Bitcoin Whales accumulating. So last week was a little rough in Bitcoinville, as we obviously discussed a number of times. I saw many people asking, what does this price retrace mean for the institutional narrative? Is this the end? Was that just a drop in the hat? Are people going to be freaked out and turn away? Well, rather than look at anecdotes, let's talk about data. A Coin desk piece last week came out called Institutions Keep Buying Bitcoin's Dip despite near-term volatility. And it included a number of different data points. The first one was the number of whale addresses in the Bitcoin

ecosystem. So addresses, or more specifically clusters of associated addresses that hold more than 1,000 Bitcoin are referred to as whales. The number of these addresses has been spiking throughout 2021, and they continued to grow last week, minting about 50 new whales. This, of course, suggests that those high net worth individuals and institutions saw the price decrease as a buying opportunity. A second data point comes from over-the-counter transactions. Of course, the way that people buy Bitcoin and other cryptos can be either through exchanges or it can be through brokers over-the-counter. The total number of Bitcoin transactions has remained high, but the ratio of Bitcoin transfers involving exchanges has remained the same. This suggests that many of the new

transactions have been done through OTC. In fact, the CEO of CryptoQuant said that 93% of transactions in the Bitcoin network were used for non-exchange transactions, including OTC deals, versus just 7% using exchange deposits and withdrawals. A third data point is actually an ongoing trend. OKX Insights noted that the percentage of on-chain transactions over 1,000 Bitcoin spiked to over 45% in September and has remained consistently high. Last June, it was only about 5%. And of course, last May is when Paul Tudor Jones came out with his

great monetary inflation thesis. All of this is to say that even despite last week's action, the percentage of on-chain transactions, including these big amounts, continued to hold steady and remain high. A fourth data point is really simple. It's announced transactions. As if to make this point for us, micro-strategy scooped up another 314 Bitcoin for an additional $10 million on Friday. So it appears based on all this evidence that it is not institutional investors fleeing, but if that's the case, who is to blame for the dip? OKX Insights suggested it was over-leverage speculative traders and retail investors who found themselves, quote, weak-handed.

One more note in crypto markets around Wales. One of the questions for this bull run has been whether Ethereum would start to draw the attention of investors as Bitcoin has done. There have been many clear communications from people who are intimately involved with the institutional investor landscape that this is simply not the case. Nidig said this, Skybridge, which is Scaramucci's fund, said this.

Basically, they all said that the big institutional investors are entirely focused on Bitcoin. Makes sense, right? It's more understood. It's the thing that the narrative has derrised, and there's more liquidity. However, all that said, the number of large Ethereum holders is growing as well. The number of whale addresses holding at least 10,000 ETH jumped to 1,103 on Saturday. That's a 13-month high, according to Glass. node. 35 whale addresses have been created this month, 75 since mid-November. What's more, like Bitcoin, the number of ETH held on exchanges has been falling. Currently at its lowest level since October 2019, and it declined by more than $1 million in the past four days. Bitcoin flowing

off exchanges usually means that players are taking direct custody of their Bitcoin. With ETH, it's more likely traders and investors depositing that ETH into decentralized exchanges, liquidity, pools or locking them up in some sort of staking arrangement. Either way, like Bitcoin, reduced supply on exchanges tends to mean a positive impact on price. So perhaps it's no surprise that we're seeing ETH trading above its all-time highs this morning. Next on this sort of super brief, just another quick one along similar lines. There may be no media personality or financial media personality that the mainstream financial boomers, and I say that lovingly, love more than Jim Kramer. Last week, a Maryland resident won a $731 million powerball jackpot.

On Thursday on his show, Mad Money, Jim Kramer gave some advice. He said, quote, you know what? If you won the lottery, yes, I'm going to say it, 5% in Bitcoin. Hello. He also got specific. He said, don't buy it all at once and don't buy it on the weekends. But all in all, he argued it was, quote, an important new store of value. He also reinforced the narrative that has been driving this new show.

shift into the Bitcoin space. He said, if you're already rich, you have to worry about inflation the same way Superman worries about kryptonite, because it's the only thing that can really wipe you out. And given the way we're spending, like drunken sailors in this country, it may be an issue. Point that I'm making is you have, on the one hand, this data about institutions continuing to accumulate, and on the other hand, a reinforcement and a continuation of that narrative for a mainstream audience. So despite the price action we saw last week, I don't think there's any doubt that this is still just the beginning of this bull cycle. Next on the show today, let's do a little preview of the Fed meeting coming up this week. We are officially in the Biden administration, and this week marks

the first Federal Open Markets Committee meeting during this new era. The context for this meeting is that yields on the 10-year Treasury note are above 1% for the first time since the pandemic began. When yields go up, it's generally a sign that investors are more confident in buying more risky things. In other words, the 10-year treasury is an ultra-safe investment, so when there's a lot of demand for it, it pushes the yields down. When there's less demand for it, it pushes the yields up. So higher yield means lower demand for this safe instrument. Bloomberg says, investors are increasingly speculating that more government spending to aid the economy will allow the Fed to begin tapering its massive bond-buying program as soon as the end of the year. That's in spite of Powell's recent insistence

that now is not the time to be talking about an exit. Indeed, there's a lot of conversation around whether Powell will stamp down on talk of a 2021 taper of their buying program. Another Bloomberg piece was titled, Rates Traders Are Counting on Powell to Quell Talk of a 2021 taper. So for a little bit of historical context, in 2013, there was a famous episode that some people call the market's taper tantrum. This is when then-chairman Ben Bernanke hinted that they might begin before anticipated paring down their asset purchases and it jolted yields. Steve Rosterholtz of Insight Investment said, We are entering a phase where the market needs constant affirmation

that the Fed is committed to not tapering. That's because of growing optimism on the fiscal side, which is raising the risk that the economy may rebound more quickly than expected. I think this language is fascinating. Raising the risk that the economy may rebound more quickly than expected, well, the risk is that the market is now addicted to this Fed's supply of liquidity. You would think the market would be more comfortable and even happen, about things getting better, but that means less intervention, and that's not the world that we live in

anymore. Currently, the Fed is buying around $80 billion a month in treasuries, along with another $40 billion in mortgage-backed securities. And that's the spigot that companies do not want turned off. We'll get more information about the Fed's position later in the week. Many investors want to be a part of the next bull run. Others seek to build their dream home, finally launch that startup, or fund their education. Try Nexos instant crypto credit lines and borrow against any major cryptocurrency with no minimum or maximum withdrawal amounts, no fees whatsoever, no credit checks, and flexible repayment. Not to mention the APR starts at just 5.9%. Stay on top of your investment game with nexo.io. And remember, it's your crypto, your credit, your choice. Get started at

nexo.io. Next on our extended brief for this Monday, tech Wall Street versus tech in governments. The other thing happening this week is that it's earnings week on Wall Street, and a lot of attention is focused on tech companies. On Tuesday of last week, professional investors and hedge funders made their largest new buy of tech companies in a month, according to Goldman Brokerage. The market is expecting tech giants like Facebook, Alphabet, Apple, Amazon to report faster profit growth than the rest of the market for a 12th straight quarter. Some of the optimism around these companies is also based on the broad recognition that many of the trends that made these companies outperform. form last year aren't going away even as the vaccine comes online. We've seen seismic and structural shifts. Options traders, like the Robin Hood kids, are also going absolutely ham. On January 8th, more than $500 billion, a half trillion dollars was traded on individual stock options the highest single day on record,

and the focus was largely around Tesla, Amazon, Apple, and Nvidia. John Cherry, who's the global head of options at Northern Trust Capital Markets, says, this is the most popular I've seen call buying in my career. Where I think that is really driving from is kind of the meltup that we've seen in broader markets. Another way to put this is the belief that stocks only go up. However, some say that this is actually sort of a last hurrah with two big concerns. One, at some point there will be rising interest rates, but two, many are anticipating growing regulatory fights with a new Democratic administration. On that last front, a Wall Street Journal piece from this weekend was titled, China is joining the global push to reign in tech giants. Now, this piece correctly identifies

that there is a growing trend across all of these places, the U.S., Europe, and China, to push back on the power of tech platforms, particularly as they get into more financial tools. That said, I do think it's a little disingenuous to make some clean comparison between China's approach to this and the U.S. and Europe, given that this is power that the Chinese government specifically wants for itself. I talked about this quite a bit on my show about Alibaba before, but go check it out. It's about what China's intervention around Alibaba has to do with their Digital Yuan project. Finally, I wanted to end the show with a really interesting discussion provoked by Melton Demers who tweeted about CryptoVC and what's happening in that space. I'm going to just read her

two threads, actually, because it's a pretty awesome peek behind the curtain of what's going on in that domain. Meltem tweets, CryptoVC is going through an explosive phase. There are big funds with greater than 500 million in assets under management, a lot of small funds with under 50 million assets under management, and tons of prop firms and angels. I've done 15 deals in the last three months as an angel and small fund coin shares co-vc. Here are my observations and implications. The big firms need to deploy in size, $5 million checks and up. A $250 million fund could do a $5 to $10 million deal, every month for two years and still be under-allocated. And there aren't enough companies raising Series B, C, D rounds. Every deal I've done lately is under a $50 million valuation. So we see

firms competing to take down entire rounds. A recent Series A financing had two firms competing to take down the entire round and it eventually got upsized a lot. If a company is putting up up user acquisition and growth and a revenue story, it's highly competitive. Most projects and companies don't need money, though. Why would a founder take 20 to 40% dilution when they're banking cash in crypto? So they do 5 to 10%. So the valuations go up, but available allocations go down, resulting in an even bigger squeeze on allocators who need to deploy. Add in the onslaught of non-crypto M&A that's coming, which is culling the herd of investable unicorns. Add in the wave of SPACs and direct listings taking later stage opportunities out. There just aren't enough places to put

capital in size right now. What's a fun to do? Seed slash Series A is ultra-competitive. I'm trying to deploy as fast as I can across a wide range of companies because many will not raise again or raise small rounds at crazy valuations. But your pedigree and reputation matter. Founders can be choosy since there's so much money. Funds are rushing to add platform and services, something I built at DCG and continue to build at CoinShares Co. It's a big differentiator. Perks include code audits, marketing, hiring support research, etc. Expect this to grow exponentially, it already has in traditional VC. Companies are becoming more selective in how they raise and have more pools of capital available

to them. Many rounds now never hit the fundraising trail. And once Coinbase IPO goes out at 50 billion plus, even more capital is going to come hunting for ROI in crypto. Now, because people were so interested, Meltem actually gave an example that I'll read too just for completeness. Let me give an example of how deals are going down in CryptoVC. I'll do a sample equity deal and token deal. Deal one, early stage company raising equity with zero dollars revenue in November 2020. Deal two, token project bootstrapped by anonymous founders in October 2020. Let's start with the equity deal. Early stage company that was just getting started with monetizing in November. We'll obfuscate all detail, of course, this is directional. We negotiated terms to raise

two to three million at a sub-15 million valuation with expected revenues of two to three million in 2021. In December, the company did over $1 million. January to date, the company has beaten its entire 2021 revenue and profit goals. They cut the round to strategic investors only and raised way less because they don't need the money, just help. Firms got cut entirely or allocation dropped to 25K. We are seeing companies becoming profitable and cutting their rounds entirely or taking very little capital.

It's bloody out there. As a VC, you are banking on 500K in a deal and you get zero. That's raw. You need to deploy to get paid, but companies don't need your capital. Good luck. Okay, deal two. A DeFi token deal with anonymous founders. Product has been built and shipped token as a top 500 market cap. The team hasn't sold any tokens and wanted to do a strategic round to raise money to hire

more devs and speed up strategy and ecosystem growth. Spent a few weeks talking to funds, needed $1 to $2 million to fund ops for one to two years, since it was a really small team and some contractors. Many token funds and VCs wanted at minimum $1 to $2 million allocations each, plus short lockups on the tokens, plus preferential terms of some kind. Ultimately, most funds were cut, and majority of checks are from angels and prop firms who are already adding value to the ecosystem. The team will hire more full-time devs with these funds, but are wary of raising more capital

from funds. It's a headache and creates conflict. Anyways, these are intended to be illustrative of the shift in power dynamics in CryptoVC. There are tons of angels, firms, and investors who add value before they ever write a check. I aspire to be one. Sometimes I succeed and sometimes I don't. But the world is changing. Everyone has capital.

The landscape is changing and fast. Megafuns can't compete. Family offices can't even play. Traditional VC, lull. You have to be responsive. No two weeks to reply to email BS. You have to move fast. You have to be thoughtful and on the ball. Edge isn't capital anymore. Edge is you. Your network. You're in your firm's capabilities. Your time, your energy. It's going to get ugly. So this may be more insider baseball than some of you guys are interested in, but I think it's really fascinating. It says a lot about the nature of the markets. A couple of things to point out. The first has to do with this idea of dilution. When companies are making money, they don't feel like they need to do the traditional VC round where they would sell

10, 20, 30, 40% of their company. They don't want to do that. Founders want more upside in what they're building. So they're reducing the amount that they're actually willing to sell to 5 or 10%, as Melton pointed out. That means there's a reduction in the total amount of equity, viable assets for investors available. One thing that Meltem didn't mention, which is exacerbating all this, is there's a larger dynamics of just simply more risk capital available across the venture spectrum, across the private equity spectrum. Interest rates being held so low for so long since the great financial crisis means people have been pushed farther and farther out on the risk curve in order to try to get yield. That's why you've seen so many traditional private equity people get into the venture capital game, and it's why venture capital tries to get into crypto games and even things that are even riskier, right? To some extent, rising valuations and some of these dynamics are just based on the larger macro trends. Now, a third piece that she pointed out, which I think is hugely important is crypto M&A and SPACs.

I anticipate we're going to see a huge amount of that this year. When it comes to M&A, traditional finance is going to rocket into this space. There is simply no way that all of these hedge funds, all of these big company treasuries, all of these high net worth individuals, and all of these institutional investors, are going to start announcing their Bitcoin and crypto allocations, and you're not going to have the big banks of the world try to get in on that action. When they do so, they're going to feel like they're behind, and they're going to feel like they need to move fast. When you feel behind and you need to move fast, you don't try to build things internally. You acquire the teams that have the

capacity to do it. I expect to see acquisitions from the likes of Goldman, City, all of these people who are behind the eight ball when it comes to offering crypto and Bitcoin services to their clients, and I think that's going to take tons of these companies off the market when it comes to these early stage investors. What's more, SPACs are a trend that like it or not is here to stay, at least for the moment, and there's simply no way in my mind that it doesn't come hugely to crypto, and more than just with backed, although that's the first one announced. Anyways, I think it's going to be really interesting to watch. There's some totally new dynamics for this particular bull market that we didn't see last time. I, of course, will be here to tell you all about it as it

goes. But for now, guys, I appreciate you listening. Like I said, a little weird the next couple days because I've pre-recorded some great interviews, but if something crazy happens, I won't be here to tell you about it. I'll be back as normal by Thursday and Friday, and if anything crazy has happened, you know I'll be talking about it then. Until tomorrow, guys, be safe and take care of each other. Peace.