The Breakdown - The Bloodbath-ening: Is This the End of the Crypto Bull Market?

Episode Date: May 20, 2021

In one of the bloodiest days in recent crypto history, NLW looks at the reasons behind the wild market crash and explores whether it means an end to the bull market. As part of this, he explores five different categories of fear, uncertainty and doubt (FUD): Elon energy FUD Resurgent tether FUD China ban FUD Used for crime FUD Regulatory FUD -- 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

The thing is, the long-termers are up a lot in Fiat terms from last year still, and I find it likely that they're going to be discount shopping like crazy. I know that I spent my morning frantically working to find an exchange where I could myself re-up. If that's the case, and buyers come in and scoop these discounted assets to get to some healthy-feeling levels, even if they're below what they were before, it could be that we look back in a few months and realize that bigger bull market means bigger crazy swings along the way. 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 nexus.io and produced and distributed by CoinDess. What's going on, guys? It is Wednesday, May 19th, and boy, oh boy. There are some days that you remember for a long time in this industry. Last year we had Black Thursday, March 12th, where Bitcoin fell from above 11,000 all the way touching down below 4,000. That was the COVID bottom, and of course we started marching from there. Now we have Wednesday, May 19th, the bloodbathening, and the question is, of course, is this the end of the crypto bull market?

Right now, I honestly can't even tell how far down we are because every tracking app and every exchange website is somewhere between offline and intermittent. Gas prices are through the roof as people try to exit their positions. Liquidations have been massive and are still rolling in. There seems now to have been a slight reprieve, but honestly, who knows? Because people were saying that last night as well. So like I said, I think there are two questions on everyone's mind. The first is, what the hell cause this? The second is whether this is one of those big bull market corrections before we rock it off to the moon, or a shift back to a bear market. Let's talk about the first question first. What caused this? Last night I tweeted Elon Energy

Fud, Resurgent Tether Fud, China Ban Fud, used for crime fud, regulatory fud. Welcome to, and then they fight you. So let's review each of these in turn. First, Elon Energy Fud. Obviously, we have discussed this extensively, but I want to talk about the real ramifications. To be blunt, Tesla getting into Bitcoin and then later getting out of it because of environmental concerns is way, way worse than had they just never gotten into it in the first place. There are tons of companies that haven't bought Bitcoin yet. Tesla took the proactive step to buy and start accepting it as payment, and then, just a few months later, said that this thing is actually so bad that we have to reverse course.

This was a double whammy narrative hit. The first whammy is that it added a huge amount of fuel to the environmental mental thud fire, being massively vindicating for the Boil the Oceans people. The second hit is that it also hurts the corporate treasury argument. Tesla was supposed to show that it wasn't just full-on mavericks like Michael Saylor, who were into Bitcoin as a corporate treasury asset. It was at least more successful eccentric geniuses. Tesla's pullback on the space hurts that narrative badly.

Now, of course, you'll say, yeah, yeah, but Tesla didn't actually sell its holdings. Elon even clarified that. Sure, he did, but it's been pretty clear to everyone watching that Elon has shifted his attention and become at least seemingly antagonistic, and that's the story that's getting play. Now, as I was preparing this, Elon did tweet that Tesla has diamond hands, indicating that they are continuing to hold, but if anything, that just shows what a fickle friend he is. Now, there is one more way in which the Tesla fud might be bad for Bitcoin. This is that there's a largely shared sense that the move to stop accepting Bitcoin was at least somewhat

motivated by concerns on how Bitcoin was playing with government regulatory and market bodies that Tesla really needed to view it as ESG and environmental friendly. If that's the case, which seems highly likely, then it could actually be that the whole Elon shenanigan also demonstrates a particular flavor of regulatory risk as well. Next, however, let's talk about resurgent Tetherfud. Last week, Tether shared their reserves. This was part of their deal with the New York Attorney General. They have to make regular attestations about their reserves. As you would expect, people who weren't Tether Truthers before weren't all that stressed, while people who were, were. The biggest question was around the significant

percentage of the reserves that were in commercial paper, a type of short-term debt that is theoretically easy to turn into cash. However, the safety of that instrument has much to do with who the issuers of the debt are, and that was an information that was disclosed as a part of Tether's attestations. The din of questions around this was enough that a couple days ago Tether Council Stuart Hoganer wrote a medium post titled, quote, Tether is setting a new standard for transparency and responding to criticism that's untethered from facts. Here's what he said about the commercial paper piece. Quote, commercial paper makes up almost two-thirds of the cash and cash equivalents and other

short-term deposits in commercial paper. Commercial paper is short-term debt issued by corporations. The vast majority of the commercial paper we hold is in A2 and above-rated issuers. In order to ensure that it has diversified exposure, Tether imposes limits on individual issuers and on regional exposure. These are in line with Tether's investment policy and industry practice. The commercial paper we hold is purchased through recognized issuance programs. Accordingly, wild speculation that this includes commercial paper issued by crypto exchanges is absolutely false. No such commercial paper, if it exists, is held by Tether. No commercial paper purchased by Tether is issued by any affiliated entities. Now, Cass Piancy, who has been a

long-time critic of Tether, said, if this is true, that's great. Stu should share all the commercial paper, the corporate bonds, the reverse repos, the secured loans, and the funds. At this point, I think the more information Tether shares the better. At the same time, the big irrelevance for the bloodbathening story is that the folks who didn't trust Tether, and more importantly, who saw it as a systemic risk, didn't go away with the NIAG settlement, and this brought them back out in force. A third FUD category, perhaps the most important in today's sell-off is the China-Ban-Fud. So obviously this was a key part of the show yesterday, but a huge number of mainstream outlets are running with the Reuters version of the story

that China has banned financial institutions from interacting with cryptocurrencies. The block version of the story, however, is that three self-regulatory institutions in China reaffirmed rules that were laid out in 2017, that nothing actually changed. That, of course, doesn't get the same type of clicks that China bans crypto does. If we were to have an adult, rational, non-FUD, non-hype conversation about it, We could talk about what the decision to make this reaffirmation right now suggests about China's digital currency efforts. The fact that this isn't new doesn't mean it's insignificant.

It shows that China views all things other than the digital yuan as threats to the digital yuan. But the FUD isn't that sophisticated. It's just a parroting of the band story. At this point, if it feels like you're in Groundhog Day, you're not alone. It's amazing how much traction the China band narrative gets every time, even when in practice it's actually massively more complex. Looking for the best way to unlock your crypto's liquidity? Nexo.io is exactly what you need.

Borrow against your digital assets at just 5.9% APR. Earn passive income with yields of up to 12% and swap between more than 75 market pairs with the instant nexo exchange. Try the Nexo wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io. A fourth FUD category is used for crime. This one got rejuvenation thanks to. the Colonial Pipeline shutdown. The Colonial Pipeline is one of the most important oil and energy

infrastructure pieces in the U.S., and when hackers took over key colonial pipeline systems using ransomware a few weeks ago, they demanded Bitcoin as a way to get paid. Last week, it was reported that the hackers were paid about $5 million in Bitcoin, but then yesterday, Elliptic, an on-chain analyst, reported that the total was actually more like $90 million. On its own, I don't think this would have much power to move things, but as part of a litany of concerns, it takes on more significance than it otherwise would. Fifth and finally is regulatory FUD. I mentioned the Elon dimension of this, an indicator that perhaps behind the scenes,

ESG concerns are a bit bigger than we've seen, but another dimension of regulatory FUD has to do with recent comments from the SEC. In short, the SEC is throwing off indicators that it thinks crypto exchanges in particular aren't regulated enough. This could put a damper on the now-9 Bitcoin ETF applications that have been submitted, which could in turn be seen as a stopper on the institutional momentum that has driven the rally up to now. However, yesterday we got even more cause for regulatory concern. The new acting director of the Office of the Comptroller of the currency, Michael Sue, indicated that they would be reviewing

all of the changes that Brian Brooks made during his tenure at the OCC. Quote, we created an office of innovation, updated the framework for chartering national banks and trust companies, and interpreted crypto custody services as part of the business of banking. I've asked staff to review these actions. My broader concerns is that these initiatives were not done in full coordination with all stakeholders, nor do they appear to have been part of a broader strategy related to the regulatory perimeter. I believe addressing both of these tasks should be a priority. Now, I think at the risk of myself being a fudster, that this may be an even bigger deal than people are giving it credit for. Definitely not in terms of this panic selling, but in the context of larger changes. The changes that

Brooks put forth were hugely impactful in getting banks and financial institutions to come into the space. A reversal of that could have a massively damaging effect. In the same way that it was worse that Tesla got involved and then walked it back, I could see it also being a situation where it would be worse than the OCC never having made these changes in the first place. Not just because banks would no longer have approval to play in the space in the same way, but because a reversal would make all financial institutions trust less any future approvals around cryptocurrency. They would have justification in seeing those things as clearly temporary and politically motivated, and might choose then to avoid the space as a whole because

who wants to deal with that? So now we're back to the question of what caused this, and I think the base tier thinking answer is China Fudd. That's what mainstream press is running with, so there you go. More complex answer is that some combination of all of these happening all at the same time had a damaging impact that started the dip rolling, but even more importantly, preyed on the psyches of newer investors to the space, which created a cascading effect. So you have a dip that starts rolling, and because so many people are playing with leverage, that dip turns into liquidations. Liquidations cause the price to go down even further and even faster.

This triggers the already unsteady psyche of new investors who bought in at 50,000, 55,000, even 60,000, and they start racing for the door. Them racing for the door causes even more liquidations as there's more downward pressure on the price. And thus the downward spiral happens. According to bybid.com, liquidation data, the last 24 hours have seen over $8.5 billion in liquidations. And this doesn't include Binance Futures which could push it over $10 billion. There is perhaps one more even compelling answer to why this pullback happened, which has to do with a lingering loss of momentum after Coinbase's IPO failed to perform to expectations. There was such an intense focus on that day in buying leading into it, and then whoop, nothing. No big price bump, in fact the opposite.

Bitcoin has been steadily down since then. Institutional fund flows have reversed. In some ways, today's action could be seen as just the end of that cycle. It's just that the action today was so dramatic that it's overshadowing the longer, more boring catalyst. But now here we are, and the question is, is this a bull market retrace or the beginning of a new bare market? Many will point out that in the 2017 bull market, Bitcoin saw numerous pullbacks of 30 to 40%. What's more, we had a significant period of sideways action in the 50,000's for Bitcoin, which is nothing like previous cycle highs. In previous cycle highs, they saw rapid rips up to the ultimate top with a huge number of people fomowing in, only to stay at that top for a very,

very short amount of time. So if this is a cycle shift, it looks very different from previous cycles. Kathy Wood, for her part, is still bullish. She got on cable news today and reaffirmed her call for $500,000 Bitcoin, but perhaps an important contra indicator from Matthew Graham from Sino Global Capital, who tweeted, anecdotally retail Chinese investors have completely panicked out of the market. Of course, crypto Twitter remains bullish. in Choi, the Spartan group, tweeted a poll asking, do you feel that the bottoms in, resume up, or that this is a cycle top down only? Of the more than a thousand respondents, 68% or so said bottoms in and 32% or so said cycle top. So kind of two-thirds, one-third. What's my take? Well,

on the negative side, I do wonder and will be watching closely to see how institutions that bought into this whole Bitcoin space react to this level of volatility. Does it have them turn and say, you know what? No, thank you. Is it accepted as just part of the deal, part of doing business? Part of the answer to that question may be shaped by how we recover now. It does feel to me like there was a lot of capitulation from a lot of the newest new folks, potentially some of whom were even riding the meme coin train. The thing is, the long-termers are up a lot in fiat terms from last year still,

and I find it likely that they're going to be discount shopping like crazy. I know that I spent my morning frantically working to find an exchange where I could myself re-up. If that's the case, and buyers come in and scoop these discounted assets to get to some healthy-feeling levels, even if they're below what they were before, it could be that we look back in a few months and realize that bigger bull market means bigger crazy swings along the way. If, on the other hand, these fud narratives continue to take hold and long-termers don't have the spare cash to buy the dip and bring prices back up to some respectable level, who knows? What is for sure is that it is days like today that make the Bitcoin space and the crypto industry as a whole like nothing else on Earth.

I hope you're listening out there that you are enjoying this, that you are not wrecked, that you trade with appropriate leverage, and that tomorrow is a better day. Until tomorrow, guys, be safe and take care of each other. Peace. We're witnessing the greatest paradigm shift in finance in modern history. Join thousands of newsmakers and influencers talking the future of money at Consensus by CoinDesk, a live virtual experience of leaders, changemakers, virtual reality. reality meetups, keynotes from Ray Dalio, Gary Vaynerchuk, and much more. Get an up-close look at the boom in crypto, the surge in institutional investment in Bitcoin,

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