The Breakdown - The Breakdown Weekly Recap | Feb 29 2020

Episode Date: February 29, 2020

The full week's episode run in one long-run, long-chill, long-sleep episode: Monday | Caitlin Long on Coronavirus, Crypto Custody and Building a Bank Tuesday | 6 Explanations for Crypto’s Coronavirus Focus Wednesday | Is Bitcoin A Safe Haven or ‘Schmuck Insurance’? Thursday | A 101 Guide To Ethereum’s ProgPoW Controversy Friday | Understanding This Week’s Market Whiplash, Featuring Scott Melker

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Saturday, February 29th. And today, as every Saturday, we are going to do a quick review the week before posting the entire uninterrupted extended set of conversations and shows from this week. all five episodes in a single episode for your leap year. And really, there's no doubt what the focus of this week was. This was the week where coronavirus fears finally came home to roost in the markets, and the turmoil in the larger economy hit the crypto markets as well. At the beginning of the

week, we kicked off with an interview with Caitlin Long, which was nominally about her new bank, Vanti, but was also about why building this separate financial apparatus matters so much and what a Black Swan event like coronavirus might mean. On Tuesday, we got deeper, right? This was before the markets had their worst crash. On Tuesday, we looked at why crypto was so interested in coronavirus, right? Why this was such a big conversation in this community. On Wednesday, we looked at comments from Chimath, Palahapitia about the idea of how you, you know, you need to put 1% of your net worth into Bitcoin, something he calls Schmuck Insurance. We dug into the idea, the Safe Haven narrative.

On Thursday, we got into a completely separate issue, the Prague-P-O-W debate that has been defining and running around the Ethereum community. I really just tried, admittedly, from an outsider perspective, to summarize the conversation so far and the stakes of the debate. So hopefully that's a useful primer. And then finally, yesterday, we dug in. In both Scott Melker and I, who some of you know is the Wolf of All Streets on Twitter, we talked about what this market whiplash has meant, right?

How we went from all-time highs a couple of weeks ago, by the way, all-time highs that were printed while millions of people were quarantined in the supply chain center of the world, how we went from that to the fastest correction, in other words, the fastest 10% drop in history. So anyways, it was a crazy week in the markets and really interesting in the context of figuring out where crypto fits in the larger economic structure. So I hope you enjoy that. And moreover, I hope you are having a great leapier weekend wherever you are. I will be back on Monday for more breakdown. Catch you then, guys. Peace.

Welcome back to the breakdown. An everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Monday, February 24th, and today we have an interview with Caitlin Long. Caitlin is one of the best-known commentators on Bitcoin and Crypto, particularly as it relates to traditional markets.

She has a background on Wall Street that expands decades. and is one of the most cogent thinkers at the intersection of traditional markets and Bitcoin, and in particular, what Bitcoin and crypto assets can do to address some of the problems that we're facing in the macro markets. Well, today it was announced that Caitlin is building a crypto bank in Wyoming. The bank is called Avanti, and it's focused on providing payment custody and security and commodity activities for institutional customers using digital assets. They currently have eight products in their pipeline that are not available in the U.S. market

based on regulatory requirements. And the interesting thing about Caitlin's thesis, as you can hear in this interview, is that we've reached the point where for many institutions, the question isn't whether they're interested in being involved with crypto assets, but what the actual infrastructure allows them to do. The interview focuses in large part on what makes Avanti different in terms of its vision for how it interacts with its customers' assets. This is not the same type of relationship that you might see with commercial banks,

but involves much, much stricter requirements such as full reserve assets at all times. One thing that I find so interesting about this is that in a world where institutionalization of Bitcoin and crypto assets is inevitable, a lot of the type of work being done by Avanti seems to try to align that institutionalization with the fundamental principles underlying Bitcoin, rather than just having it approximate the way that people interact with current financial institutions, which of course Bitcoin was created in large part to critique. Towards the end of the interview, we also get into Caitlin's thoughts on the larger macro markets. As of this recording, the Dow is down a huge amount, something like 1,000 points based on

coronavirus fears. And as Caitlin discusses, it seems that the markets may be finally reacting to the vision of coronavirus as a larger economic issue and something that can't just be contained by central bank policy. There is a ton of interesting insight from Caitlin in this interview, so I hope you enjoy it. And without any further ado, let's dive in. All right, we are here with Caitlin Long, newly announced as the founder of Avanti. Caitlin, thank you so much for taking some time on what I'm sure is a very busy day to join us and talk through this exciting new project. Hey, it's my pleasure.

I'm very glad to be able to talk about it publicly now. Yeah, I bet. Well, so for those who haven't heard the news, maybe you can just tell us a little bit about what Avanti is and why you decided to throw yourself into building this new financial institution. Avanti is a company that's been formed to apply for a Wyoming Special Purpose Depository Institution Charter. That is a special type of bank charter that will enable a digital asset focused bank to exist. There are eight products that we've identified that due to regulatory issues currently existing in the United States

are not able to be offered by either existing U.S. banks or U.S. trust companies. Avanti will be able to offer those once it gets its charter. And the specific focus is, of course, going to be on serving fiat on and off-ramp demands for the institutional investor community and on providing custodial services around Bitcoin and other crypto assets, specifically for the type of institutional investors who require the highest standards. Those are fiduciaries for their customers like pension funds, endowments, foundations, corporations, sovereign wealth funds. They're really not yet in Bitcoin. And I've spent a lot of time in my career with exactly that type of investor. And they need a higher level of service that doesn't exist in the U.S.

market right now. And they specifically either are required to or prefer to work with a bank as a custodian. This will be the first, well, the Wyoming SPDIs will be the first ones. Whether Avanti is the first one through the door to get its charter remains to be seen. There are others coming. But this is the first one that's focusing, to my knowledge, on the institutional market specifically. And so it sounds like your thesis in this is that we're at the point where there's some number of institutions or a sufficient number of institutions at this point who are no longer held back by thesis or lack of education or lack of interest, but who are actually disincentivized by the existing infrastructure. Is that, is that fair? Yes. And in fact, I just

spent time last week with one of them that's going to be involved with Avanti, not announced yet, but it's a big institution. And they had two things they were focused on. One is that it's a $300 billion asset class. It's not appropriate for institutional investors to ignore it anymore. So they They have to have a strategy. And the other one was that they were actually getting donations in crypto and really struggling with how do they handle those donations. I heard a horror story about how a university, not the University of Wyoming, had real problems handling a major gift of cryptocurrency.

And there just isn't a service provider out there enabling them to handle that and that they would be able to accept more donations if such an institution existed. So it's pretty clear there's a need here. And that's exactly what Avanti is designed to fill. So, okay, so I wanted to ask then, or follow up about how this relates to the work that's gone into Wyoming. I know a lot of what makes the SPDI so different is that it has a different and more rigorous set of registration requirements. Could you speak to that a little bit? Yeah, well, it's worth noting that the SPDI law is open source, It's available for anybody to come in and use it, but it does have the strictest requirements. And the 100% reserve requirement is a function of the fact that these banks are very unlikely

to have FDIC insurance. The FDIC insurance is optional technically, but given that the reserve requirement is 100%, none of the applicants, to my knowledge, are planning to get FDIC insurance. And in fact, actually, the FDIC has been one of the most conservative with respect to allowing banks to get involved with crypto. And an FDIC insured bank in the United States right now cannot even provide trust services around crypto. That's become a major blocking point for the industry. So what all SPDIs are going to look like

is probably relatively small on balance sheet U.S. dollar deposits and then much bigger off-balance sheet assets under administration through their trust powers. But they're required to be 100% reserved in both sides of the bank's business. the traditional deposit division and the traditional trust division. Got it. And so the other concept that I thought was interesting that you shared in the thread where you announced, Devante, is this bailman concept, which is basically a different

conception for how assets are handled. Yep. It's analogous to Valley Parking for your car or a coat check. When you turn your property over to someone for safekeeping, you don't give them legal title to your asset. And when you want to back, They have to give you your actual asset back. They're not allowed to do anything other than what you direct them to do with it while it's in their possession. We're separating the concept of legal title and possession. That doesn't exist in the traditional securities industry because the legal title of all the securities rests with, in the U.S., the depository trust company, for example.

And so you can't get a bailment that actually has that teeth in the U.S. And the traditional asset managers actually really want that because they don't want to have to be forced into a debtor-creditor relationship with their custodian, which is exactly how the securities industry works today. This is why when the Lehman Brothers and MF Globals of the world go down, there's a long bankruptcy process for customers to get their assets back because everybody's forced into a debtor-creditor relationship. And so we've rethought that in Wyoming and said, these digital assets are bearer instruments. There's no reason why there should ever be a debtor-creditor relationship with a service provider. Let's go back to the old trusted idea of

money warehouses where someone actually deposits an asset into the money warehouse for safekeeping, but does not become a creditor of that money warehouse. And when you want your asset back, the service provider has to give it right back to you. So I think the thing that's so interesting about this and a lot of what has gone into, obviously the thinking that's been done in Wyoming, there feels like this inevitable financialization

and institutionalization of Bitcoin and of crypto. But what's so fascinating is that a lot of the work that you guys have done there can be summed up almost in trying to ensure that that institutionalization happens in a way that is cogent and coherent with the principles of Bitcoin versus just adopting the norms of today's financial system, which may not be best serving the individuals at any part of the system. Is that a fair way to put it? I mean, it's a little bit philosophical, but it just seems kind of an interesting take on the institutionalization process. Yes, it's very philosophical. And in regard, it is consistent with the not your keys, not your coins ethos. You don't actually have to

turn over sole control of your digital asset to a custodian. You could use the custodian as a signatory and a multi-sig arrangement, for example. Or if you are trying to, if you are an institution trying to comply with those custody rule requirements where the SEC wants exclusive control of the private keys, you end up in a bailment relationship where, again, you're not a debtor creditor. So we were rethinking this. I must say it's very consistent with Wyoming's approach toward property rights. The state of Wyoming was actually one of the places where there was a minor civil war called the Johnson County Cattle War fought over the fencing of the West, which was all about whether property rights could be enforced. And those that wanted to fence the fence off

their property and keep others from trespassing one in that instance. So that's one example of the ethos of Wyoming dating back many, many years. And also there was a Supreme Court case in Wyoming where someone actually tried to defraud their bank by re-hypothecating an asset that had already been pledged as collateral for another loan. As many of you know, re-hypothecation happens to the tune of billions a day in the financial market, and yet in Wyoming, based on this Supreme Court case, it's technically a felony. It's not like we rewrote anything in Wyoming law. There's a long history of respecting clear property rights in Wyoming law, and this fit just very, very perfectly right within that same ethos. So one more question about Avanti, I guess. You announced that you would be partnering

with Blockstream on the technology side. What does the technology side actually look like and what is the nature of that partnership? Well, we will be releasing more details later, but they were very interested in aligning with us as a delivery vehicle for some enhancements that they will be releasing to certain parts of their platform. And again, it fits very closely with the notion that if there's going to be a 100% reserve required financial institution delivering services around Bitcoin, that using the Blockstream approach actually makes perfect sense because of the platforms that Blockstream has created. And I won't put any additional details around that. We will release over time. But I think people can anticipate that there are going to be some enhancements to

existing platforms and that there will be, again, a 100% ethos, a 100% reserve ethos that is applied to the products that Avanti releases in conjunction with Blockstream. I guess one of the other things that's fascinating to me about this is that you have chosen to focus on this as the next big move. I know that a lot of your time is spent thinking about the challenges that we face in traditional markets. And I'm wondering how you see this emergent Bitcoin ecosystem as addressing some of those challenges, how you connect the dots.

between what we're facing more broadly with this particular work? Well, I think more people are starting to realize the instability of the traditional financial system and maybe not as many people are realizing the unfairness of it. But there's certainly, you know, we're recording this on a day when the Dow is down approximately 1,000 points. Now that's obviously due to the coronavirus scare. But that scare would not be such a big deal from a financial perspective if the financial system weren't so leveraged. I tweeted out about this in, I think the third week of January,

when I started watching this, because I come from a life insurance background. I've worked on catastrophe bonds related to pandemics earlier in my career. So when this started coming out, I was watching it a lot sooner, probably than it hit the mainstream headlines. And, And I was pretty concerned about this. This has been something actuaries have been concerned about for a long time. We're overdue for a pandemic and understanding that this is coming out of China, which is actually where a lot of the credit creation in the traditional financial industry is coming from these days. The credit is created out of the economic activity through trade that's happening mostly between China and the United States. That's where the U.S. dollar credit is originating. And so if we're going to see a slowdown in just regular trade volume, that's going to have an impact on how much credit is going to be able to be created through the financial system, which is what helps prop up asset values.

I drew the analogy at the time that this has the potential in China to be what Chernobyl was to Russia. Chernobyl in a healthy economy would not have actually tipped over the country's economy and caused the damage that it did do, the breakup of the Soviet Union. Gorbachev admitted that that was the real precipitating factor was Chernobyl. It was clear to me when I did some research on that a few years ago, why that was the case because it just had such an unbelievably broad and deep impact on the economy, but they had a bad balance sheet to begin with, and so it wasn't difficult to tip over the economy. And I think the issue with China and coronavirus is potentially the same, that this is a weak Balanchi, China has had an enormous credit bubble. Here we have the situation now where a

potentially broad and deep economic disruption is coming. And that has potential to tip over that economy, but the spillover effects all around the world, in particular to the United States, could potentially be pretty high as well. And again, these extraneous events, unforeseen Black Swan type of events, we could handle them in the economies if we could handle them. If we add strong balance sheets. But when you combine the fact that the balance sheets are weakened by being towards the end of likely end of a multi-decade credit bubble on top of something like this, it's a dangerous brew. We're starting to see financial, the traditional financial markets start to recognize the potential here for that. Yeah, I mean, one of the things that's fascinating is that

it feels like, you know, I was just listening to Hidden Forces this morning with Ben Hunt. And there you're talking about how fully the coronavirus situation demonstrates the decoupling of financial markets in terms of an asset price function, actually showing the function of pricing or showing economic fundamentals as compared to just existing on their own, right? And the example here being hundreds of millions of people quarantined and unknown futures and stocks continuing to reach all-time highs. And obviously today we're seeing more of a reaction, but it still has felt this this incredible, demonstrative psychic fracturing almost in a strange way. Well, and it's been delayed.

And what has delayed it is that the central banks around the world have, especially in China, have thrown enormous liquidity at the situation, which until arguably today, it really wasn't deemed to be something that was a real threat from the financial market perspective. And so the injection of more of the same drug in terms of banking sector liquidity coming out of the central bank in China certainly put a band-aid over it for a while. But a band-aid doesn't stop a hemorrhage. And I'm not saying we're going to be at that level yet. But if your listeners are interested, go back and look at my tweet storm. I think it was the third week of January.

So it was a while ago talking about the impact of what this could become, because of just how leveraged the Chinese markets are. And so the decoupling only lasts as long as the drug injection from the central banks actually still has some oomph, so to speak. And I think we're starting to see that this is starting to overwhelm the ability of central banks to counter this. You cannot solve a pandemic if that's indeed what we're facing with liquidity. It's just not going to work.

We're glad that you're working on Bitcoin-related and crypto-related institutions. So, congrats on the launch of Avanti, and we'll be watching it closely. Thank you so much. I really appreciate everyone's interest. It's hard on days like today where there is such a dominating macro-market story to focus on anything else and figure out where the connection point to crypto and to Bitcoin lies. What's so interesting about Caitlin is that she is someone who's watching those macro markets, and actually applying her critique in the type of institution, the type of company she's trying to build. So hopefully through that interview, you got a little bit more of a sense of what Caitlin and her partners are trying to build with Avanti

and how they see it addressing some of the challenges that we might face. So that will do it for this episode of The Breakdown. We will be back tomorrow with more on Crypto, Bitcoin, and everything else that matters. Cheers, guys. Welcome back to The Breakdown. an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk.

Welcome back to The Breakdown. It is Tuesday, February 25th, and today we are going to focus our conversation on answering why the crypto community seems so interested in the coronavirus. I did a poll yesterday that more than 1,500 people responded to that I think says a lot about, why you're seeing such an inordinate amount of conversation about a public health issue in a theoretically financially technology-minded community. But first, I did want to run through just a few follow-ups to stories we've been following for the last few weeks. So let's kick it off with that and then we'll get into our main topic. A few weeks ago, I had Tyrone Ross on the show. Now,

Tyrone is a financial advisor who's heavily involved with making sure that crypto makes it to mainstream audiences, right? Make sure that it gets to the people who need it the most. And when I asked him what he thought the most significant company in the crypto space was going to be, he said, bar none, no question, not even close, it was cash app. And his reasoning was that basically cash app is the way that people are interacting, regular people are interacting with money in a way that is totally different than other applications, right? And so you might look at a finance or a Coinbase and say that's really important to the crypto community, but the vast majority of people in his estimation who are going to come into this space over the next couple years are going to be

through apps like Cash App and specifically Cash App. But Cash App, however, isn't the only company in that space who is trying to disrupt banks through a mobile first experience. Another big competitor in that area is Revolut. Revolut offers both traditional stock buying as well as cryptocurrency buying and just raised a $500 million series. D-Round. So a lot of new dry powder for a big player in the space, that like Cash app has the potential to onboard a lot of new mainstream users. All right, second story. Last week, the block reported that FTX, the derivatives exchange, would be raising money at a billion dollar valuation, making it a unicorn in something like nine months after launching. Well, we got more details about

that and basically they are launching an equity token, which represents an ownership stake in the company that runs FTX. One equity token costs $2. The minimum purchase is $250,000. And initially, they won't be available to trade on any exchanges, but that could change in the long term. Now, the goal, according to Sam Bankman-Fried, who's the CEO of FTX, is that by doing the raise this way, they'll be able to invite smaller investors in. So, of what was an exciting report and sort of rumor at the time is now clear and has more detail to it. Third, Chainlink continues to be all over the place. We talked to ChainLink founder Sergei Nazarov last week in the context of the BZX attacks where ChainLink was helping them

think through how to better do pricing oracles, right? How to use ChainLink's decentralized pricing oracles instead of these sort of single point of failure price oracles. Well, today, Chainlink was back in the news because Pocod will be using their oracles for its interoperability network. The idea behind Pocod is that it's supposed to be able to connect different blockchain applications with what they call a para-chain network that serves sort of as a bridge, right? So they're in the same interoperability space as Cosmos. And for ChainLink, this will be the first time that a non-Etherium chain integrates them. So more interesting experiments in what has been one of the best performing assets over the last couple years. Fourth, something to look forward to for next month,

the next U.S. House Subcommittee hearing on digital currencies will be happening in March on 24th. So basically, it's called a review of domestic and international approaches to digital currencies. No other information has been shared, no other information about, for example, who might be testifying, but I'm sure in the lead-up to that, we'll have a lot more conversation about Facebook's Libra and the U.S.'s digital currency plans and all of that sort of stuff. So if you're interested in the central bank digital currency movement, this is something to keep an eye on. So like I said, March 24th is the next U.S. House Committee on Financial Services hearing.

Now, finally, in a story that actually dovetails with our main topic for today, the decentralized storage network file coin, which has to be a newsteralized storage network file coin, which has to be one of the most anticipated launches of the year has actually pushed back its window for launching again, and the reasons that they gave are largely about continued test network, right? Things take longer than anticipated, but also about coronavirus. So here's a quote from them. Some of our Chinese community members have directly asked us to wait to launch TestNet Phase 2 for two or three weeks until they can safely return to work. We hope that this six-week launch delay will afford enough time for the situation to improve in China and for all our global

communities to participate in the network without compromising their safety. This to me is the first of many, many, many, many types of stories we're going to see like this, not just in crypto. In fact, I think far less in crypto that is already adept at and normalize the remote work phenomenon, but much more in the context of global supply chain disruptions and just people being scared, right, and organizations having to adopt new strategies. But that leads, I think, perfectly into our main topic for the day, which is why crypto is so interested, so fascinated, and so focused on the coronavirus. If you are spending any time on crypto Twitter these days, it's almost impossible to ignore just how much of the conversation has shifted over into the

implications of coronavirus. And importantly, this is not just a couple people randomly screaming to the heavens, nor is it something that's just been happening for a few days, but something that's been going on for coming up on a month now. Now, I think this is fascinating, and I myself had a number of different theories about why this might be, but I wanted to see what the community thought. So yesterday I took to Twitter and just asked. I wrote, there has been a ton of coronavirus talk in Bitcoin and crypto circles. Why do you think that is? I then gave four options which I turned into a poll. The four options were, we're skies the following type slash profits of doom. B, were more hedging macro risk oriented. C, we believe that BTC can or will act as a safe haven. D, all of the above,

or E, other use comments. Now, in point of fact, I actually had a bunch of others that I wanted to include but couldn't because of space. So this list that I'm going to share with you now is actually six reasons why I think the crypto community cares so much about the coronavirus. So let's dive in. The first is sort of the most obvious, which is just that this is an actual global phenomenon that spans every different asset class in every different industry. And it is not, in fact, just crypto-related, but that across different industries you're seeing similar conversations where people are asking what the implications are. So John Kutzmeda responded to my poll and said,

it's an every asset, every country thing. The Echo Chamber of Crypto is not the only place discussing it with good reason. Global trade and distribution channels are being disrupted, shut down, paralyzed, etc. The knock-on effects will be crippling for a lot of economies. So this argument is that this is just huge, significant news. And I think that that is very arguable. It's sort of almost my default state. My scientific test case is there is some amount of this conversation going on in every industry. So maybe it's just the sampling bias of being here

that makes me think that crypto is so obsessed with this when in fact it's everyone that's obsessed with this. Now, in that vein, Larry Sarkernick, who's an investor at DCG, said, the reaction by tech and finance Twitter to COVID-19 couldn't be more different. Tech Twitter is swept up in data and worried sentiment. finance Twitter is predominantly calm, citing base rates and the human tendency to overreact. Let's see who's right. Now, I've seen plenty of finance Twitter being very worried about this as well, but I still think that Larry's tweet is interesting evidence in our case as we try to figure this out. Another theme that I heard a lot in this, it's just significant, but everyone is paying attention,

but maybe crypto people are paying a little bit more attention, is that the folks who are in this domain are thinking in more big exponential trend kind of ways. So Hector Rosencrantz from Kasa Hodel says finance and tech people are far more attuned to exponential trends than most. Sebastian Munier, meanwhile, had a really nice way of saying it. He says, because those circles in average, and he's talking about crypto here, one, have some time to think, two, tend to live in the future rather than in the present, and three are prone to magical thinking, both wishful thinking and undesirous thinking. I thought that was a really interesting way

to put kind of the flip side and double-edged sword of being able to envision future scenarios. But I think that it also does bring up this magical thinking, undesirous thinking, wishful thinking, the second question or the second reason that it might be that crypto is really interested in this, which is that we sort of have a lot of profits of doom.

So let's examine that idea. The way that I summed up this possibility any of my poll was the sky is falling types, right? This is the chicken little story, that we're prophets of doom, that we're looking for bad signs to reinforce or give validation to our theories about the world falling apart. And that got a significant number of votes. It got 20.9% of the votes. Some people like Whale Panda, who are well known in the space, thought that it was absolutely and dominantly that. I think he said that it was 85% that sky is falling mentality. And he said there's a reason that crypto has a lot of conspiracy theory types.

Stephen Paley, who's a lawyer and who advises and writes for the block, wrote, One strand of religious fundamentalism supports Israel because in their theological worldview, it's the next step to the return of the Messiah. One strand of crypto fundamentalism embraces virus doom, Preparism because it correlates with a view of Bitcoin as an end-day's asset class. So Paley here is actually getting at a whole bunch of the different possible arguments that I gave from the Prophets of Doom side to the BTC as a hedge side, to the prepper, preparer self-sovereignty side. So he kind of hits all three here, but I thought it was, again, a nice way to put this,

even if perhaps a little bit skeptical. I do think it's worth at least noting the tendency or at least proclivity for some part of this community to look for any piece of evidence that supports a worldview that says things are falling apart. I saw Mark Dow on Twitter, who's in the FinTech side, and it's actually very skeptical of Bitcoin, post something where he's tracked permabairs for many years via Twitter, and he noticed that a huge number of them shifted almost everything that they were saying over to coronavirus. And he wasn't trying to make judgments. In fact, he said that he believes that we're dramatically underestimating the economic

outcomes of coronavirus, but still, it was fascinating to him to see just how many people of those folks who had said that recession was coming just around the corner and global collapse was coming just around the corner for years and years and years had shifted to this. And I think this is a very human tendency, but still something that is worth noting, right? There's a difference between understanding possibilities and seeming to think that there is something fundamentally challenged in the way that superstructures are designed or that systems are organized or just the way that the economy is set up, while also not constantly predicting doom. and looking for disaster around every corner.

Which gets to the third possibility, which is the idea that this group of people are more focused on preparing for possibilities, right, and hedging future risk than some other groups. I thought that the best way to articulate this that I saw came from Mandrick, who wrote, many of us already prefer self-sufficiency over reliance on others, especially governments.

there's almost zero risk in preparing for a future where you shouldn't go outside for a couple months, so why not plan accordingly? Brian Lockhart chipped in and said, if you're already on the self-sovereignty track or prepper, if you prefer to make fun of it, then it's just one more thing to consider one more thing worth investigating and doing threat assessment on. I think there is a real difference between folks who have this self-sufficiency mentality on the one hand and the profits of doom on the other. So I think that it's really worth noting. and in fact, this macro-hedger's idea got 19.7% of the 1,500 votes in this poll. The next option that I gave and the fourth option that we'll talk about is

the idea that hoping Bitcoin performs as a safe haven asset in this context. The belief that this will show that Bitcoin is actually moving into a risk on asset. Now, I was really surprised to see something like 24.5% of people say that they thought that this was one of the reasons that crypto was so interested. And in the comments, I saw that there was a real kind of divide between people who were thinking of this as a positive and people who were thinking about this as a negative. So the people who were thinking about this as a positive were basically saying every time that there's some big kind of macro challenge, Bitcoin moves a little bit more into its role as digital gold and even has some advantages over gold in terms of portability, right? So there was that set of

people who were saying that, look, we're not rooting for this, but when Bitcoin performs or continues to perform as other things are falling apart, it's something that's strong. And that's probably why crypto people are so interested in this. Now, there was another set of people who were basically saying that crypto folks were rooting for disaster because they wanted their assets to be driven up, which is obviously a very different take on this. And I wonder in terms of how many votes it got. Like I said, it was 24 and a half percent of the 1500 votes. I wonder how many people were saying, not that they thought that Bitcoin would be a safe haven in this context, but they believe that other people in the industry who were talking about coronavirus so much were hoping

that it would act that way. So really interesting there, a lot to dig into, a lot more I think to dig into than maybe just these poll results are. So far, it certainly hasn't seemed to be clearly acting like gold, right? Whereas gold is reaching the highest that it's been in seven years, Bitcoin is kind of floundering, right? It's gone up and gone down a little. It's been in this mid, nine and a halfs for basically the last week or so. And it doesn't seem to necessarily be doing anything other than whatever it's doing. So there are more folks coming around to the idea now that if anything, it's showing that Bitcoin is just simply non-correlated, right? It certainly didn't have the thousand point drop that the Dow had yesterday.

but you also can't say that it's going the other direction. And in fact, there's been research that suggests that Bitcoin's association with or tracking of gold has gone down in the first part of this year. So a lot of confusion in this narrative, but certainly a lot of people who seem to think that this narrative is part of why the crypto community is so interested. Now, let's talk about one answer that's pretty obvious that I didn't include actually in the poll that came out of the E, other use the comments section. which is Bitcoiners built-in mistrust of authority, right?

This came up over and over and over again, even in the context of other answers, right? So some people said, like, sure, they're macro hedgers, but we've also been taught to mistrust authority. And the numbers that we've been given and the way that the governments around the world, particularly the Chinese government, have responded to this, have suggested that there's so much more to the story than is actually being told. So Bitcoiners' natural mistrust of authority is being triggered here in a major way, and that is part of why there's such an active engagement from the crypto community with this. So I think that this is almost like background noise. It's going to be part necessarily of any

correct answer. It could be sort of almost like that first category that I said, everyone is paying attention. Well, I think that that's just definitively the case. And so too is it definitively the case that bitcoins and crypto community more broadly, their skepticism of authority is on display in a big way. Now, the last point that I wanted to share, which I think is the most interesting to me in some ways, is the idea that this is revealing. This event is a Black Swan event that is revealing fundamental truths about the market that we live in. This is a much more interesting, broader version of the Safe Haven thing, right? The Safe Haven thing is about an asset, Bitcoin specifically, this point that I'm trying to make is that we are seeing and having this event

expose something that is fundamentally off about the markets as they exist now. And I can't even come close to doing the justice to this argument that a conversation did yesterday on the Hidden Forces podcast. Hidden Forces is what I would call a crypto-adjacent podcast. It is not just about the crypto industry, although it often veers into it, and specifically Bitcoin, but it's about the world that has necessitated the rise of and created the conditions for the rise of cryptocurrency and these self-sovereign technologies. The host, Dmitri Kofinas, goes with a really broad array of guests from psychology to finance to national defense. I mean, it's really a macro picture podcast that goes far beyond just the economy or technology.

and I really, really recommend it. His most recent episode is called Market Nialism, Price Discovery in a world where nothing matters. And it features Ben Hunt, who's the author of Epsilon Theory, which is a popular newsletter and consultancy, that focuses on narratives and how narratives shape the world around us, and in particular economic decisions and political decisions around us. So I can't imagine why I would be interested in the narrative guy.

And second, it featured Grant Williams, who, among other things, is a co-founder at Real Vision with Raul Paul and has just done a ton of really interesting things in finance media. I want to share a part of their conversation that is about the psychic fracture and disconnect between what we're seeing in terms of the world's response to this virus. And in particular, China's response, China as the supply chain capital of the world and the urgency of their real response and what's happening in the markets. Because like I set, I think that it sums up this idea that coronavirus is exposing fundamental truths in a way that is much better than I could. So let's give that a listen.

We have 400 million people quarantine. We have footage of people standing still and then falling flat on their faces in the street. We have the spraying stuff, we have people on U.S. evacuation flights with biological warfare kits or not just a mask. This stuff. People getting dragged from their homes, people being, I've seen. buildings getting welded shut, stuff that, you know, it's, and you don't want to retweet it because you don't know if it's real and you want to be responsible and everything else. But this is in the supply chain center of the world economy. Right.

And markets are all time high. In the middle of a trade war. It's wrong, right? The market is wrong. How do you deal with that? How do you deal with the market being wrong? See, I'll tell you, Grant, I don't think the market's wrong. I don't think the market's wrong at all.

I think this is exactly what you would expect when capital markets are no longer. Okay. The pricing of capital markets, it's no longer a transmission belt for investors to acquire, you know, fractional ownership shares in real world companies, right, for them to invest and grow in the like, that that meaning is gone. It's now a score. It's now, I say, a political utility. And that's what it means.

I think this is a profound insight that this discreet. that this disconnect between hundreds of millions of people quarantined and markets reaching all-time highs is just such a clear exposition of the underlying fracture that Bitcoiners in particular, but the whole crypto industry in general, feels and is designed in some ways to address, this lack of realness, this fundamental disequilibrium that feels like it cannot go on forever. So to me, I think that is the most interesting reason. And on some sort of subconscious level, the core reason that crypto people are so getting dragged into this issue and find themselves so compelled by this issue, that it is just

making and laying bare the weirdness of our world, the profound weirdness of our world. So that's my bet. Now, the last thing I guess I will say, for those of you who are following this poll at all that I ran is that the top receiving answer, the poll choice that got the most votes was, as you might have guessed, D, all of the above at nearly 35% of the votes. It's not going to be just one factor or another. It's going to be some combination of all of these things. But like I said, for me, the one that is most interesting and that has the greatest subtext power, I think, and is a part of all of them, is the feeling that something is wrong and this type of Black Swan event

is showing just how wrong. So that's my thoughts. What do you think? This was a hugely engaging poll. Something like 50,000 people saw this thing. Obviously, 1,500 voted. You guys have opinions on this. Let me know why you think the crypto community is so fascinated by this issue.

Hit me up on Twitter at NLW. And we will be back tomorrow with another episode of The Breakdown. See you then. Welcome back to The Breakdown. An everyday analysis, breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Wednesday, February 26th.

And today we are going to be looking at, first, the world of CBDCs. Canada has run a test and come away unimpressed and has some interesting thoughts that might reveal maybe what's in store for the future of central bank currencies. We also got interesting news out of China that relates to how the coronavirus is impacting their plans, which will bring us to our second topic, which is interpretations of the Bitcoin price in the context of coronavirus. Bitcoin like everything is hemorrhaging right now, and does that mean, and this is what we'll ask, that the safe haven asset narrative is dead? So that's second. Third, we're going to be looking at the Mount Gox anniversary, the Goxiversary basically, of the insolvency of the first big exchange to dominate the Bitcoin world.

And we'll look back at the history and maybe a little bit about what it meant and point you to some cool resources for those who want to dig in a little bit more. So with that, let's actually dive right into our first topic, CBDCs. Ever since the emergence of Libra last year, we've seen central banks from governments around the world race to figure out what their strategy around digital currencies is going to be, right? For a lot of them, that means forming research initiatives, some of them cross-border and collaborating with other governments or international institutions like the Bank for International Settlements.

For some, it's a more aggressive testing posture, right? You have Cambodia who's saying that they're going to test. And obviously, of course, there's China who has made it clear that they want to be the leader in the world of new digital currencies and plan to get a digital yuan out this year. Canada has actually been one of the more active governments in this country. They ran a test cross-border settlement trial last May, but ultimately they came away unimpressed. So in a speech called Money and Payments in the Digital Age yesterday, Timothy Lane, who's

the deputy governor of the Bank of Canada, said, we have concluded that there is not a compelling case to issue a CBDC at this time. Canadians will continue to be well served by the existing payment ecosystem, provided it is modernized and remains fit for purpose. So this is obviously quite a departure. This is a bank who's gone all the way through a research period, an exploration period, and even testing period, and has decided, nope, it's not really important to us right now. Now, this has sort of been the U.S. governments and the Federal Reserve's base position on a digital currency that it may just not be necessary, but it is interesting to see a government that's gone all the way through this

process and come out on that side. Now, there are two factors that could change Canada's opinion on this. So they're not leaving this behind entirely. They want to be ready to go at basically a moment's notice. And those two factors that they listed were, one, if cash just sort of disappeared in a more aggressive way, right, if there was actually a need for something that had a higher burden than what is required now. But second, and obviously more important to our conversation is the idea of private crypto gaining widespread adoption. So he said basically, if there were a monopoly that would erode competition and privacy and pose an unacceptable challenge to Canadian monetary sovereignty,

that's when you could see a Canadian CBDC. So effectively, the Bank of Canada is saying that there is a scenario that they can see in the future where a private cryptocurrency is threatening Canadian monetary sovereignty, and that's when we'll need to do a CBDC, but for now they're not. So it's kind of they're taking a reactive posture. Now, a country that is taking a decidedly proactive posture is China, right? China has made it clear that they are going to release a digital yuan, and spectators are very interested and somewhat worried in some cases about what that will allow them to do in terms of continuing to exert economic influence in the region and beyond.

Japan's central bank and Japan's government have been very aggressive and clear. with their U.S. partners that they believe that the Chinese digital yuan is a threat to the power balance in the region and is something that needs to be counterbalanced in some way. One question, however, has been how the digital yuan plans might change on the basis of the coronavirus. And there have been two kind of strands of thought on that. The first is, obviously, that just by sheer weight of the shutdowns and quarantines and everything else, happening that this research would have to be delayed or would likely get delayed along with everything else. The second strand is that perhaps it creates a higher incentive, at least even,

to push forward with this research because cash is potentially part of the way that this virus has spread. Well, it's the former of those that is coming to bear now, at least in the short term, where the Global Times is reporting that effectively sources close to the People's Bank of China are saying that the coronavirus has led to postponement of work across government institutions, including with the People's Bank of China. So this is not an official statement. This is a report from quote-unquote sources close. But it seems to kind of confirm what we would have all expected, I think, in some ways,

that this research might be delayed by the coronavirus itself. This is, of course, to say nothing of the coronavirus beyond China's borders and what sort of economic impact that will be. But with that, let's actually turn quickly to Corona for a second, but in the specific context of the Bitcoin price, and more specifically, what it means for Bitcoin status as an emergent safe haven asset. Is Bitcoin a safe haven asset, or more specifically, will it act like a safe haven asset in the next recession? This has been a question bandied about for a very long time, but especially

over the course of the last year, as part of the institutional argument for Bitcoin a option or Bitcoin hedging has come back to the idea that it is going to behave in a way that is different than the rest of the asset markets that we see around us. Now, interestingly, this narrative has always been sort of caught between two questions. The first is whether Bitcoin is a macro asset at all. And what I mean by that is an asset that actually responds in any meaningful way with larger macro events, right? For a long time, Bitcoin has just kind of done its own thing irrespective of what's going on in the markets, and that wouldn't make it a macro asset. The second question is what type of macro asset it is. Is it a risk on or a risk off asset, right?

Does money flow in when people are greedy and feeling comfortable and they want to diversify and find new yield, or does it flow in when people are getting nervous and want to take it out of risky things? So one of those, the latter is the safe haven asset narrative. This is the idea that Bitcoin will attract people in the same way that a gold does in some sort of crisis because it's digital gold. The second part, the former question of whether it's a macro asset at all, comes back to this idea of whether it's a non-correlated or uncorrelated asset that doesn't actually care and behave. So the interesting thing and why these two different narratives get bunched up together is that both of them could lead theoretically to investors wanting to hedge

into Bitcoin when things get volatile. So you could want to hedge into Bitcoin when things are volatile because you think that it's going to behave like a safe haven, like a digital gold, but you could also want to hedge into Bitcoin when things are volatile because you believe that it doesn't respect that volatility. It doesn't care about volatility. It does what it's going to do and it's not going to move in concert with the rest of the market. So these functionally could look very similar, but they have very different narrative implications. And so this conversation has been confused because it's gotten all bunched up together. The safe haven side of the argument has had higher traction or not so much traction, but resonance in media over the last, call it nine months, because there

have been a few sort of eye-popping times where BTC has surged when the rest of the markets have gone down. And the interesting thing about this week and kind of the new evidence that we have this week is Bitcoin, like everything else, has just been hammered. It's lost a huge amount of its value. It's lost something like 40% of the value that it's gained in 2020 just in the last few days. And so people are now saying, okay, well, clearly this is the death of the safe haven asset narrative. And I think it's much more complicated than that. So my take on this is first that the base case narrative for Bitcoin. And I say this as someone who spends a lot of time watching narratives is as an uncorrelated asset. So what that means is an asset that is interesting to people,

even as a hedge, not because it's going to move in the opposite way of stocks, but because it's going to do its own thing regardless of what's happening in stocks. I believe that this has been the core narrative that's driving people's interest, institutional interests, right, outside interest in Bitcoin for some time. And the flirtation with the idea of safe haven has been driven by one, like I said, a couple of these eye-popping moments. Second, a belief in future potential, a belief that Bitcoin, will grow into a safe haven asset.

And third, a bet that some investors are willing or going to put down a little bit of a down payment on that future potential. So Travis Kling from Ikegaa Asset Management has been on this show before talking about how it doesn't take very much in terms of asset managers starting to say, hey, you know, maybe it's not a safe haven yet, but I bet a few more people will act like it is this time and put in a little money for that narrative to become self-fulfilling prophecy. Now, I mentioned this on Twitter, and I had a great response from Jeff Dorman over at ARCA who said, safe haven is often incorrectly associated with perfectly negatively correlated. Bitcoin is a safe

haven from purchasing power destruction, not stocks. This is obviously a very different phenomenon and something that shows perhaps a different time preference, right? When people are talking about a hedge into Bitcoin as a safe haven, they're talking about a long-term play. And so, With that, I actually want to turn to one of the people who's had this conviction longest that Bitcoin is a hedge away from an outside of the existing system. Chamath Palahapitia was early at Facebook and started to build a name for himself there and went on to found social capital, which started as a venture firm and then transformed itself into a different type of financial operation.

He's the chairman of Virgin Galactic. He's the owner of the Golden State Warriors now. And he is an irreverent thinker, right? a iconoclastic thinker in a lot of ways. In 2013 in May, when Bitcoin was sitting at just about $130 per Bitcoin, he wrote an essay for Bloomberg called Why I Invested in Bitcoin. He kicks off this piece since the 2008 financial crisis, we've seen a massive decline in trust in the financial services industry. Lehman Brothers, Bear Stearns, American International Group, the London Whale, Cyprus, and a host of lesser scandals have prompted consumers

to say one thing loud and clear. I don't trust you, or you're only in it for yourself, or who made you king, or some very reasonable variant thereof. The point is that this fundamental trust no longer exists. In its place, rises Bitcoin. He then goes on to explain what Bitcoin is, because remember, this is 2013. For a lot of people, this essay was the first time that they had read about Bitcoin. He likened its stage of development to the TCPIP in the 70s. He talked to talked about the type of activity that was happening at that time. He was talking about the fact that there were going to be illicit uses on top of really interesting uses. But he also had this line which a huge number of people have resonated with ever since and a recommendation. He said,

I've told my friends that it is entirely rational to allocate 1% of your assets to Bitcoin, as I have. Call it Schmuck Insurance. As the 2008 crisis proved, schmucks can cause a world of damage. So now, here we are almost seven years later. Bitcoin has gone from this week or I guess last week, 10,000 down to now just under 9,000, but still a huge, huge change in those seven years from when it was $130 a Bitcoin and he was writing this. And so what has changed, if anything, about Chimath's point of view? Well, he was on CNBC this morning and people were looking to rake him over the coals for the safe haven or uncorrelated thing. And I think it's worth just listening to what he had to say.

Everybody should probably have 1% of their assets in Bitcoin specifically. And I think it is just a fantastic catch. So if you go back to the conversation this morning, when you see the amount of leverage the financial industry is running and you think about all these dislocations and all these exogenous things that are happening that you can't predict, there's a lot of risk to the downside. And it would be great that an average individual citizen

of any country in the world has an uncorrelated hedge. So, as you can see, basically nothing of his take has changed. He's still recommending that 1% schmuck insurance, which is pretty phenomenal to see seven full years later. So what does this mean about Bitcoin status as a macro asset or a safe haven asset? I think we're seeing a return, a recalibration to the idea of Bitcoin as uncorrelated or non-correlated. frankly, we might actually see even that challenged a little bit if really everything continues to

crash on fears of coronavirus, maybe that narrative will change. But for now, it feels to me like a reset back to what I see as the long-term base narrative of Bitcoin, which is not safe haven. That is a future potentiality. That is a future possibility. That is a future narrative to speculate and bet on for Bitcoin, but the base case narrative of Bitcoin as uncorrelated. Speaking of history, however, I want to close out with another event from six years ago this week that would totally tip the entire crypto markets into tumult, which is the exposure of Gox and the insolvency of Gox and the 750,000 Bitcoin that all of a sudden showed up disappeared.

Six years ago, in February of 2014, Mount Gox, which was basically a OG Bitcoin exchange, right? It wasn't the first, but it was the first big Bitcoin exchange seemed to be on the ropes. In a story by June Ian Wong on Coin desk, he wrote, Mount Gox, the world's original and once-largest Bitcoin Exchange appears to be in a state of disarray after it suspended Bitcoin withdrawals to work on what it said were technical issues. Meanwhile, the clamor of angry customer voices is growing. That was written on February 8th, 2014, and just a few weeks later, something entirely different and entirely bigger would emerge. On February 24th, Ryan Selkis, who you now know from Masari, but who earlier in his crypto life worked with DCG and worked at CoinDesk, wrote a memo on his quote-unquote

TBI Daily Bit. This is a tumbler that he kept. The note was called Bitcoin's Apocalyptic Moment. Mount Gox may have lost 750,000 Bitcoins. So Selkis published this note and he basically excerpted the introduction of a quote, unverified report. So he was saying that it was unverified and that he hadn't been able to prove that the document was real, but it was coming from a reliable source. The document was called Crisis Strategy draft. And from the introduction, it said, at this point, 744,000, 400,000, 108 Bitcoin are missing due to malleability-related theft which went unnoticed for several years.

The cold storage has been wiped out due to a leak in the hot wallet. With Bitcoin and crypto just recently gaining acceptance in the public eye, the likely damage in public perception to this class of technology could put it back five to 10 years and cause governments to react swiftly and harshly. At the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for most of the public. That was the note from this report that Ryan had received, and his comment was, this is catastrophic, and I am sorry to share this. I do believe that this is one of the existential threats to Bitcoin that many have feared

and have personally sold all of my Bitcoin holdings through Coinbase. To do so and not give you the same information would be dishonest and immoral. I'm a risk-tolerant investor, but I believe this will be catastrophic for Bitcoin, both as a currency and as a fledgling industry. If this is a hoax, it is one that I am fully blindsided by. I fear, however, that it is not. Crazy times. And this would, this was a cataclysmic moment for the industry.

Now, of course, we have the benefit of hindsight six years later to know that this two Bitcoin would survive, as it always does. However, that was not clear then. And think about this six years ago, this fledgling asset, which was something like $680 or $800, between there during this month leading up to this was so young and so full of promise, but this would just absolutely wallop the industry.

It would have ripple effects that would last for a very long time. It would set up a new generation of exchanges to come in its place. I think sometimes we forget because we're living in it that there actually is already history to this industry. And it's history that we should know and that we can learn from. So do yourself a favor. Go check out the note from Ryan. to link to it. Go read CoinDesk's coverage, right? They were up and running when this was happening.

Pete Rizzo, the former editor-in-chief, linked back to a piece from that time. June Ian Wong, who's at Coin Desk now and who was a writer back then, has great pieces there. Go listen to Ryan, who actually describes this whole situation on the latest Charlie Shrem podcast. It's a really, really fascinating moment in the history of this industry. And something that I think might be a little bit helpful anytime we see price drops to remember just how much Bitcoin has already been through and what it may be able to handle in the future. With that, I'll wrap up for today. I hope you guys are having a great week. Happy hump day. We're almost through to the other side. And I will be back tomorrow with another episode of The Breakdown. Peace. Welcome back to The Breakdown. An everyday analysis

breaking down the most important stories in Bitcoin, Crypto, and Beyond, with your host, NLW. The breakdown is distributed by Coindesk. Welcome back to the breakdown. It is Thursday, February 27th, and today we are going to break down the debate around Prague proof of work, Prague P-O-W in Ethereum. So a couple caveats before we jump in. The first is that I am coming at this from something of an outside observer's perspective. I have not been involved in any of these debates. Ethereum is very interesting to me, but it's not a community that I'm deeply interwoven in or

anything like that. And the way that I have tried to make sense of it is by just reading the perspectives of a lot of different people from across the community, representing different interests within the community to try to put this together. So really important that this is not a kind of inside observer, it's an outside observer. What I want to try to do with this is go through and present this in such a way that someone who is in my similar shoes, right, who's not in the Ethereum community, or who even just hasn't been really paying attention very much, can make sense of what the conversation is, why it matters to different groups, where different groups stand, what the context of the most recent part of this debate is, and where things

stand today and what might happen next. So that's the goal. I hope that this is useful and enjoyable. So let's dive in. So first up, what is Prague P.O.W, other than a hashtag that you're probably seeing all over Twitter. Prague P.O.W stands for programmatic proof of work. And the idea is that it is a different consensus algorithm from the current consensus algorithm for Ethereum that would be specifically designed to combat ASICs and favor GPUs. So let's talk about these terms a little bit. A GPU is just your average processing chip that anyone would be using in their normal personal devices, right? Whereas an ASIC is a dedicated hardware chip that is specifically designed to mine a unique hash algorithm. So ASICs are built for specific proof of work mining, right?

So there are Bitcoin ASICs that are just designed that hardware is useless except for mining Bitcoin. Now, there are pros and cons to A6 mining. On the pro side, they can really increase the security of a proof-of-work chain by making it easier for people to deploy more hash power against the mining of that chain. Now, on the other hand, A6 do tend to push out small individual miners that are using their GPUs to mine, right? It's so much more efficient that it doesn't really create a lot of space for those large decentralized networks of individual miners. Because of that, you basically have the risk of centralization,

where ASIC-based mining captures all of the hash power available within the context of a particular chain. So in some ways, you have a centralization versus security dialectic. And different proof-of-work chains have different approaches to this. So Monero famously has a very anti-Asic stance where they update their hash algorithm at regular intervals so that even if people do produce an ASIC for the Monero hash algorithm, well, within a few months it's going to be out of date and that hardware is going to be useless. So they basically combat ASICs in that way. Now, let's look at the history of the Prague-P-O-W conversation within the Ethereum context. Prague-P-O-W has been a discussion in Ethereum since basically Bitmain released an Ethereum ASIC in

2018. So Bitmain, who's obviously one of the biggest companies in Bitcoin mining, release an ASIC that is specifically designed to help mine Ethereum, and that creates the potential, again, of greater concentration of mining activities, not in this large decentralized network of people mining with their GPUs, but with companies that are specifically dedicated and are willing to pay the capital expenditures to buy lots and lots of Ethereum ASIC mining devices. So there's been this conversation going on for a while, but it hasn't really been a hot topic for a minute. This was of course until Friday. So next, let's talk about the context for this most recent dustup. Last Friday, Ethereum had its core dev call, where basically they talk about the different

upgrades planned for the next version of Ethereum that will be pushed in a future fork. So on Friday, after that meeting, one of the devs involved posted the brief notes and recap of the call, and people were like, wait a second, what's this about Prague-P-O-W? because they mentioned something in passing about Prague POW. So someone responded on the thread, Captain Crypto 33, says, So Prague POW is a go? That's great news unless I'm reading this wrong. James Hancock, the Cordev, who is tweeting, said, you're not wrong. Feedback is still appreciated.

Harry Glyn at Harry Canuck says, I am shocked to see this given all the pushback from the community. I thought it was DOA. Twitter is going to be filled with more Prague POW arguments again. Eric Connor, who's one of the folks behind Heath Hub, says, yeah, this is extremely disappointing to hear. There is clear contention in the community, but the core devs continue to just shake it off and act like it's not there. I had hoped months back that it was clear this was contentious,

and we had just moved on. Also, for the first time maybe ever, we have no community infighting. The focus is on adoption and usage in ETH2 is really close. I'd hoped we'd be smarter at, quote, reading the room and not introduce something like this, which poses nearly all risk and no reward to the broader community. Okay, so basically we have on Friday a core dev call. On Friday as well, a community finding out that those core devs had agreed to implement

Prague-P-O-W in the next Ethereum update and the community finding this out after the fact and being like WTF mate. So later, Vitalik got in on the conversation as well, and this was in the context of a different thread that was focused on governance, so you'll see why that's kind of the concept. context, Vitalik says, by the way, the way Prague POW was ninja reapproved definitely did not help make people trust the governance or feel safe, and arguably drove the Twitterati to believe that they have to send loud, simple, and clear messages to get their voice heard. So on the one hand, Vitalik is saying that this may not have been the best process guys, but he also

kind of did use this dismissive term of Twitterati, and that was picked up on by the community as well. Andrew, who's at Cyberhokey, says, reducing non-deves to, quote, Twitterers and quote, coinholders is awfully dismissive of a large percentage of the total user base, infrastructure funders, and community builders. These people give value to the code devs produced by valuing it, using it, sharing it, and supporting it. So here we have a new factor introduced to this, which is a power dynamic, right? A power dynamic between core devs on the one hand and everyone else on the other, and a

question of within the messy context of Ethereum social governance, whose perspectives matter. But at this point, maybe it's worth getting into a little bit about the arguments for and against Prague POW, and what has people actually upset about this specific issue. All right. So Prague POW, who is for it and why and who is against it and why? For this, I'm going to lean on the recent newsletter from Camila Russo in her defiant newsletter. that gets into the Prague POW issue. She worked with a number of members of the community, including Scott Lewis and Eric Conner, who I just mentioned, to really compile these different pros and cons. And so I'm going to share what they collectively came up with. So first, the Prague

POW side, which again is a mining algorithm that focuses on preserving the role of GPU miners and maybe slowing down or hindering the role of ASIC miners. The arguments, for this are one, that it reduces the risk of minor centralization. As we talked about before, GPUs are cheaper, they're more affordable, more people use them. They're more likely to be used by a large decentralized network versus ASICs, which are going to be very focused on commercial enterprises who are designed to mine, which could introduce centralization. Number two, because Asics are network-specific and that hardware can't be used to mine other coins, it potentially could reduce the incentives for people to launch attacks on the network. So that's number two.

A third is about the idea of what was intended. So the third argument presented here is that the Ethereum algorithm, ETHHash, was always meant, quote-unquote, to be ASIC-resistant. There's a fourth argument, which I think has been more of what I've seen, actually, which has to do with the transition to proof of stake. And effectively, the argument in this case goes that there's going to be some transitionary period between proof of work and proof of stake on the Ethereum network. ASIC miners have a very strong incentive to prevent the transition to proof of stake, right? ASICs are specific to Ethereum. And so if you've put in a bunch of money to invest in ASICs for a specific chain and that chain is making a decision to move away from proof of work entirely, it will render

all of that money that you've put into that ASIC mining apparatus totally useless, right? It no longer is paying itself back. It's no longer making money. That's just dead hardware. So in that estimation, the miners who are using ASICs have a very strong reason to push back against, try to delay, try to sabotage, whatever you want to say it is, the transition to proof of stake. So that's the fear that I've seen actually behind a lot of the arguments for Prague POW is that the ASIC minors are potentially a source of instability when it comes to the transition to proof of stake. So it's kind of a fourth pro reason that I've seen. Now, the three arguments that Camilla lists that are against Prague POW, so these are in favor of keeping the ETH hash algorithm as it is, which is to the boon of

basic miners, so they're, you know, obviously their hardware isn't rendered useless. The three arguments that they're listed here are, one, not enough support for Prague POWW raises the risk of a fork, of a contentious fork that could split the Ethereum chain. We'll get into in a minute why this is so problematic. Second, there's a concern around Ethereum governance, basically that if this goes through in this way, it represents an Ethereum governance capture by people who have a vested interest in GPU mining. So again, this gets back to that process argument. Third is that it would be an unnecessary distraction, right? This shift to Prague-P-O-W would be an unneeded distraction when there are a lot more pressing issues such as Ethereum 2, right? Ethereum 2.0.

So those are the pros and cons, and it really then comes down to a question of who is for this and who is against this. Well, obviously, ASIC minors are going to be against Prague-P-O-W. Core devs who are worried about ASIC miners capturing the process or hindering the process of moving to proof of stake are for it. And then the community is kind of in between. And the question is how split is the community? So, Omar Baum did a poll the other day on Twitter where, obviously, you know, take any Twitter polls with a grain of salt. But he had this poll. Should Ethereum hard fork Prague POW to disrupt ASICs for the benefit of GPU miners? Is it worth the risk of splitting the chain and community at this point in the game to uphold

decentralized mining? The responses, then there were 2,070 responses to this. The responses were yes at 23.2%, no, at 43.4%. Don't know, what is Prague POW at 15.7%. Hey guys, I have a podcast for you. and then the people who wanted to view results were 17.7%, which, by the way, I really hate that as part of polls, but what are you going to do? So that is a kind of a pretty clear indication that at least with this engaged slice of the Ethereum Twitter community, there are far more people who are against the idea of Prague POW than who are for it. Okay, so now let's take a step back and actually talk about what I think is going on. I'm going to be now a little bit subjective. I think that really what we're seeing here is a fight around three things.

Process, power, and potential problems. So first process, there is a clear consternation with the way that this decision was made that transcends just the issue itself, even though the issue is important and contentious, right? This was something where the community thought that they had made their voices heard, that Prague-POW was not something they wanted to see, but then CoreDev seems. to just kind of slip it in anyways, right? Vitalik called it Ninja Reapproved. And so there's a real contention around the process.

Eric Connor wrote another piece about potentially how the Ethereum improvement process could change and be different based on this. But I think that it's very clear that there is a process issue in terms of how decisions get made. Now, this is part of the messiness of a new type of organizational structure that is a an organization at all, but is in fact a network of competing interests. But certainly process is part of the problem here. A second part of the problem and the reason that this Prague-P-O-W debate matters has to do with power, right? There is a power dynamic between what Vitalik called and

what some people interpreted as Vitalik dismissively calling the quote-unquote Twitterati and the core miners on the other hand. And so you really have these two sides. where there's this set of people who are building the actual protocol who feel because they are building the protocol that they are entitled to make important decisions like this. And then you have this other set of people who believe that because they breathe life into the protocol through the marketing advocacy, building applications on top of it, actually giving it value through their belief, they need their opinion to be heard as well. This is a key power dynamic that we've seen play out in other chains. Some people have pointed out that this is reminiscent of

the user-activated soft fork and the block-size wars in Bitcoin, which in a lot of ways came down to a power question, more than even a technical question, of whether mining interests in that case could capture and drive in commercial interests could capture and drive the Bitcoin Protocol, or whether these sort of small stakeholders, some of which were just, quote-unquote, anonymous Twitter accounts, you know, hiding behind avatars or whatever, could actually make their voices heard. And in Bitcoin, at least, the ability for the larger community of small stakeholders to really push back and stop a decision that was contentious, but favored by many of the largest companies in the space, was a really important power moment in the history of Bitcoin.

I think there is something similar here that we're seeing in terms of where power lies or trying to figure out where power lies in Ethereum. Now, the third, and I think most direct, least theoretical, least philosophical problem here is the issue of defy and what defy means for the state of Ethereum right now. So Chris Black makes this point very concisely in a tweet 17 hours ago as at the time of recording. He said, nobody is making a strong case why we need Prague-Pyod I get that some people want it, but it's not worth the goddamn chain split risk, okay? Clap emoji. Defy can't afford a contentious chain split.

Nearly one billion is at stake here. Can we stop f***ing around with this now? Please. So, obviously, an impassioned speech. But this is not the only person who is talking about this. In fact, last October, Dragonfly research put out a medium post called Ethereum is now unforkeable thanks to defy. And the entire thesis is basically that if Ethereum forks, the implications for breaking defy are so phenomenally huge that it makes it nearly impossible to imagine a scenario

where a fork, a contentious hard fork, is actually worth it. So I'm actually just going to read from the conclusion of the piece because I think they sum it up better than I can. They say, what this little thought experiment tells us is this. Ethereum is not what it used to be. In 2016, Ethereum was still a proof of concept. And ETC could plausibly claim to be a better version of how the, quote, world computer should evolve. But today, it's clear that ETH is valuable because of the systems that exist on top of it.

Unlike Bitcoin, whose ledger is simple enough that forks are functionally airdrops, ETH's ecosystem is incredibly complex. Because its applications are intertwined with unforking. components, the entire system is rendered unforkable. Any minority folk is doomed to obscurity. Defy is the ultimate kingmaker in any future governance crisis. Users, miners, and developers certainly have a voice, but the chaos that would be unleashed by unraveling Defi ties everyone else's hands. With all of the new higher-level financial applications coming online in the next year, defy is liable to only become more fragile.

So this to me is really the nut of it. And what I think is effectively what I might call the birth of protocol conservatism, defy is the centerpiece at this point of Ethereum. It is the driver of financial interest in Ethereum. It is the driver of developer activity in Ethereum. DeFi is a huge part of what makes Ethereum what it is. Defy is also an incredibly complex interwoven set of composable protocols that all work together in very specific ways.

In the context of a chain fork, it could unravel that, right? It could turn this very intricate foundation into an absolute house of cards. And the interesting thing is that this means that there is now something real in Ethereum. It's not just future potential. It's not just these things that might happen later on, but things that are actually happening now and that have specific rules and that have real money in them. When you get to the point where there is something that's worth protecting,

your bias as a community becomes to protect that thing rather than to potentially threaten or disrupt it. In some cases, change is going to be a thing. threat. And in those cases, that creates a new type of conservatism, which might have felt very odd and out of place even just a couple years ago before defy. I think Bitcoin has gone through this where the longer that this protocol has existed, and the more important it is as this fundamental building block of a new store of value system for the world, right? A new global settlement system, the less willing people are to introduce new things that could

upset the apple cart. I think we're starting to see the beginnings of that in Ethereum as well. And now I don't think that this means that there's no innovation happening. Obviously, there is a huge amount of innovation happening across Defi, right? And tons and tons of experiments, and certainly beyond Defi and Ethereum as well. What I mean by this idea of the birth of protocol conservativism is that people are less willing than before to take risks that could introduce fundamental change that could disrupt that core thing that is at the genesis or at the core of so much of the value. And that, I think, is at the core of what's happening here. It's not that people necessarily who are against Prague-P-O-W think that ASICs mining is great. It's that they are unwilling to

risk a contentious hard fork within the community that could be catastrophic for defy because it might be a little bit better in the context of ASIC mining, right? It could prevent a theoretical unknown attack later from A6 minor who don't want to transition to proof of stake. That's what's at stake here is that there's an issue that they believe or a thing that they believe would happen, a contentious fork in the case of Prague P.O.W versus things that could theoretically happen as it relates to problems with AIC minors. And when the risk is the devaluation of DFI, it's just simply not worth the risk. So what's next with the Prague POW debate? Well, Eric Connor says in a tweet just from yesterday, I'm going to stop bringing up Prague POW until after the next core dev call on 3-6.

I feel that the voice of those opposed has now been heard and further debate has diminishing returns for all. Andrew, Cyberhokie, says, if I'm reading the all-core devs getter correctly, most core devs appear to be apathetic reprog POW. I'd like to see more demos. I'd like to see more demonstrable support for an EIP amongst Debs before contentious changes are greenlit. If it's something we can live without, it's not worth the risk. So here we have Eric saying that he thinks that the voices of the community have been heard, and Andrews saying that basically it doesn't seem like the support for this is that deep among those Cordes, even if they voted to go forward with it at the last call.

Nick Johnson, who is a lead developer of the Ethereum name system and at the Ethereum Foundation, really kind of makes this point. He says, I was initially a strong proponent of Prague-P-O-W, and I still believes it achieves its stated goal of being ASIC hard. I also believe that it's a worthwhile goal. ASIC miners lose 100% of their investment if ETH transitions to POS, so they have a strong incentive to resist that. I think both ASIC-hard and ASIC-friendly algorithms are reasonable options for POW.

The middle ground, which turns out to include ETH-Hash isn't. With it, ASICs are possible and more efficient, but hard enough to design that they limit competition. But when the whole goal of Prague POW is to reduce the likelihood of a contentious fork, it makes little sense to implement it if it seems likely to result in a contentious fork of its own. In my view, POW change on ETH-1 has become more trouble than its worth. That is, I think, a really reflective answer, right? If the whole goal of Prague-P-O-W is to reduce the likelihood of a contentious fork,

It makes little sense to implement it if it seems likely to result in a contentious fork of its own. The reason that I wanted to take the time to dive deep into this is that I think it's, well, one, it's one of the most important issues right now in one of the most important chains in the crypto space. But two, I think it is emblematic of a huge amount more than just Ethereum and just Prague POW. I think these dynamics of how decisions get made in the process for decisions being made, in decentralized networks is new uncharted territory for us, right? It's a new experiment. The idea of how power operates in those networks and what the power balance is between communities of advocates as opposed to large financial interests is also new territory that has to be hashed out. The issue of a conservatism that grows over time on the basis of

there being more to protect, this is a phenomenon of networks. that get successful enough to have something to protect. These are all emblematic of much larger issues across crypto, and I think this is a great case study. So hopefully this has been useful, and if not, or if I've missed things, please let me know. I'm at NLW on Twitter.

And depending on how this conversation evolves, maybe we'll do a follow-up where we actually have some of the people who are more intimately in this conversation, actually come share their opinion. But for now, that is today's breakdown. We will be back tomorrow with a quick, cool interview talking about markets and more. Until then, keep hanging and I will catch you

soon. Peace. Welcome back to the breakdown. An everyday analysis breaking down the most important stories in Bitcoin, crypto and beyond with your host, NLW. The breakdown is distributed by CoinDesk. Welcome back to the breakdown. It is Friday, February 28th, and man, what a week It has been. Today, I'm joined by Scott Melker, who many of you will better know as the Wolf of All Streets on Twitter. Scott is a trader. He's a DJ and musician. And he is a super, super interesting thinker. Part of the reason that I wanted to bring Scott specifically on the show today is that we've seen a week where there's a lot to dissect in terms of crypto, but there's also a lot of contextualization needed in terms of the larger macro economy, right? In terms of the larger markets

and what's happening there. Scott is the rare trader who speaks as eloquently about fundamentals and about the macro economy as he does about charts and short-term trends. And I think that you can't really talk about this week, whether it's crypto specifically or just the economy in general, without shifting your view from the short term to the long term. As you'll see, Scott makes this point really clearly. He talks at one point in this interview about just how jarring it is that something like 10 days ago, the stock market was printing all-time highs, yet now we've had a 10% correction.

These are strange, strange phenomenon that are not just normal patterns in the economy. And a lot of it has to do, as we discuss with a fundamental shift in what stock market numbers even mean and whether they are, as they once were, about the perceived value of the company or something completely different and fundamentally different, more like a political scoreboard. We talk about the legacy of QE and 10 years of quantitative easing and what it has done to these markets. But we do also contextualize it in crypto, right? We look at the week in the Bitcoin safe haven narrative. This is something that I talked about earlier this week on the podcast, and I think is really, really important to understand just where Bitcoin and

the rest of crypto assets fit in this larger conversation in this larger question. One of my favorite interviews I've done, so let's dive in. Now, just to be clear, this show, and especially this episode, are not investment advice. Anything presented here, any conversation, is strictly for entertainment only. All right, Scott, thank you so much for joining today. I really appreciate the time. Thank you so much for having me. I'm excited. It's an exciting and weird time, right?

You know, I was just talking with you a little bit before we started recording about how 2020 has kicked off with a bang. And for those who don't know you, you've got a lot of different things going on now. You've got a newsletter. You are highly engaged in the space. I mean, give me the, I guess, the 10-second intro for people who don't know you. Sure. Well, I've been trading in some or investing in some various capacity for over 20 years now. Actually, practically 30, if you count the stocks I bought as a child.

But it was something that I really got much more serious about in the last decade and even five years. And then the transition into crypto was sort of an obvious one for anyone in the trading space who really liked making money, you know, 2016. Right. So, you know, I came in very much as a trader and not in it for the tech type, although, you know, that has transitioned to some degree. Over time, I've traded everything. I have a generally decent feel for markets because I've just been watching them for a really long time. I went to school at the University of Pennsylvania at a time when Wharton was sort of, you know,

the finance center of everything. So, you know, I had a lot of exposure there. It's just something I've always been at least superficially interested in, basically, my whole life. I think it's actually funny, the comments on In It for the Tech, right? I've been joking a lot this week that the more that the price of Bitcoin and the rest of crypto dips, the more we're all in it for the tech, which is sort of been the story of this week. A losing trade becomes a community member, right?

Well, listen, I, you know, I spent a lot of time in just kind of traditional tech startups before moving into the crypto side of the world. There's a similar thing there where everything that you fail at is just a learning experience, which I do actually happen to the thing is true, but you see it most often when people are kind of on the back foot a little bit. Yeah, I don't think that's true at all with a trade. I do think that's absolutely true. with a life experience or a failure at work. But, you know, with trading, it's usually emotion and is not a teachable moment. It's just something that people tend to repeat over and over again.

So unless they actually learn about it and change their behavior, but, you know, I think that traders quickly become investors, to become passionate community members for the coins they're holding by a very natural evolution or de-evolution, I suppose. I don't think that most of them learn from that, unfortunately. If you were paying attention, this is definitely a week where we could be learning a lot. And that's why I was so excited to actually have you join. I want to maybe get into kind of the larger market movements. I know you're interested in them as well and I've been paying really close attention.

But let's talk about just what's happened, what we've learned in crypto this week. I mean, how would you summarize this last week in the crypto market specifically? I don't think anything in Bitcoin's price movement as far as a retracement at this point is particularly surprising or unhealthy at current level. Regardless of the macro picture, I don't see anything strange in the movement of Bitcoin or cryptocurrencies relative to it. It's obviously all coins. We had a big move, and it's retracing that big move, currently is still above a 50%

retracement, very healthy. And that started at a predictable level of resistance being the previous swing high, you know, where you would expect any idea of a bear market's over if we break and hold 10,500 area, right? But that said, throw technicals and all of that out of the window, as you kind of touched on, we're in a very interesting macro environment. And I think that maximalists and the digital gold narrative people and the store of value, which, you know, I have mixed thoughts on all of those, those people would have really liked to see Bitcoin behave in an opposite manner during this global downturn in markets and during this

coronavirus scare. You know, you can't judge anything on a week. Bitcoin could go up. It could become digital gold. It could do all these things. But if you want to look at this in a microcosm and sort of in the short term, well, there really wasn't that much buying volume. Bitcoin has dropped with everything else.

So it's hard to make the argument that people rush to Bitcoin in times of uncertainty. For me, it would be a grand departure from history for an asset like Bitcoin to perform well in a risk-off environment because people have never in history bought something riskier when their safer, quote-unquote, safer investments are dropping. So it would be a really surprising thing for me to have seen Bitcoin just rip in the face of all of this uncertainty. Narratives are a lot of what I follow. And I feel like this week has been a really important recalibration in some ways of the Bitcoin

as Safe Haven narrative. So I actually did the podcast yesterday about this as well. And in some ways, it feels like over the last call it nine months, the idea of Bitcoin as this uncorrelated asset, right, that just kind of does its thing. Sometimes irrespective of what's going on got lumped in with the idea of Bitcoin as a safe haven narrative. And they're obviously a little bit different. Like both can function in similar ways in times of trouble, but they're very actually

different in terms of what type of behavior you would expect or not expect in this situation. And I feel like they've been uncoupling this week a little bit. Now, of course, the counterpoint to that or the extension of that is that if Bitcoin is also going down at the same time as everything else is going down, then even the uncorrelated asset narrative becomes a little bit questionable from this piece of evidence. But I do think that we got really excited. And I think that I might have been driven a little bit by, there were a couple of eye-popping moments, you know, the middle of last year and towards the end of last year where one day randomly the stock market tanked and Bitcoin went up and it was enough for a CNBC clip. So I think it's been interesting to see that kind of peel back

a little bit this week. Yeah, I agree with that. To touch on sort of what you said about safe haven versus non-coordinated asset, interestingly, I do believe very strongly that investors should have, whether it's only 1% or 5% of their net worth in Bitcoin, because I do, even in light of this week's events, I don't think Bitcoin is necessarily dumping because of what's happening in global markets. I think, like I said, I think it was ready for correction. So that was predictable regardless. It was in the chart, so to speak. But the safe haven, it would have risen, right?

So I don't think that it necessarily is correlated because it's dropping, because I would have expected a drop, perhaps. So I think it kind of hurts the safe haven argument, but it doesn't really affect the non-correlated or un-correlated argument. I mean, there's two kinds of risk that as a risk manager, and I'm not talking about as a trader, I'm talking about, you know, if you're at a fund or for your entire portfolio and the way you approach markets, there's systematic risk and there's idiosyncratic risk. Systematic risk is the idea of most things being correlated, and let's be real. almost every single traditional asset is in some way correlated.

You know, gold go up, sure, but very few things are immune, as we can see here, to a Black Swan event or a major market drop. So if you're looking to diversify your portfolio, you're looking for things, even in small amounts that offer you idiosyncratic risk, which means somewhat, you know, not correlated to the market and detached from what's happening. And so I do think that Bitcoin is that. But when I say that everybody should own 1% of it, they should buy it, put it away forever, and hope that they never need it.

Not because it's the future of money or because it's any of those things. Because perhaps if part of my friends, if it really goes down, you might need it. And it might behave in its own manner if in that one in a million chance our currency becomes hyperinflated or something like that, the people of Venezuela, right? So there are cases, obviously, where it's extremely valuable. And I think it's also in that case important to differentiate between value and price. Because even if the price of Bitcoin is dropping, for some people in certain situations, it still has tremendous value.

Venezuela being a great example. They don't really care what the price is on an exchange if they can actually use Bitcoin to pay for goods. And that's real value. So I do think that there are cases where Bitcoin can be. very valuable. And also, like, why wouldn't you want one percent of your money, which is money, if you lose it, you won't even notice? Why wouldn't you want an asset that could be worth a few hundred thousand dollars one day? Buy one Bitcoin and see what happens if you have money. So I don't think that the idiosyncratic risk portion has been discredited at all. I think that a safe haven

digital gold argument is dubious at best. This is kind of the Chimath argument, right? about 1%. I mean, this is what he said in his why I bought Bitcoin essay in like 2013 in Bloomberg, and he stuck by that up into an appearance on CNBC earlier this week where he said the same thing, right? Really echoed this sentiment. When we talk about non-correlation, we're not talking about on a kind of week-to-week level. We're talking about something that is potentially non-correlated on a much longer time scale in the context of, as you put it, kind of these Black Swan events. Right. That's why I said really put it away and don't think about it, which by the way is how you should approach any investment and not trade anyways. If you could buy Bitcoin now and see what happens in five to 10 years and not worry about it, then that's the approach you should take if you're a casual investor who just wants a bit of idiosyncratic risk and a bit of exposure. All right. So let's talk actually about the larger markets as well. Because again, one of the things that I think people find really compelling about your analysis and your analysis.

your insights is that you're moving back and forth between the micro and technical analysis, but also you clearly care about and spend a lot of time thinking about the bigger picture. What's your read on the markets, right? I ask you read on the crypto markets, but what's your take on what we've seen in the larger stock market, just global markets in general this week as a whole? I think it's bad. I think it's a bit irresponsible to sugarcoat it. That said, it's hard to find a bottom, but there will be one.

and if you have a long time frame, the market will go back up and it will rip and it exceed expectations. So, you know, bullish, bad, good are all, you know, about context and time frame. I would say in the short term, there's no reason to believe that it's necessarily going to bounce today. There are technical indicators, you know, the 50MA on SPX and, you know, the Dow, the levels that it's at. But, you know, right now it's a very uncertain environment. I think you just need to use common sense in situations like this, and there's no indication right now that the situation is under control. And the market is completely binary as far as emotion, right? People are fearful or if they're greedy.

When they're fearful, they're selling. And I think that that's what's happening right now, and I don't think we have clarity. So with any clarity on where this virus is going or where the environment is headed, we'll maybe start to form a bottom. That could be here. That could be 20% lower. Nothing would surprise me. So I think it's a time to exercise caution. I am generally a dip buyer in markets, especially with my long time frame, but I have not

started buying here yet, which says quite a lot because, you know, Brexit, things like that I pretty much bought right away. I am personally short some market indexes and a few choice stocks that I believe would be over exposed and some that I was shorting before. I think the bigger issue here that people maybe aren't talking about or that I haven't heard about, it's not really the virus itself. I mean, I think that the virus is one issue. The supply chain from China is the bigger issue. But I think the biggest issue and the real elephant in the room is that I already felt, and many did, that the market itself was inflated and was extremely overvalued.

And that that's the case for many of these companies that have risen 50% in the last year gone skyrocketing. So to me, just mean reversion or returning to the actual value of things is a big drop. And that doesn't even account for what happens if they actually lose value. Right. So this drop, I don't think it's surprising really anyone, but I think the aggressiveness and velocity of the drop is somewhat astounding. I mean, if you're not paying attention, this is a historic drop. The SMP, I believe, was hitting an all-time high 10 days ago. And as of today, it's officially in correction at a 10% drop from that all-time high in 10 sessions.

It's not like the crypto market. This thing's only trading, you know, I mean, obviously there's after-hours trading, but this is not in a 24-7 market. So that's just during business hours. It managed to do that. And that's something that we haven't seen since literally World War II. You know, and these are the worst days we've had since 2008 when everything went down the drain. So I'm not saying it's 2008 by any stretch.

I'm just saying proceed with caution. I think it's just common sense that things were overvalued and that maybe the world was not as exceptional of an economy as maybe certain people led you to believe. And here we go. This is the fascinating schizophrenia about the stock market right now and just really like the asset prices in general, is that the question actually ceases to become even overvalued or undervalued,

but what the numbers that we're looking at actually mean. So there's a great podcast earlier this week, Hidden Forces, that had Ben Hunt and Grant Williams on. So Ben Hunt, who writes Epsilon Theory and Grant Williams, who's done a ton of things, he has a ton of media, but he also helps start Real Vision. And they had this really interesting argument where Grant basically is talking about his experience during SARS,

who's in Hong Kong as that happened, and what that was like as compared to the, the just total lack of reaction of markets to the first phase of coronavirus, right? Where this was at the time this was recorded before this week, right? So this correction hadn't happened yet. And he was talking about, you know, you've got X hundreds of millions of people quarantined over here and the stock market is reaching all-time highs over here. And his point was that that just feels so wrong.

It is. Ben Hunt's point was that it wasn't just that it was wrong. It's that the stock market no longer is a mechanism for seeking the fair price of an asset that's going to give you a return in some way. It is now a political scorecard, right? It is just for, it's for any of the score. And I thought that that framing was so, so profound to hear explicated so crisply. Yeah, I mean, to that point, let's think about the past, I don't know, year. Market gets good news, goes up. Gets bad news, goes up. Gets worse news, goes up, right? You can point to a lot of things, but there's been nothing that has affected the market in a

negative manner until this week. And like you said, coronavirus is not new this week. I mean, that's something that the market should have been reacting to a month ago, and it actually ripped the hardest with the coronavirus news. I mean, they're quarantined tens of millions of people, you know, multiple New York cities over there. And everyone over here is having a party, you know, pop in champagne because their beautiful 401ks or 409Ks, whatever our president thinks they're called, are, you know, never dropping. It's just, you know, just absurd. We already knew that factories were closing American companies and Chinese and that all of this downside was going to be coming and the market just continued to go up. So the day,

like you said, that the market fails to react appropriately to news means that you're in full fomo and emotion and we all, certainly anyone who's been in cryptocurrency knows how that ends. It's very similar to when the market starts to lose that fundamental way of judging value, then you're in that phase where people are buying things only to sell them for more, which we all did in 2017. And like I said, you know, you know where these parabolic advances end. It's really interesting. I think holding aside, you know, predictions, prognostications and all that sort of thing,

it does feel like there are a growing number of observers who look at these markets, and say, you know what, maybe central banks can prop up this whole thing one more time or, you know, or multiple more times, right? But at some point, there has to be an event or a threshold where it just can't go anymore, you know, and I mean, in a lot of ways, I feel like bearish market media is entirely about guessing which event that's going to be, you know, is it going to be retirees who have to sell? Is it going to be some black swan like Corona? But it does feel like this is an example of kind of nudging us further and further along that path. Yeah, I agree.

And I mean, it's actually amazing, though. I haven't checked today, but I believe Chinese markets have actually been up. So there, Kiwi is working. But we've been in the quote-unquote greatest economy and market of all time. That doesn't really add up when our Fed has been pumping money into the market, right? You have to wonder now, especially in light of Fed is going to have to react soon, if they're going to just continue to try to ease or reduce rates. And at what point do we just run out of dry powder or a way to react?

And the bottom falls out. So I think, you know, at this point, they have to proceed with real caution and maybe not react immediately just because the president or the media or the public makes them feel like that's the right move. I think that, as I said, everything is just incredibly inflated and has been propped. and can't keep that up forever. I do think that the central banks are going to all get together here and start to work together to try to mitigate the loss. But I think that really, at this point, QE and rate cuts

are more likely to sort of take the edge off and ease the pain. Maybe it'll be a, you know, instead of a bungee jump, it'll be an escalator. But, you know, I think that the trend is down. Weird and fascinating times. Scott, I really, really appreciate you taking some time and sharing your thoughts. I could definitely talk to you for a lot longer about this. But for folks who are listening who are like, damn, I got to get me some more of that brain,

where can people find you? I know that you have a new podcast coming out, right? Is that right? I do. I'm working with a company called Blockworks. They handle a lot of the podcasts in the crypto space. We're super excited. I've actually already recorded about five, so I can't wait to get these things into the wild.

The core concept being, you know, people in the crypto space. but also music, art, sports, basically anyone with a really interesting story to tell who has even a slight or superficial interest in finance and the space. So it's been pretty eye-opening to hear the stories of the people here. So we were trying to do something different. Otherwise, you can always find me on Twitter at Scott Elker, S-O-T-T-M-E-L-K-E-R. And there will be links to that podcast

and also to the newsletter that I put out a few times a week. I really try to put out as much content as my ADD-D, riddled brain can. So it tends to be a lot if you follow me. I hope it's not too overwhelming for people. Awesome. Love it. All right, man. Well, thank you so much for your time and we'll definitely catch more soon. Thank you. We'll do it again soon. The thing that I just keep thinking about, re-listening to that conversation is we are in a really, really interesting moment where what Travis Kling has called the largest monetary policy experiment in human history is coming up against some serious tests, right? Coronavirus and the supply chain shock it represents are a black

swan event that is putting to the test how much central bank monetary policy can continue to prop up asset prices and artificially inflate even asset prices. And it may not be that this time shudders the train that shuts down the party, but it does feel like every time this happens, and central banks and governments are called into plumb forever more exotic forms of market support, we get closer and closer and closer to that time that it just doesn't work. So I don't know what that means for these markets. It's very conceivable that the party could go on for some longer amount of time, but I think that we do have to understand just what a phenomenally unique time it is

and look at the markets through that lens. So I hope you've had a great week and are looking forward now to a wonderful, restful, or otherwise interesting, exciting weekend. I will be back as usual on Monday with another episode of The Breakdown. Catch you then. Peace.