The Breakdown - The Bull Market Is Back on the Menu! (Did It Ever Leave?)

Episode Date: August 12, 2021

On this episode of “The Breakdown,” NLW covers bull market indicators, including: Investment firms reporting positive market signals Continued NFT boom Markets ignoring outdated FUD Both NYDIG and Arca released reports detailing their perceptions of positive market signals towards a bull run. Signs included Grayscale GBTC unlocks, institutional interest and risk appetite. The NFT bubble has not burst. Capital continues to flow into the space and digital art collections like Crypto Punks have shot up in value, exceeding even the previous March highs.  Crypto seems to be rolling over FUD: Tether’s additional backing clarity and BitMEX’s nine-figure settlement helped to ease uncertainties in markets over regulations. China’s crypto crackdown and the subsequent Great Hashrate Migration caused little impact. Even the Poly Network’s $600 million hack this week made no dent to prices. Is Bitcoin’s “defiance rally” part of a bigger bull run? Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW The Breakdown is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: Overearth/iStock/Getty Images Plus, modified by CoinDesk.

Certainly, we've seen some major price corrections over the past months. 50% plus for Bitcoin and ETH, more than that even for Defi. However, one, those numbers had run up incredibly quickly, and two, we were under a nonstop barrage of fud. Tether and Bitmex as examples of regulatory fud that I just gave you, less cause for concern than they were a month ago. Grayscale GBT-Navtrade and unlock fud, proven to be a fairly nothing-y-nothing burger.

One by one, those fud concerns have been, if not addressed, then certainly mitigated. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big-picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, August 11th, and for the first time in about a week, we're not going to discuss big political machinations. Instead, we're going to discuss the raging return of the bull market, and as we're do, I'll weave some other news from the last week, that we haven't had a chance to discuss as

much. I mentioned this briefly a couple of days ago in the show about what I called Bitcoin's defiance rally, but I didn't get too deeply into how different market actors are interpreting this return to the fair lands of green. There are, perhaps unsurprisingly, some very different takes. Nighting, this show's sponsor, pointed to Bitcoin leading the way in one of their weekly notes to clients, quote, Bitcoin dominance, a measure of its share of the total crypto industry market cap, is back on the rise

after hitting a low of 40% ahead of the May price correction. In times of broad crypto market corrections, investors tend to seek the relative safety of Bitcoin over other less proven digital assets. Another investment firm ARCA pointed to a set of different market signals that were all confidence restoring. First, related to Bitcoin was the end of the massive gray scale GBTC unlocks. there had been much debate about whether those unlocks would be price suppressing, and there were enough people who were betting that that was going to be the case that when that didn't really

come to pass, it had a reverse bullish effect. In other words, you expect that all these locked assets unlocking means that there's going to be a bunch of unprecedented selling which would drive the prices down, but that doesn't happen, and so you say, hey, maybe things are better than I thought. Second, even through the dip of the last few months, there have been a relatively steady stream of announcements of big firms from traditional finance and the tech sector integrating with digital assets. Arker, for example, flagged Bank of America, Goldman Sachs, Shopify, and just today on CoinDesk PNC Bank is potentially working with Coinbase, so there's clearly a lot happening, and that trend had picked up in recent weeks. Third, they discussed how some massive

crypto company fundraising had not only shown the private market appetite for crypto investments, but had been large enough to actually break into the mainstream news cycle. Speaking of which, there is another macro factor that they touch on briefly as well, which is overall risk appetite. The peak of the Q1 bull market coincided with a growing belief among traditional market participants that the combination of a recovering economy and consequently growing inflation was going to force the Fed to back off its dovish monetary policy. If interest rate rises were on the table, one of the first things to be hit would be extreme risk stock valuations.

In traditional markets, we saw this narrative hit tech stocks and risk funds like Kathy Woods' Ark Innovation ETF. In crypto, it hit, well, everything. Of course, there was a whole lot more going on, but I do think those macro correlations are worth paying attention to. That narrative has now shifted a bit. The Delta variant is creating a new narrative reason for central banks to keep the pedal on the metal, which, ironically, means risk remains the name of the game.

From ARCA, quote, for equities year-to-date inflow stand at $580 billion, which, if we continue at this pace, would be more inflows in one year than in the past 20 years combined. Digital assets continued to be the other asset class that is attracting capital at record paces, only it's much more difficult to track and quantify this data due to the fragmentation of private fund vehicles and retail investors that invest in more than just Bitcoin. Finally, ARCA discussed one more big factor, the NFT explosion, but I'll come back to that in just a minute. First, I want to flag a thread by Alameda co-CEO Sam Tribuco. He wrote it trying to interpret what was going on in markets, and specifically how much of the news of the infrastructure bill was shaping things.

Here is, I think, the key section from his thread. Gary Gensler's comments, in addition to the first the market heard of the infrastructure bill amendments, drove the market down last week. And then, just like we always do, we saw the markets recover some right away. prices just always overreact to news regardless of what it is. We saw it with Elon, we saw it with China, we've seen it before from US news, and we saw it here. We see this every time partially because of our usual friend liquidations. When organic price action occurs, it triggers some liquidations in the same direction, amounting to, in this case, more net selling that anyone wanted to do, and so there's some reversion. But we also see it, I think, because the crypto trading markets are

immature and just not efficient. The big firms which would arb this stuff away in traditional finance aren't yet, and so we're able to stay in these paradigms where news is consistently overbought or sold." End quote. Finally, Sam ends on why the conclusion of the infrastructure bill process, which, as we know, didn't exactly go our way, would still have a price-lifting effect. Quote, a cryptocentric amendment has been the biggest thing going on, and its front-page news of like, real newspapers and websites. The Senate is taking this seriously, and now they're going to keep taking it seriously, and not in an overly negative way. I think that is what the market is reacting to, the idea that we've made it. And if crypto stays as relevant as it has been,

critically, in ways which are not really bad regulatory, but neutral is seemingly sufficient to me. I suspect the market will continue to do so. The breakdown is sponsored by NIDIG, the institutional grade platform for Bitcoin. As long-time listeners know, NIDIG is a major force in the Bitcoin space, and they're now making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers to offer Bitcoin. That mainstream access is critical for all of us, and you can learn more about it at nydig.com slash nLW. That's nydigig.com forward slash nLW. Okay, so we've got a bunch of positive signaling culminating in this intense focus on crypto, where all of a sudden we became much more relevant to a whole lot of people

in power than we have been. into a couple weeks earlier. But there is at least one of the thing that we have to note, and that is the absolute explosion in NFTs. Volumes are exceeding the previous highs from March. Price floors on many projects, particularly OG digital art collections like the Cryptopunks, are through the roof, and more projects are being spun up every day. There were some specific catalytic factors for this as well. Shopify announcing that sellers could sell NFTs through their platform, a new protocol for fractionalized NFT ownership that could mean better liquidity. And then of course, at the beginning of the month, that massive scoop of

over 100 punks for over $6 million all in one sitting. I'm not here to discuss the specifics of prices or projects as it relates to NFTs right now, but if we're discussing a return of bull market moods, you absolutely can't ignore the amount of capital flowing into that space as a factor for the resurgence of the overall markets. Okay, but from there, let's talk about a few more factors that also perhaps allow me to weave a bit more of the recent news in as well. There have been a few stories that hit the wires that have really taken the teeth out of some previous fuds that potentially had a price suppressive effect. Let's start with tether. And as always with tether, there is only so much use in trying to convince anyone to change their position. But a few months

ago when we got our first reserve attestations, the big thorny issue was that a lot of the backing was held in commercial paper, but with no accounting for the creditworthiness of the issuers of that debt. This time, we got much more detail about the roughly 49% of tether reserves that are held in this category. According to the report, 93% was rated A2 and above, and only 1.5% below A3. On top of that, the portion of tether reserves that were held in U.S. Treasury bills has gone from only 3% previously to 24% now, which is a pretty significant bump in the security of those assets. Now, there are still a few categories that are caused for concern. As J.P. Koening puts it, quote, we still don't know much about one corporate bonds, rating, maturity, two funds, are they prime

money market funds, three other, and four secured loans. Together, these four opaque categories sum up to about $9 billion worth of backing or 15% of Tether's total assets. End quote. Still, the point for me is that every time we get more information about Tether, incremental though it may be, it de-risks that part of the market and certainly that part of the narrative a little bit more. And speaking of de-risking parts of the narrative, the rise and fall and perhaps rise again of Bitmex will be written about in the annals of this industry. The exchange that more than any other was associated with the rise of crypto derivatives and exotic instruments like 100x leverage started to be crushed under regulatory pressure last year. Eventually, this led to criminal complaints against CEO Arthur Hayes

as well as the company's CTO. But yesterday, Bitmex announced that they had settled with FinC, the Financial Crimes Enforcement Network, and the US CFTC, to the tune of $100 million. Now, nine-figure settlement, that's bad, right? Well, not necessarily. Bitmex called it a new chapter for the company and a new era for crypto. Quote, we want the story of Bitmex to not only be one of a company that pioneered crypto derivatives, but also led the way in advancing crypto responsibility. Basically, they said, times have changed, and so will we as well. Now, from an outside observer's perspective,

seeing exchanges race to clean up their act is confidence-inspiring, even if it comes with some big penalties for past transgressions. If you're the average institutional investors, it again de-risks the space. And I think this perhaps brings up an interesting question. The title of this episode says, The Bull Market is back on the menu, but it's worth asking, was it ever really off? Certainly, we've seen some major price corrections over the past months. 50% plus for Bitcoin and Eith, more than that even for Defi.

However, one, those numbers had run up incredibly quickly, and two, we were under a non-stop barrage of FUD. One by one, those fud concerns have been, if not addressed, then certainly mitigated. Tether and Bitmex is examples of regulatory fud that I just gave you, less cause for concern than they were a month ago. Grayscale GBTZ NavTrade unwind and unlock fud, proven to be a fairly nothing-y-nothing burger. And then, of course, there's China. Don't forget, we had this cycle's cataclysmic China-bans Bitcoin event happen, and this one

was serious. We're talking about a global redistribution of hash power out of China. Turns out, though, not only can the market absorb it, on the other side, we're left with a Bitcoin and a crypto industry that is radically less subject to influence by a global financial and political actor that many remain extremely skeptical of. CMS Holdings put it this way. What's great about this run is that we already did the China rug so smooth sailing. Take all this and then layer on top of what so many include as a major unintended political derisking of crypto over the last couple weeks in the U.S., and you have the ingredients for a bowl

run, which never really ever truly left, to restart again with vigor. Indeed, perhaps the best analysis of what happened over the past couple weeks is that a lot of people bet that we were going down further, and they were wrong, and when things flipped to the upside, their liquidations helped fuel what's happened since. Anyways, that's my read for now and we'll have to see what happens next, but one last note before I go. On this massive $600 million-plus Polynetwork attack, the largest hack in Defi's history. That's a story that's still evolving, so I want a little more time to wrap my head around it before giving you the full breakdown.

But I think it's a reasonable question to ask how there could be the biggest hack in history and to not have that make even a dent in this price momentum. Are people really that degenerate? The answer is sort of, well, yeah, but in a more nuanced way. Something I've long said about Defi is that one of its greatest weaknesses is also, relative to its development, one of its greatest strengths. What I'm referring to is its high barriers to entry. Defy heads often complain that difficult UI-UX and technical complication make it inaccessible

for the masses, but an unintended consequence of that is that when this sort of hack and exploit happens, it's not the masses who are left holding the bag. It's a highly enfranchised, technically competent set of users who are more or less aware of the risks. I think that, more than anything, is why Defi can shrug off this sort of event. And to be clear, this doesn't mean that people won't be hurt. It's just that net net, a higher portion of the people who get hurt, are people who truly did know what they were getting themselves into. I continue to think that at this stage in Defi's

development, this risk mitigation through high barriers to entry is a net positive for the space. Likely more on that attack later this week, but for now, that's my take on this bull market. I'm really not sure that we ever left it. What do you guys think? Hit me up on Twitter at NLW, let me know, and until tomorrow, guys, be safe and take care of each other. Peace.