The Breakdown - The Crypto Market Comes Roaring Back

Episode Date: December 2, 2023

A look at the five most important stories in crypto this week. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Saturday, December 2nd, and that means it's time for the weekly recap. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello, friends. Well, we are back with the weekly breakdown, and we are doing the version that is me and Scott Melker going live on Friday mornings, replayed for you here in all of its glory. As you will see, the big theme of this show and of this week is, I think, the transition away from the cleanup of the past, see SBF trials, see CZ settlement, and into the exciting future that's coming.

We talk about nine straight weeks of positive fund inflows. We talk about positioning for the upcoming anticipated ETF. And it definitely feels like we have turned a corner. Even if there's still a lot of antagonism coming from certain parts of the Biden administration, most notably the Treasury Department, from a market perspective and from an institutional perspective, things have clearly shifted. And so, friends, without any further ado, let's get into the episode. We really slacked here the last couple weeks, man.

It's been a weird little period, but we're back as our, as is the whole industry. We just wanted to give it a chance to get rid of the last of its 2022 and 20203 stink. Yeah, I mean, what did we even have to talk about the last three weeks? Very little is absolutely nothing. But the one thing that we have not gotten a chance to talk about, which has obviously been driving, I think somewhat everything is Binance, world's largest Bitcoin Crypto Exchange, Binance founder, CZ to resign as CEO, plead guilty. We obviously saw that happen already in the past.

There's been some surprise developments, I guess, since then, the treatment that he's gotten from the federal judge that he can't leave the United States. I think people were expecting he'd be able to. He's obviously stepped down from the board of Binance U.S., which apparently is still a functioning exchange. I thought it was effectively dead. And we've moved on to Richard Tang, a guy who clearly has a ton of experience working with regulators.

And I think there's an argument to be made now that Binance will become one of the safest, most regulated exchanges on the planet and that institutions are going to probably flood back in. I mean, they're not dead. They're going to continue moving forward. They're paying. They're fine. What am I missing here? Finance, good to go.

I mean, listen, it's all going to come down to confidence, right? And so a couple things. First, it is likely that there's a stabilization among individual users now that this is done. I think that there will be some number of people who, I guess, this sort of convinces them that there was something going on there that they shouldn't like and maybe they leave now. But I kind of feel like the innuendo, the rumors, the suspicions of all of this have done their work over the last, you know, whatever, 12 months, right? Binance's market share had gone down pretty meaningfully. And it's sort of a situation where the people who were going to leave because of this set of things probably already had. So the people who stuck around were just waiting for this particular phase to be done, right?

Which it is. Now, the question is to what extent, you know, the more institutional kind of upmarket investors are going to want to come in and use this. And I think probably it's going to be based on a combination of things. One is, do they have different product offerings that make it an appealing venue for those investors? And two, do the sort of requirements of the settlement actually make it, the perception of it to be an extremely safe place, given how open their books are going to be to the DOJ and to everyone, you know, like, ironically, this could be very good for their business

in the sense that, you know, if you are trying to make decisions about where is a safe place to invest, the information about finance is going to be radically more open than most offshore exchanges by virtue of, you know, the settlement that they have. Now, of course, there's still the hurdle to get over with, you know, compliance departments and, you know, the sort of, you know, lingering risk issues and things like that. But for sure the exchange has survived this. And that's an outcome that could have been pretty different. Yeah, it somewhat reminds me, I keep saying this, of Silicon Valley Bank, right?

You had the collapse of Silicon Valley Bank, worst bank in the world. I would never bank there. Then the Fed and the government step in and say they're going to fully back everything and everyone's like this is the safest bank. on the planet. I know that no matter what happens, I'm fully backstopped here. So if you have the United States government keeping that monitor in Binance, paying attention, I think that it's become a really good place for institutions probably to spend their money and to spend their time. Interestingly, you might not have seen. We've had this narrative that the CME had surpassed Binance

in futures open interest. Binance has now taken the lead again, actually, since this happened over the last week. So they're at 114,000 Bitcoin CME back to 108,000. That was about a 15,000. thousand spread in favor of CME just a few days ago. So clearly at least there's interest coming back in. And if you ask what the institutions think of this to sort of support this narrative, we have J.P. Morgan saying this is positive for crypto, the finance settlement. And of course, Bernstein as well, Binance will retain its international dominance after U.S. settlement. So we're not the only one saying that this seems to be a clear path forward for finance at this point. Yep, absolutely. I mean, a lot of this was going to hinge on what that sort of narrative

was coming out of it. And I think to the extent that the best way to resolve this type of thing for everyone is a meaningful action that doesn't totally destroy value, that does signal an actual shift, like they kind of, everyone sort of seems to have got this one right. It's easy stepping down seems to have been the big move that I think they needed to see that to make it more than a slap on the wrist, right? I think it also telegraphs what would likely happen if we see other bad actors attacked by the United States government that it could be a huge fine, somebody steps down, but they're allowed to operate. I think this really eliminates the fear of these platforms getting crushed. And of course, I'm talking about maybe the DCGs and the tethers,

if there's other ever action against them. The biggest fear was that they crushed finance. That's not happening. This is actually how Wall Street banks were generally treated. Maybe not their CEOs, but you know, if a Wall Street bank did something wrong, they pay a massive fine. It's meaningful, and they move on with their business. And that's what we're seeing here. And I think that that's really encouraging for the future if we have other actions. Yeah, this is a little bit outside of sort of our purview, but I do think it will be interesting to see kind of historically speaking if the actual holding of executives to account the way that we've seen with obviously Sam and now with CZ is a sort of a crypto-specific flavor,

right, that it's something that's reserved just for this, or if instead it reflects a broader philosophical shift where it's sort of the beginning of a different attitude towards white collar crime, you know, that actually can include, you know, more than just financial punishments for executives. Obviously, this is one of the biggest things that people had complaints about coming off of the global financial crisis is the lack of that type of accountability. So I wouldn't be surprised if, you know, once again, crypto's first to the party, but it's not exclusively a crypto sort of shift in how white collar crimes are approached. That'll be interesting to see because we certainly know.

that there will be a lot more white collar crimes. That's definitely coming. And since we're talking about institutions, here's our title, right? Money is pouring back into crypto. Crypto funds attract largest weekly inflow in 2023 as Bitcoin short sellers capitulate. Coin shares. Digital asset funds attracted net inflows of 346 million last week fueled by anticipation for a spot Bitcoin ETF. Coin shares reported. Ether and Salonda led among Altcoins fund inflows. This is the largest numbers that we've seen since 2021, right? I mean, there's been a bit of a stagnant market to some degree. I think that it was boring until maybe Bitcoin broke $35,000. But you can see this obviously in the news, but just anecdotally, even with the price action of a number of altcoins outside of even what's

happening with Bitcoin. But like, can we finally say, hey, man, we're back or we're so back, I guess, if you really want to be hyperbolic? You know, listen, I think, I think that there has been for some time a sense that we had meaningfully hit an inflection point where the worst was over and perhaps the best hadn't begun again. I don't think that people are fully ready to call bull market in the way that we think about them when it comes to crypto. But there is clearly positioning going on in advance of an ETF. There is clearly a shift in sentiment across all of the big sort of financial houses when it comes to this. The resolution of these issues, you know, like the kind of twin pairing of a settlement with CZ and the, you know, the conviction of SBF,

those are real kind of clean up moments. And, you know, I think that what's not super clear is to what extent this is, these big institutional funds really getting excited again versus just sort of making the rational play to position a little bit ahead of an ETF. But I also don't know that it matters all that much because it all kind of contributes to the sort of positive feedback. back loop of narrative shift that leads to sort of a feeling and a sentiment difference, which has all sorts of impacts, which sort of take something that, again, might just be positioning to start, but makes it more real, right? When you see institutions come in this way, all of a sudden, entrepreneurial interest goes up and builders get louder and that makes it

feel more real and people who are on the sidelines come back in. And it sort of all has this sort of positive halo effect, almost regardless of the catalyst. And, you know, nine weeks in, nine weeks in a row of positive inflows, it starts to, be less of a feeling of, you know, this is sort of just a little shift and something that feels a lot more significant. Yeah, I agree. And something I mentioned in the intro, world's largest Bitcoin futures ETF breaks 2021 record highs for asset under management. This obviously is pro shares, BITO. It has 1.47 building billion in holdings is a flurry of Bitcoin ETF applications in the U.S. seemingly spurs institutional interest in the asset. So it's not, this is part of those inflows,

but this is pretty astounding when you think of it. First of all, when BITO, launched, it was at the peak of a bull market. It was the fastest ETF in history, not just crypto, any ETF to a billion assets under management. This is arguably the most successful ETF launch in history. We've had years now of watching this thing and knowing that it massively underperforms the price of spot Bitcoin. Right. I think the last numbers I saw roughly 10% a year, obviously just because of the way that futures contracts roll and that they have to buy futures contracts that are dated further out. So even knowing, that this product is underperforming spot,

people are buying it in anticipation of the spot ETF. To me, that's just an exceptionally bullish narrative. Yeah, I mean, listen, the evidence is getting stronger and stronger, and it's getting harder and harder to kind of have the, the ETF is fully priced in kind of argument, or that the ETF is a non-event kind of argument. We'll see if people sell when the thing actually happens, but it is very clear that people, you know,

And by people, I mean markets and investors think that this is going to be a significant moment for this asset and for this asset class. Yeah. Do you think that outside of the spot ETF that any of these inflows have another narrative behind them or do you think that we're just like riding hard on this single thing at the moment? I think that it's, so I think that the specific catalyst that makes it feel like this is the thing to do now is for sure the positioning ahead of the ETF. You know, everything, I mean, listen, we've had along these nine weeks continued signals of increased SEC engagement, right, like a sort of a different tone from them, not necessarily in public statements, but in terms of, you know, the way that they're actually having people revise their, you know, their documents. So I think that there's clearly a big piece of that. However, I also think, and this is something that you and I have talked about before, that there's probably a perception that

Crypto has been, you know, broadly speaking, underpriced relative to other risk assets because of the absolute chaos in the market over the last year post-FTX collapse, right? We had a decoupling to the downside where Bitcoin and crypto and, you know, the rest of the assets in the class were sort of probably more to price than they would have been naturally even in a bare market because of the overhang of, you know, government regulation on all those things. So it seems to me like the combination of one, a little bit of correction of that, you know, mispricing based on, you know, those risk factors being eliminated, plus the specific catalyst of an ETF coming up as a reason to do it now. Plus, you know, the emergence of some sort of new

inklings of narrative around, you know, Bitcoin is being talked about on the shows again, right? It's back on CNBC. And it doesn't take too much of that sort of narrative salt sprinkling to, uh, to just round that package out and make it make sense. Yeah, I absolutely agree. Our next story is the CBDC of Paloosa, as I mentioned, FIREPublic hearing on Digital EROC's experts diverge on key issues. Actually, there was a study project. I don't know how to pronounce it.

I don't know. I'll be on. I destroyed that one on my show. I just did it twice. CBDCs can meet privacy requirements, BIS research reveals. People who don't want you to have privacy tell you that they can give you privacy. I mean, that that's how I kind of read that. headline. I don't think the BIS is to be trusted, but it seems like CBDCs are on the docket.

They've been on the docket in Europe for quite some time. The ECB is a very big proponent of them. Like, if you look at compared, if you compare the statements of the ECB compared to the Fed, very, very different tone about a digital currency, right? The Fed is very circumspect. They push it off to Congress all the time. It's, you know, they don't want to touch the decision-making authority on that one with a 39 and a half foot pole, right? Whereas Christine Lagarde and the ECB are much more vocal about their support. They're actively trying to, you know, figure out what European citizens' issues with this are and try to address them. You know, I think that the issue, because I dug into this a little bit this week, and this is not just in Europe, this is sort of, you know, all around

the world where CBDCs are being considered, is that there's this lip service being given to citizens' concerns around privacy and surveillance. But instead of actually trying to it's not even that they're not trying to address that issue. It's that the first response to it is to dismiss it as sort of the wild fantasies of conspiracy theorists, right? Of course the government isn't going to do this. And at this point, you know, right or left, people just aren't buying that, that sort of blithe dismissal of what feels like a fairly meaningful concern. And so, you know, to the extent that these governments are serious about this and actually want to sell citizenry on and what they perceive as the upsides,

you're going to have to do more than just sort of dismiss those concerns as to be dismissed, you know? Yeah, I totally agree. I think you kind of joke, like, yeah, just trust us. Like, literally everybody assumes the dead opposite. We assume that the government is going to intentionally try to do this and remove our privacies. And we've seen it in China, right? So China doesn't mean that it's the rest of the world.

But nobody wants to go down. I think that's slippery slow. of the CBDC examples that we've seen. And I'm sorry, I don't believe a BIS study that says your privacy will be protected. There are people working for this. Chris John Carlo, I don't know if you know him, but used to be the head of the CFDC. He has a think tank called the Digital Dollar Project. And literally what he does now as an activist is go around the world to everybody who's proposing CBDCs and preach to them the importance of privacy and how to do it. So there are people out there who believe that a CBDC can be done in the same manner that we have cash

and privacy can be protected. I just don't think we protect that we believe our government is going to go for that because that's not the intention here. Yeah. I mean, listen, Giancarlo is a sort of an exception proves the rule type of person who has hurled his body, his reputation, his future career on threading that needle and actually creating a cash like thing. I think his sense is that this is completely inevitable. And he's trying with sort of everything that he has and trying to recruit people who feel like him to the idea that, you know, it's coming. And so it has to be wrenched into sort of a cash like instrument. And that's the only way to do it. So we'll see if, we'll see if that argument works. But it's become more of a political issue in America than I think

anyone would have thought. So I have a hard time imagining that it gets too much traction here, at least in the immediate future. Even the Fed has said we don't want to do this, right? I don't think it's happening anytime soon in the United States. Treasury seeks expanded sanctions, powers in digital space, aims to combat use of digital assets and illicit finance. This whole timeline to me is just so suspect, right? We had the Wall Street Journal article about terrorist funding of Hamas with crypto, quickly debunked, but the politicians and the regulators have not really accepted that debunkment

and have continued to use it and beat the pavement to gain more power over the crypto industry. This is Wally. This is Wally Adiemo, is a deputy treasury secretary. And he made these comments at the blockchain association meeting in front of a bunch of pro-crypto advocates in D.C. I mean, he basically said this is a threat to national security that crypto is being used. Not only, I don't have the quote in front of me. I talked about yesterday. Not only for illicit finance, it was like child, you know, like illicit drugs. It was child labor and all this crazy stuff that he said that crypto is being used to fund. Most of that has been already debunked, but that doesn't stop him from wanting a secondary sanctions regime and asking for more power

for the Treasury. So the one hand, we have, yay, Bitcoin Spot ETF. On the other hand, seemingly we have scorched Earth against everything crypto. Yeah. I mean, the Treasury has always been the biggest antagonist in many ways, the quietly the biggest antagonist of the crypto industry. going back to the infrastructure bill fight, you know, three years ago now, when that bill sort of happened and there was sort of the provisions around, you know, broker definitions, at first the entire D.C. lobby establishment thought that there had just been a mistake, like that someone didn't understand. Then they got in there and started talking to people at Treasury and found out that they did understand and that Treasury really did want those powers

and that they wanted, you know, effectively to create a situation where crypto was soft banned because, you know, note operators can't provide KYC. It's just not possible. This has been a recurring fight. It's been ongoing ever since that. Now, I think the Treasury kind of slunk back into the background a little bit as other members of the administration took on a louder role over the last, you know, year and a half or so, right?

They were very content to let Gensler become enemy number one. And then they were content to sort of, you know, have the banking regulator establishment and Operation Choke Point be the vehicle. it's to me, what's perhaps not surprising and a little conspicuous is just as all of those things sort of seem to be leveling off and receding into the distance a little bit and, you know, actually going through settlements. All of a sudden we have sort of like this expanded powers, you know, comes screaming in as a request and, you know, whatever. The only positive thing is that I don't think a lot of congressional allies that we have are buying it either. And, you know,

Regardless of whether it's in the context of crypto, I do think that a key political issue over the next election cycle is going to be expansion of government powers and the fight against that. Yeah, I think it's just noteworthy that there's no, no backing off by this administration against this industry, even if we do get a Bitcoin spot ETF, right? It's funny. Even the news that finance was kind of in the clear last week came within 24 hours of crack in suit from the S&Suit from the S&S. SEC, right? So I think it's just very clear that nothing's really changed as far as the way that the anti-crypto army is going to approach this industry. I don't know if you saw this while we were talking. Somebody literally sent me a message. You need to see this. Circle refutes false claims on illicit financing. Have you seen this? Because I'm going to surprise you with it, if not.

So this is from Dante Desparte, the letter written to Chairman Brown and Senator Warren. They list off a few things. I was trying to read it. First, Circle has long made, combating illicit finance activities, including those, blah, blah, blah, blah. guiding principle of our business. Circle does not bank Justin's son. That's number two, is that they're outright saying they don't. Third, Circle is a highly regulated financial services firm that devotes substantial resources to ensuring we are compliant. Doing a lot of ass kissing here, but this is the kicker, the quote that he sent me. I'm going to show it to you right here. Moreover, Circle supports Senator Warren's and Senator Marshall's recent amendment to the National

Defense Authorization Act to strengthen AML provisions in the digital assets industry. We also share broad agreement with Chairman Brown's recent letter to U.S. regulators calling for a stronger disclosure regime in digital asset market. So maybe we're not getting a central bank digital currency, but we may be getting a highly regulated stable coin that's very in line with this administration's wishes. Circles play in my mind has always been for a very long time to thread this needle and be there standing when it becomes clear that it's politically unpoweringly to have an actual CBDC. They're trying to be basically the sort of the private market infrastructure that can be

adopted and integrated into the public system because at some point they're going to say, look, we already have effectively a CBDC that's, you know, clearing billions and billions of dollars. So I don't know, whatever, man. It's a it's a tough game that they're playing. But talking about like the first whole three quarters of the letter is like everything you're saying is wrong. But we support you, you know.

But just so you know, we're on, we're on your side. We have the privilege on the outside of not playing politics because we're, we get to lob bombs in. And that's, frankly, it's our job. It's the job of everyone in this industry, media or otherwise, to hold to account everyone who's, you know, both in this industry and outside of it. But it's a different role, right? And figuring out how to actually sort of thread those needles is very difficult. And unfortunately, we have to deal with the Senator Browns and the Senator Warrens right now. So I don't know.

Yeah, they have to. I totally agree. But interestingly, you know, from the top of its height of market cap, USDC is down about 60%. Right? You're talking about watching USC that was only 10 billion behind Tether at one point now. I think it's roughly 30-ish for USC and Tether's going to be pushing 100 billion soon. They're at 90. So you can see clearly where the market has decided regardless if that has anything to do with circles positioning with regulators in the government. I have no idea if it has to do with the Silicon Valley Bank collapse and just there was a huge outflow from USC at that point. I don't know, but USDT is booming all over the world and USDC is shrieking. Yeah, I mean, listen, I think USC is, uh, the, the outflows are a critique of

the US government regime and the US regulatory regime more than Circle specifically. Now, of course, they implicate Circle because Circle is a part of that, but I don't think that people took a rational look at USDT versus USDC on the merits outside of that and said, you know, oh, yeah, we want to move into tether. I think that they said, you know, look, the company that was trying to be the most compliant got caught up in this Silicon Valley Bank thing. They got depegged. Like, that tells you everything you need to know, we're out, you know?

Yeah, yellow. Like, well, if they're screwed, I guess we might as well go with the one that's bigger because they might be screwed to. Yeah, good attitude. Finally, our fifth story and the most obvious one of those. the week, I think. Micro Strategy's Sailor makes biggest Bitcoin purchase in more than two years. Crazy, man. The firm's Bitcoin holdings are now worth roughly $6.5 billion. He's up over a billion because their cost basis is down near $30,000. This was $16,130 Bitcoin they bought November.

I mean, the cost basis was just $36,800, something around that. Price is actually higher than a purchase announcement by Micro Strategy for once, which is good news. This dude, I mean, is he ever going to stop? Is he going to own it all? Are we going to have any left? He's never going to stop. There are three things now that you can count on. Death, taxes, and Michael Saylor buying more Bitcoin.

This is all there is. It's never going to stop. People are so feeling. I see the funny narratives. It's going to be centralized. I mean, it's such nonsense. I think the only story here is that this dude has incredible conviction. I just can't imagine.

Just imagine a world where Michael Seller literally becomes one of the richest men in the world, just because he dollar cost averaged into Bitcoin. I mean, that's the trajectory right now. Yeah, it's really insane. But you've got to, I think, respect it. And honestly, not financial advice, but the way that he's approached this market is probably a lesson for most people

who try to go full degenerate and trade more alcoins to make more Bitcoin. You literally just have to buy Bitcoin. Yeah. I mean, listen, I think my guess is that Sailor is a more influential figure this cycle than he was last cycle among his peers. And the reason that I say that is that what he did in the sort of intensity with which he burst onto the scene, his arguments about sort of ice cubes melting, the treasury argument, like it was radical at the time. It was

something that people couldn't imitate. I mean, no one did, right? You got Elon a little bit and square, kind of, but like the treasury narrative never came, never came through, the corporate treasury narrative. Now you have just a sort of the slow accumulation over time and it looks a lot savvier, you know, with the benefit of a full cycle having lived through a down market too than even it did before. And he's sort of, you know, Sailor's not a quiet guy, but it's certainly not like the the same sort of introductory bombast that it was when he first kind of emerged onto the scene. So, you know, it'll be interesting. He's not quiet, but he's also not flashy about it, Right? It's the same strategy. Listen, there's nothing, if you're in crypto, there's literally

nothing more, quote unquote, boring than just buying Bitcoin all the time. Yep. Right. So, but to your point, I think he's been somewhat proven a genius for continuing to buy through the bare market. And anyone who's ever dollar cost averages kind of wants price to go down every once in a while so that you can approve your cost basis. And that seemingly has worked out tremendously well for him. Do you think that we're going to see other institutions start to put it on the balance sheet like you did in Tesla now that the accounting rules have changed a bit? I'm skeptical. I'm really skeptical.

I think that that's... Yeah. Listen, as much as we are coming back, I really do believe that sort of the rampant fraud of this cycle, compared especially to things like the ICO boom, which looks quaint in retrospect, they really did, I believe, set things back quite a bit. You are going to see professional.

investors, I think, start to treat this like just a legitimate asset class that they want to be in and have exposure to and have an allocation to on a much bigger scale than they did the last cycle even. But I don't think that that's going to, the sort of more novel experiments of putting it on balance sheets and things like that. I just think that that's going to be a bridge too far this time around is my guess. But I'd love to be proven wrong on that. I agree, but the beautiful thing about it is this time we don't need it. So we didn't have a Bitcoin spot ETF to debate ad nauseum in the last cycle, which we do now. I think we covered everything we've got here 30 minutes.

Perfect. Guys, everybody follow NLW, obviously on X's own channels where this is also broadcasting and the breakdown, which is the, I still argue, is the best podcast in the crypto space, man. Thank you for everything you do. I'm glad that we are finally back. We're back. I'm sure we're going to get disrupted by Christmas in two weeks. But hey, we're going to try our best to keep showing up every Friday.

Love it. Thanks, everyone.