The Breakdown - The Ghosts of Bitcoin's Past

Episode Date: December 27, 2024

Part 1 of a three part end of year special exploring where we've been, where we are, and where we're headed in Bitcoin and crypto more broadly. 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 another breakdown end of your episode. 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. All right, friends, well, this year for our end of the year episodes, as we are off for the

holidays and doing these preloads, I thought it would be a fun idea to reflect on the year that was and what's to come using the convention of my favorite story, A Christmas Carol. None of this is particularly innovative, of course, as a conceit, but I do think it's a pretty good fit for this year, given that so much of the story of 2024 is about an inflection point between different eras of Bitcoin's life. And so, as you might have already guessed, we're going to do three episodes, the ghost of Bitcoin's past, the ghost of Bitcoin's present, and the ghost of Bitcoin's future. As we look at Bitcoin's past, just like it was for Scrooge, some of it is long past, some of it is near past, but all of it is our past. And with that in mind, we kick off with a very

near past, in fact, something that's not past enough for most of us yet, which is the soon-to-be-ended reign of Gary Gensler. It's not too long ago that few in the crypto industry, knew the name of the SEC chair. Previous cycles saw the odd SEC action which nudged the industry in a particular direction, like the Dow Report and the Hinman speech, but no regulator made themselves a main character quite as much as Gary Gensler. At this stage, there's very little left and said about the outgoing SEC chair. We all know he attempted to push the industry offshore, if not crush it entirely.

He held up the Bitcoin ETF for as long as he could before the courts and the political heft of BlackRock forced his hand. The industry breeds a sigh of relief, knowing that Wells notices will slow down, and the lawsuits will move towards resolution. A less discussed topic is what it means for the agency to move on from its most controversial chair in recent memory. The SEC saw a staggering rate of staff turnover during the past two years, with reporting suggesting morale was at multi-decade lows. Gary Gensler didn't just crush the domestic crypto industry. He crushed the spirit of excellence within the halls of the

SEC. With Gensler leaving, the institution has a new opportunity to live up to its mission, to deliver rules and enforcement that promote investor protection and capital formation. Amazingly, for all of his bluster, Gensler leaves with basically no lasting legacy. Only a small handful of crypto rules were written, with most being rejected by the courts as an overreach. The idea of regulation by enforcement dies as soon as the court cases end, and this, of course, is the problem with not actually trying to work for the long term. Almost all of what Gensler did can be wiped immediately away.

What's more, it's not just that the industry will no longer deal with a hostile regulator. For the first time in Bitcoin's history, the industry will engage with a regulator whose door is truly open. Paul Atkins, assuming he is confirmed as chair, enters with fully fleshed out ideas about how the industry should be regulated. But most importantly, he brings a willingness to listen and collaborate with the industry on solutions. That likely doesn't mean a free pass to go back to the Wild West days, but it does mean that the gigantic crypto companies will be able to take their first step out of the gray area and engage in good faith on sensible rules. We've never seen what the industry looks like when it's fully and unambiguously legal.

We don't know what it would look like to have crypto representatives on advisory panels and truly engaging with SEC staff on common-sense proposals. We don't know what's possible with an agency that starts with yes and then figures out how to make something possible in a safe way. There could be a massive renaissance in crypto and Bitcoin. All of the products and ideas that have been sitting on the shelf for years could reenter the market, and it doesn't necessarily mean we need to wait for lengthy rulemaking. The SEC can achieve a great deal at the staff level with no objection letters and simple

guidance. In other words, we could see a rapid shift out of the regulation by enforcement era with relatively straightforward and uncontroversial actions. Gensler's term wasn't so much defined by what he achieved, but by the vacuum he created. The SEC ultimately lost three years that could have been used to set guidelines. The chilling effect has already started to lift, but the more exciting part will be seeing the SEC get started on the work that should have been done long ago. Another increasing bygone is the Crypto is for Criminals era.

One of the biggest shifts during this cycle, perhaps the biggest, of course, has been the normalization of Bitcoin on Wall Street and in broader society. Bitcoin achieved brand name recognition a little in 2017, and then again in 2020. but it still carried a heavy stigma. There was still a widespread belief that Bitcoin was for criminals. That sentiment is now almost completely gone. Earlier this month, we saw BlackRock make their first clear recommendation that people allocate 1 to 2% of their portfolio to Bitcoin.

Micro Strategy has now been added to the NASDAQ index, and Coinbase is expected to join the S&P 500 in 2025. Bitcoin is mainstream, and within a year, almost every retirement account in the U.S. will have a small exposure to the asset class. This cycle has really seen the industry stand up and fight the cryptos for criminals narrative. We saw a wave of criticism in the mainstream press and Congress that crypto was being used to fund terrorism and drug cartels. And yet, in February, a senior treasury official was questioned on this point in front of Congress. He was forced to admit, under oath, that crypto is used

by terrorists in, quote, relatively small amounts. More recently, we saw the court's rule that the tornado cash sanctions were not legally authorized. Across many similar incidents, we saw the narrative get chipped away until there was nothing left. Crypto is no longer for criminals. It's for millions of regular investors and savers across the U.S. Now, the criticism will no doubt continue. We're still going to see articles written about Tether in the Wall Street Journal, and of course speeches from Elizabeth Warren from her position as ranking member of the Senate Banking Committee. What matters, though, is that the resonance is gone.

No one is going to believe Bitcoin is primarily used by criminals when they see it being sold by Black Rock. The next one might be a little bit more controversial of whether we can really call it in the past or not, and that is, of course, the D-Gen era. There was a moment during the last bare market where the most popular crypto product was betting on hamster races. We've seen all manner of silly, absurd, or distasteful products grab the attention of the industry over the years. Increasingly, though, that era seems to be disappearing quickly. In fact, you can see some people even lamenting it. There will likely always be meme coins, NFTs, and assorted degeneracy in crypto, but it's no longer clear that that will be the main draw card.

Given the new openness and participation from the traditional finance world, the industry is increasingly creating real projects that do real things. One of the last times we saw this, we got the explosion of defy, which established a fully functional on-chain financial system. The growing pains were rough and it didn't take long for insanely risky products to emerge, but the promise was electric and the underlying infrastructure wasn't genius. For several years, founders had been terrified to attempt serious projects. One letter from a regulator could kill a startup before it got off the ground, squandering years of work. The far more lucrative pathway was to launch a meme coin and try to grab some money from the attention economy. While many builders continued behind the scenes, momentum stalled. Venture funding dried up,

and there seemed no point in continuing. This was obviously a dead-end path for the industry, which once held the promise of bringing the entire financial system onto new infrastructure more fit for the age of the internet. And so the question is, does the return of real projects necessarily mean the end of the Dgen era of crypto? The big question is about incentives. That meme coin frenzy of this year didn't emerge out of nowhere. It was a direct byproduct of the regulatory environment. Serious DFI projects with functionality and revenues could be viewed as breaking securities law. A novelty animal coin created as a joke was much more safe, believe it or not. There was even some suggestion that this was an intended outcome for regulators.

If the industry couldn't be killed, at least it could be reduced to a laughing stock. It might seem absurd to make this point while meme coins are still being featured on Bloomberg and lampooned by Fin Twitwick commentators, but there is a real sense that in the future it won't just be the DGens. Here's one that's pretty interesting, and while somewhat sad at first, also just shows maturation. As the fifth Bitcoin cycle ramps up, the mythology around Satoshi is losing some of its resonance. There is a new generation of people entering the market, who are only vaguely aware of his story. The hard cap of 21 million coins, the genius of the difficulty adjustment, these things will continue to define Bitcoin, but the person behind them may be less and

less relevant. Satoshi the founder was always about anonymity. They knew the only way an idea as revolutionary as Bitcoin could survive its first decade was by ensuring the identity of the creator was kept secret. When the government came to attempt to shut Bitcoin down, there needed to be no single person attached to the product. Satoshi needed to be everyone and no one all at once. At this point, that particular their need for anonymity is less relevant than it's ever been. Bitcoin is not going to be shut down by a government. In fact, we're seeing the exact opposite, where governments are starting to leverage Bitcoin as a tool in their geopolitical games. In fact, at this point, revealing Satoshi's identity would be much more about triggering a round of Fudd if that anonymous founder was alive at the risk

that they would attempt to cash out their fortune. This is not to say that Satoshi will ever be irrelevant. It is just to say that as time goes on, Satoshi will be ever more a part of Bitcoin's past rather than its future. artifact of a bygone era? The idea that Bitcoin could go to zero. Since the early days of Bitcoin, volatility has massively reduced, and the idea that it could suddenly plummet to zero is basically non-existent. We've watched Bitcoin claw its way out of deep holes across three separate crypto winters. During each of them, it was perfectly plausible that the spell would break and the internet money would lose its magic. But we're simply not in that world anymore. The arrival of Wall

Street has helped shake this idea to a tremendous degree. prestigious firms are now explaining the hard money thesis underpinning Bitcoin to a wider audience than anyone could imagine just a few years ago. Even more important is the generational shift that's currently underway. Bitcoin is starting to see its first investors who can't remember a time before it existed. The teenagers who are entering the market now have grown up on platforms like Roblox and Fortnite. Digital money isn't a strange concept to them. They've been using it since they were a child. The year's meme coin surge has shown there's basically no friction for Gen Z to download a crypto wallet and start training. No one needs to patiently explain to them that digital

currency can have value. That idea is already obvious. We're watching the first generation of true digital natives by their first Bitcoin, and they're buying it during a period where hard money has a clear and compelling investment case. And lastly, here's my optimistic one, Operation Chokepoint 2.0. Nothing was more resonant this year in the crypto community than the story of OCP 2.0. Everyone in the industry knew someone that had been debanked, even if they were lucky enough to hold on to their own bank account. As the year dragged on, we began to discover just how widespread Operation Chokepoint had been. Stories emerged not only about companies losing access to banking, but also employees and their families. It's now clear that widespread debanking is not politically

tenable in a country like the U.S. Frankly, that should have been obvious after the first iteration of Shoke Point was struck down by the courts. The issue has now reached the highest level of government, and we're likely to see action on it early in the next year. Banking has always been an issue for crypto companies. Cracken founder Jesse Powell has explained how, in the early days, the company had to use PayPal to run their finances because they couldn't access stable banking. The Genesis of Tether has its history needing a way to create a parallel payments network for crypto firms. Many of the methods were sketchy at best, but these were simply the only options available to the nascent industry. Full and fair access to the banking system

is something the industry has never had. We saw a glimpse of what it could look like during 2021, with instant payment networks created within Silvergate and signature banks. The result was an explosion of trading firms and market makers, now that capital could be easily and quickly withdrawn from exchanges. And that's why the end of Chokepoint 2.0 is about so much more than people working in the industry knowing their bank won't shut them out. It should mean that firms and traders can enter and exit markets with greatly reduced fear. Crypto will become just another legal industry, attracting a flow of liquidity previously held back by fear of breaking unwritten rules. Just the simple task of receiving a venture check or topping up a trading account will no longer

be a tense and risky proposition. Crypto companies have always found a way, but now they won't have to. The mental energy that was spent getting access to banking can now be unlocked for building projects and running a company. And that is a very positive thing. That is where we will leave. our ghost of Bitcoin passed. On our next episode, we turn to the present. Thanks as always for listening, and until next time, be safe and take care of each other. Peace.