The Breakdown - The Ghosts of Bitcoin's Present

Episode Date: December 30, 2024

Part 2 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. Welcome back to another breakdown end of year 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. com slash breakdown pod.

Hello, friends. We are continuing with our Christmas Carol. themed Bitcoin episodes. We've done the ghost of Bitcoin's past, and now we are moving to the ghost of Bitcoin's present. This will be a set of predictions of the changes that are right around the corner, so kind of on the edge of present and future, but more present than future. It was clear that things changed as soon as the election results were in, but we're still just starting to get a sense of exactly how things are going to change. All of these things I'm imagining, though, happening in the next year, which is why I'm considering them the present.

The most obvious change expected next year is regulatory clarity. We already discussed the implications of the end of the Gensler era in the previous show, so today we're focusing on the things that will fill that void. Stable coins and tokenization seem like the lowest hanging fruit. I expect stable coins to be fully regulated within a year with the passage of regulation. This would allow banks to issue stable coins further blurring the lines between Tradfai and the crypto economy. tokenization also seems like it can be approved with a fairly minimal set of exemptions

and guidance from the SEC. We already saw Exodus wallet successfully go public after issuing tokenized stock to qualified investors in the private markets. Combined these two developments should make the benefits of crypto infrastructure really obvious. Regulatory clarity beyond that is a little more uncertain. I'm not particularly optimistic that we see a full market structure bill passed over the next year. The issues are very complex. It's not obvious how they should be resolved. And there likely will be a strong push for Republicans to go back to the drawing board and start over. Current market structure bills were all created out of a compromise during the Gensler era,

with the shadow of FTX cast over the industry. Two years later, a lot has changed, and it feels as though a fundamental rethink and redraft would be time well spent. One of the big gaps that needs to be filled by legislation is assigning rulemaking authority over spot crypto markets. This can be resolved by either handing power to the CFTC or granting them joint power together with the SEC. In either case, I expect a slim bill resolving this issue to be far more practical than trying to move comprehensive legislation early during the next Congress. To be clear, that doesn't mean the industry can't get a lot of the benefits of regulatory clarity. The SEC has extremely broad scope to grant exemptions, issue no action letters, as well as creating rules and formal guidance. Just because Gensler didn't

doesn't mean they can't. I expect we'll get clarity around things like token issuance, secondary market trading, and NFTs. I don't think the SEC and the CFTC are going to stop with their enforcement. I just think that basically when they say that crypto firms need to come and engage with the regulators, they'll actually engage with us. Far beyond simply ending the lawsuits against major crypto firms, this new regulatory attitude should revive the industry in the U.S. The default answer will now be yes, or at least let's see if we can make it happen, with regulators largely concerned about establishing sensible guidelines to ensure consumer protection. Hopefully, this attitude allows all sorts of novel projects and experiments to come to market.

A lot of the experiments dreamed up during the Web 3 era will be given license to run. Most will fail, but should a few genuinely paradigm-shifting projects emerge, it will be worth all of the trouble. Now, moving to our next prediction, one of the simplest regulations to remove will be SAB 121, the SEC's guidance that prohibited banks from touching crypto. The new SEC chair can repeal this rule on day one, which admittedly could be as late as April once confirmation hearings are completed. In the interim, the SEC appears to be issuing exemptions provided they're satisfied that

banks' crypto activities are not risky. Expect to see Bitcoin and some other major tokens offered directly through the banks. Beyond that, we may start to see structured products and other more complex Bitcoin offerings through the Tradfi ecosystem as well. One of the most compelling will likely be yield-bearing Bitcoin accounts, created by selling options against Bitcoin holdings or various other derivative strategies. While this has some risk, it's nothing compared to the opaque risk of Bitcoin lenders from last cycle like Celsius. Basically, with Bitcoin brought inside the financial system, we should know exactly

where the yield is coming from. Some of this could take a while to come to fruition, but simply offering vanilla Bitcoin exposure should be much less controversial. We already have a number of banks like Fidelity offering Bitcoin in a few narrow ways. I expect that Bitcoin will soon be available directly from a bank account, making it even simpler than buying stocks. Although gun to my head, I would bet that that's probably more like two to three years away than next year. will obviously have some big ramifications for the Bitcoin companies who have grown their business by offering simple and straightforward Bitcoin exposure. Still, I'm not really worried about them. These companies have had years to establish customer relationships and have incredibly strong

reputations in the Bitcoin community. In fact, we could see some of them crossing over in the other direction, obtaining a banking charter and becoming Bitcoin first banks. Ultimately introducing Bitcoin into the major banks really won't be about servicing Bitcoiners. It'll be about convincing Normies that Bitcoin is no longer weird internet money. Something that I'm quite sure about, I think that we're going to see instanties see institutional FOMO hit fever pitch early next year. Almost as soon as Trump was elected, we started to see a broad sense that people felt under-exposed. What's more, we're starting to see hedge funds taking on crypto-related trades in size. While the Bitcoin and Ethereum ETFs have been a massive success,

there's still signs that we could just be getting started. In their end-of-year predictions, Bitwise suggested next year's ETF inflows could accelerate. They noted that RIAs are only just starting to get access to the Bitcoin ETFs, and major wirehouses are only beginning to come online. Once that entire network is up and running, wealth managers will be able to sell Bitcoin exposure to their clients for the first time. We have no idea what that'll look like in practice, but just 0.1% of all wealth management assets in the U.S. would be around $90 billion worth of inflows into Bitcoin. For some context, that's more than twice the global inflows for crypto ETFs this year. Bitwise suggested that their clients that already have Bitcoin exposure will also be doubling

down, stating that 3% is the new 1%. We know exactly what retail foma looks like after living through several cryptocurrencies, but we have no idea how institutional fomo will manifest. At the moment, most hedge funds and institutional investors are still terrified of the volatility of Bitcoin. They're generally taking hedged positions in aiming to monetize the volatility rather than capital appreciation. If this cycle really starts to get out of control early next year, I expect some large investors to start looking to get exposure to the price and remove their hedges. It will only take a few hedge funds to report industry breaking gains to kick off some serious fomo. At the end of the day, investment management is a cutthroat industry, and it's difficult to keep clients without exposure

to the fastest horse in the race. Moving now to some less obvious ghosts of Bitcoin present, this is the first cycle where the Bitcoin mining reward has started to seem a little shaky. The brief popularity of ordinals drove a major spike in fees, but otherwise miners have been feeling the pinch of the having like never before. Profitability is back up over the past few months, but the summer was an extremely lean time for Bitcoin miners. If supply of mining rigs returns in full force as Bitmain shifts production to the U.S., we could see competition ramp up rapidly. At the same time, data centers have never been a more desired commodity. The AI boom shows no sign of slowing down, and that industry is extremely short on power

and facilities. DLDR is that for the first time in Bitcoin's history, there is an even more profitable way to use a data center. This places minors in an interesting and unique position. We've already seen several companies pivot to AI, which has appeared to be a successful move. At the same time, Marathon and Riot have adopted the micro-strategy playbook, issuing convertible debt to buy Bitcoin. And the scale at which they're doing this is remarkable. Marathon is the largest Bitcoin miner in the U.S. and they've acquired more Bitcoin by purchasing it from the open market

than they have through mining. Logically, then, there's only two possible outcomes. Either Bitcoin's price quickly accelerates to boost the profit margins of Bitcoin miners, or mining slowly will become a less appealing industry leading to downsizing. This could be then the first cycle where we don't see a massive boom in mining, at least in the conventional sense. Still, one of the relatively untapped parts of the industry is capturing stranded energy. The U.S. currently has almost twice is much power waiting to be connected to the grid than currently online. This is a vast, underutilized resource that Bitcoin mining is uniquely positioned to capture. As the construction of power plants ramps up to meet AI demand, I expect to see Bitcoin miners used to bridge the gap

while facilities are being completed. And so it may be less that Bitcoin mining is suddenly going to go away, and instead just if the industry continues to evolve to meet new opportunities. Many large miners that exist today will likely pivot to AI or transform themselves into Bitcoin holding companies first and miners second. New entrance might not be in the form of large companies with massive facilities, but rather small and nimble operations looking to capture cheap energy wherever they can find it. And what about the world beyond? If 2025 delivers another strong bull run for Bitcoin, one of the factors could be global turmoil. We've already seen the governments of Canada, Germany, France, South Korea, and Japan experience recent major upheaval.

China appears on the brink of major economic disaster with rates plunging and GFC-style stimulus urged. Meanwhile, the U.S. dollar looks incredibly strong, giving no breathing room for geopolitical missteps. All of this sets the stage for major turn. turmoil to spring up somewhere in the world. The U.S. economy seems set to outperform, but there's limits on how far that divergence can run. Could it be that we see Bitcoin truly live up to its billing as a digital safe haven asset for the first time? BlackRock has already been pushing this narrative, arguing that investors should think about Bitcoin more as a risk-off asset. Fed Chair Jerome Powell even recently endorsed the view that Bitcoin is digital gold. As tough as it can be to live in

interesting times, we certainly seem to be heading in that direction. Chief among the narratives for the coming year will be the splintering of the world into different centers of power. incoming Treasury Secretary Scott Besson has made it very clear that he views the world coming to another Breton Woods moment, stating that he wants to play a role in renegotiating the global order. That goes far beyond the concept of applying tariffs on certain countries. The very foundations of the free trade era seem more wobbly than they ever have. To the extent that we see a balkanization of the world in two separate trading blocks, that could lead to a massive acceleration in Bitcoin and crypto adoption.

Stable coins are already being used as a fairly small portion of global trade. If the ubiquity of the U.S. dollar was constrained, you could easily imagine a shift to Bitcoin. This wouldn't be necessarily Bitcoin being adopted by one of the major trading blocks, but instead, Bitcoin playing a role as the settlement currency for neutral countries. Bitcoin could also serve as a bridge currency between rival trading zones fulfilling its role as money for enemies. This is of all the things that we're talking about the most speculative, and frankly, now that I'm reading, it probably belongs in the ghost of Bitcoin's future, but it's important to note that the world at large is going to have a lot to say around how

Bitcoin shakes out over the next several years. Lastly, perhaps the biggest question right now for the beginning of 2025 is the Bitcoin Strategic Reserve. Up until very recently, the BSR seemed more like a campaign promise than anything else. However, over December, things have evolved rapidly. We now have several U.S. states and multiple cities and international jurisdictions with BSR proposals of their own. And that's, of course, only the plans that have been made public. There have been persistent rumors of Bitcoin accumulation in the Gulf states, which frankly make all the sense in the world. That's to say nothing of the question of a Russian Bitcoin Reserve being unveiled out of the blue. The strong competition in the game theory of Bitcoin adoption, which strongly favors the first mover,

makes a strategic Bitcoin reserve all the more likely. And in many ways, the devil is really going to be in the details. $100 billion worth of Bitcoin is a half decade worth of accumulation for micro-strategy, but it's fairly modest for the wealthiest nation state on Earth. The current rumor is that President Trump is looking into using the Treasury's Exchange Stabilization Fund designed to protect the dollar. That fund currently stands at $39 billion, with an active proposal in Bitcoin policy circles, that $21 billion of it should be re-recented. redeployed to fund the reserve. Even just thinking about normal funding out of congressional appropriations, a sum in the tens of billions is barely a drop in the ocean compared to the $7 trillion U.S. budget.

Finding appropriate pay for is wouldn't be easy, but where there's a will, there's a way. And that's certainly the biggest point here. Until very recently, it was a little unclear how serious Trump was about pushing forward the more extreme parts of the Bitcoin agenda. We now have a few statements from Trump and his family members that demonstrate he appears to be extremely serious. Bitcoin is a core part of the presidential agenda and may even play a role in their geopolitical strategy. The Bitcoin Strategic Reserve has moved from idle thought bubble to serious policy, and the question is how it turns out. If I were a betting man, which believe it or not, given that I run a crypto

podcast, I'm actually not, I think we will see some early executive order policy that won't be nearly the full Lummus plan of acquiring a million Bitcoin over five years, but also will be more than simple retention of the Silk Road coins. 2025 friends could be a hell of a year. I can't wait to come back here and talk to you all about it. For now, that's going to do it for the ghost of Bitcoin's present. Until next time, be safe and take care. of each other. Peace.