The Breakdown - The Great Bitcoin Market Upsizing

Episode Date: January 16, 2025

NLW explores how institutional demand (and institutional builders) are significantly upsizing the Bitcoin and crypto markets, and how that trend will play out further in 2025. Sponsored by: Ledn Need liquidity without selling your Bitcoin? For 6+ years, Ledn has been the trusted choice for Bitcoin-backed lending. With transparency, security, and trust at our core, we help you access your BTC’s wealth while HODLing. Discover what your Bitcoin can do at ledn.io/borrowing. 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 Wednesday, January 15th, and today we are talking about market upsizing. 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. Well, friends, there are a very specific handful of themes in the crypto and Bitcoin space right now. One is regulatory cleanup, which is inclusive of basically all of the fallout from Operation

Chokepoint 2.0 and the change of administration, basically a backwards-facing look at regulatory challenges that we've had. Another big theme right now is regulations and policy facing forward, this big question of what the Trump administration will actually do. Another emergent theme, which may break into broader consideration, is the the AI agent narrative that seems to have some chance of breaking out as the non-Bitcoin narrative for the cycle. Global geopolitical game theory is another big point of conversation, and obviously that intersects the United States with the Bitcoin Strategic Reserve, as well as numerous states in the U.S. and other nations. And the last major theme that comes up over and over and over again

is, of course, institutional adoption. The integration and sewing together of the crypto ecosystem and the traditional financial ecosystem. What we're doing today is looking at the look at the at a set of stories that all seem to indicate the trajectory of that institutional adoption. We know that in 2024, the Bitcoin ETFs set records blowing all other ETF launches out of the water. Many are still predicting that there's more to come. In their 2025 predictions, Bitwise suggested the ETFs would more than double in size this year. That suggested that institutional adoption was still in its earliest dinnings and would accelerate from here. As the year gets underway, we are starting to see some evidence of that. There's a suggestion that,

institutional adoption won't just grow the crypto industry, but will force the market to upsize in order to cater to larger players. So first up, we have a collection of stories that suggest that crypto firms need to get much larger to capture the wave of institutional adoption or hand over the market to their trot-fight counterparts. One sign is the growing adoption of regulated Bitcoin options. The launch of options on BlackRock's Bitcoin ETF in November was obviously going to lead to a big change in market structure. However, it was difficult to conceptualize the magnitude of the change. With just under two months of trading in the books, iBid options have already grown to half the size of Deribet's Bitcoin Options Market. Deribet has been offering Bitcoin Options for over eight years. Ibit is now the

fifth most active ETF options market behind the Big Four Index funds, SPY, QQQ, IWM, and TLT. Importantly, the growth doesn't seem to have come at Deribit's expense. Open interest on that platform has roughly doubled since the beginning of last year and climbed since Ibit options went live. This implies Ibit options have been purely additive, representing a new wave of investors entering the market rather than a platform shift. Deribet has always sat in a kind of strange position in the industry. The platform has operated out of Panama but recently moved operations to a newly licensed entity in Dubai. For a period, it operated without KYC, but those days are long gone. It was never a particularly shady operation, especially compared to some other things out there,

but it was clearly operating in the gray area of global finance. This meant it was largely suitable for sophisticated traders who knew what they were doing. CEO Luke Stryer said he isn't concerned about losing market share to iBit. He said, iBid options are predominantly traded by U.S. retail investors, a segment that historically has not had access to Deribit. As such, their activation has not negatively impacted our market activity. If anything, it has created positive effects by introducing new arbitrage opportunities and facilitating enhanced risk offloading strategies for institutional participants as Deribit continues to act as the global repository for risk and volatility. One edge that Deribet has over iBit are size limits.

Positions in iBit options are currently limited to 25,000. contracts, roughly 125 million per market participant. That's plenty for individual traders, but is limiting for large funds. The NASDAQ recently asked the SEC for a 10-fold increase in the limit to allow institutional size to come into the market. Jeff Park, the head of Alpha strategies of Bitwise, has called the limit, quote, discriminatorily low. Once approved, we could see iBid options explode even higher, quickly overtaking Deribet as the premium venue for Bitcoin options. In related news, Deribet is reportedly shopping for an acquisition partner. According to Bloomberg reporting the firm engaged financial advisors, FT partners to search for a deal. The article suggested

Krakken was interested at one point but didn't make a formal offer. Bloomberg also reported that Deribet could be valued at up to $5 billion. Darabet, however, denied the rumors, stating, Deribet has not been put up for sale. Over time, we have received interest in strategic investments from a variety of parties, which we will not disclose. As a regular course of business operations, Deribet appointed FT partners in early 2023 as an advisor for general advisory services and potentially secondary market investments. To me, this suggests that even some of the largest firms in the crypto industry are feeling pressure to scale up and compete with new entrants from the Tradfie world. Will that lead to a wave of mergers and acquisitions over the coming year? Not this time

because crypto firms are struggling, but because they need to operate at a completely different order of magnitude. If you've been around Bitcoin for long enough, you've heard the term hoddle and the name Leden. Lennon has been the go-to leader in Bitcoin lending for over six years. They help clients unlock the liquidity of their Bitcoin, allowing them to huddle while still accessing the wealth of their BTC. They've been battle-tested with their focus on transparency, security, and trust, allowing them to build a proven track record of client's success and security. Leden has helped tens of thousands of clients harness the value of their digital assets, issuing more than $6.5 billion in loans over the years. But as the crypto industry says,

don't trust verify. Check out Lennon's trust pilot or their reviews on social media. And to learn more about what your Bitcoin can do for you, check out ledin.com. borrowing. That's LEDN.I.O.S.Borrowing. Please visit leaden.com slash legal for product terms and disclosures. Product availability varies by jurisdiction. Next up, Swiss Cryptobank Signum has hit unicorn status after closing an oversubscribed growth round. The bank raised $58 million on a billion dollar valuation. The proceeds are intended to fund expansion into the European Union and Asia. If you're not familiar with Signum, the bank was founded in 2017 and largely catered to high net worth individuals and crypto funds. They offer lending, brokerage, asset management,

and tokenization services. Part of their key service for high-end customers is being able to offer instant settlement rails and segregated custody services in collaboration with major crypto exchanges. For example, when traders were uncertain about the solvency of Binance in 2023, Cignaum was able to step in as an intermediary custodian. Traders could keep their assets safely held at Cignaum while also pledging them as collateral to trade Binance futures. Cigham also began servicing the lower end of the market through domestic partnerships. In 2023, they formed a partnership with state-owned post-finance to offer Bitcoin trading and custody to Swiss residents. That partnership drove 1,000% transaction growth for the bank

in 2024. They have since commenced to work with 20 other banks and now provide the underlying crypto services for a third of the Swiss population. Overall, the bank has 2,000 direct clients across 70 countries, with more than 5 billion in assets under management. Signum's new fundraising is part of a multi-year international expansion. Last year, the bank secured licensing in Singapore and Lichtenstein. They now plan to pursue registration in Hong Kong and expand their European footprint as well. CEO Matthias Imbach used the raise to highlight that Switzerland is beginning to lag behind other regions as a crypto-friendly jurisdiction. He said, Signum-reaching unicorn status is a strong validation by the market of our business model, strategy,

and team. As Switzerland is currently losing ground to other jurisdictions as a preferred digital asset hub, it is our obligation to highlight the need for Switzerland to not ignore the importance of continuous innovation in the financial sector and to continue to attract talent and capital to remain relevant in the long term. So here we have not only an institutional upsizing story, but a little bit of a geopolitical game theory story as well. Now, to put some solid numbers around the rise of institutional interest, finery markets have reported that OTC trading volume more than doubled in 2024. Volumes were already elevated at the beginning of the year, up 50% from early 2023. However, they exploded higher in every quarter barring Q2. Even in the midst

of the summer doldrums, OTC volume was still up on a year-over-year basis. A strong Q4, saw OTC volumes close the year 149% higher. Finery markets commented that, quote, although comprehensive regulatory clarity is still pending, the pro-crypto stance of the Trump administration significantly fueled Q4 crypto-spot trading to 2024 highs. They suggested that the rise in institutional OTC trading was driven by Tradfai leaders, who shifted their stance from, quote, skepticism to neutrality or acceptance as the industry matured. Finery also noted that OTC trading volumes for all coins are on the rise. They represented just 13% of volume in 2023, but have now increased to a 29% market share. Very surprisingly, frankly, nearly

shockingly, light coin remains the leading all coin by volume for OTC traders, increasing by 149% for the year. Salana and XRP have also seen dramatic growth, with Solana experiencing ninefold growth in 2024. Looking ahead, Finery expects to see second and third-tier exchanges struggle in the EU with the advent of MECA regulations. They anticipate these smaller exchanges will need to pursue new business models to remain competitive. Globally, they expect regulation to begin to enable institutional adoption of DFI products, leading to a hybrid model where centralized entities integrate with DFI platforms to offer new access to yield generation and arbitrage. Of course, the potential for a U.S. Bitcoin's Strategic Reserve would be another big

change, with finery stating that it could, quote, trigger global shifts as countries and corporations abandoned zero exposure strategies. An underrated part of crypto market growth has been corporate adoption. And I'm not talking here about headline-grabbing buys from Michael Saylor, but rather the dozens of smaller companies that are quietly adopting Bitcoin. On Tuesday, Bitwise CIO Matt Hogan wrote to clients, this is a much bigger trend than most people realize. In fact, I think it's a bona fide met mega-trend. We'll see hundreds of companies buy Bitcoin for their treasuries over the next 12 to 18 months, and their purchases will lift the entire Bitcoin market substantially higher. Hogan said that most of the investors he is speaking to are still viewing micro-strategy as a one-off,

rather than part of a structural change in the corporate sector. Underneath micro-strategy, there are a host of smaller companies that have been accumulating Bitcoin. Some have been highly publicized, such as Metaplanet in Japan and similar scientific. These companies have only accelerated over recent months, each doubling their Bitcoin holdings since October. Less well-known are half a dozen small-cap companies that announced Bitcoin treasury strategies towards the end of last year. Some of these announcements were fairly nominal, with three companies announcing plans to purchase a million dollars worth of Bitcoin. None of those have actually translated into Bitcoin purchases yet, but a little-known energy company called K-U-L-R technology

has actually added $42 million worth of Bitcoin to their balance sheet and plans to do more. The biggest announcement in terms of a splash was alternative streaming platform Rumble, which plans to purchase $20 million worth of Bitcoin. They haven't followed through that purchase as of yet, but Rumble is a several billion-dollar company that could theoretically afford to go much larger than others. According to Bitcointreasuries.net, there are now over 70 public companies with Bitcoin on the balance sheet across the globe. Matt Hogan is focused on companies further up in the market, contemplating Bitcoin adoption from a mega-cap tech company. He wrote, What happens if really big companies start to take a page from Micro Strategies book?

Meta, which is currently considering a shareholder suggestion to add Bitcoin to its balance sheet, is 20 times the size of MicroStrategy. Of course, we've already seen Microsoft's shareholders reject a Bitcoin Treasury strategy, and a similar proposal is on the agenda for Amazon shareholders at the annual meeting this year. While it doesn't seem likely to happen in the short term, looking back in a few years' time, it could feel like large-scale corporate adoption was inevitable. Hogan anticipates that the number of corporate Bitcoin holders is, quote, posed to explode in large part because of a change in accounting rules. Until this year, corporates were required to account for Bitcoin as an intangible asset. This means the value couldn't be

marked up as price rises and companies couldn't book profits based on price appreciation. In addition, the Bitcoin was subject to impairment testing, meaning it would be permanently marked down if prices dropped. This quarter will be the first where companies are required to report Bitcoin price appreciation as profit. Coinbase already adopted the accounting standard early, leading them to report a billion dollars in profit in the first quarter of last year, an order of magnitude larger than usual. Micro Strategies' Q1 profits will likely be in the tens of billions for the same reason as the accounting adjusts to new rules.

Hogan commented, If 70 companies were willing to add Bitcoin to their balance sheets when, from an accounting perspective, it literally could only go down. Imagine how many will add it to their balance sheet now. 200? 500? 1,000? He also pointed out that current corporate adoption is much more diffuse than most believe,

adding, micro strategy is less than 50% of the corporate Bitcoin market. I suspect it'll be a small fraction of it eventually. And indeed, every day there's more stories like that. One company getting off zero is in Tessa San Paulo, one of the largest banks in Italy. They purchased 11 Bitcoin worth around a million dollars earlier this week. The news came via a leaked memo in which the bank's head of digital assets thanked his employees for their teamwork. During an event on Tuesday, the CEO confirmed that the purchase was an experiment or test, saying, this shows there can be some attention to digital channels, but with very limited investment amounts. It also demonstrates that we are prepared

of certain sophisticated clients request this type of investment. Seemingly, this then is customer or client-driven. And this stuff is getting more and more normalized. In fact, when I was looking into this story, there were just so many related thematic stories of either big institutions adopting Bitcoin or big banks expanding their crypto products. For example, Brazil's largest neobank, New Bank, has expanded their USDC features to all crypto customers. It doesn't take much to see just how much upsizing there is happening in the institutional space, and it is far more than just buying the ETFs. This is a theme which I expect that we will come back to throughout 2025. For now, that is going to do it for today's breakdown. Appreciate you listening,

as always, and until next time, be safe and take care of each other. Peace.