The Breakdown - The Market Reaction to Iranian Bombing

Episode Date: October 3, 2024

Yesterday Iran sent a barrage of missiles towards Israel, escalating the simmering regional conflict. NLW looks at how the markets -- both tradfi and crypto -- responded to the news. Unlocking Bitcoin DeFi with ExSat The exSat Network aims to unlock and scale the Bitcoin ecosystem without compromising Bitcoins Ideology. The network has partnered with the largest mining pools in the world, major custodians and exchanges, Cefu, Cubolt, Matrixport, Copper, OKX and aims to have over $200M TVL at mainnet launch on the 23rd of October.  Follow exSat’s Twitter to stay up to date @exsatnetwork or visit the testnet exsat.network 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, October 2nd, and today we are talking about the market reaction to Middle Eastern escalation. 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 and the show notes or go to bit.ly slash breakdown pod. All right, friends, well, the big market action yesterday was obviously not about the markets.

So today we are going to dig into Iran's attack on Israel. And just to be clear, we will not be talking about it from a geopolitical perspective. That's obviously not the focus of this show. Instead, we will be looking at it strictly from a market implication standpoint, trying to understand how investors are thinking about this and pricing in what they see happening next. Effectively, while there's an argument that market reactions are just about the least important part of violent conflict, they are, for our purposes, the focus of the show.

So with that said, on Tuesday night, Iran launched dozens of missiles into Israel in the latest escalation in the Middle East. Reports suggest that many of the missiles were successfully intercepted, but this is the most damaging retaliation from Iran thus far in this round of conflict. Israel military officials acknowledged, quote, a few hits in the center and other areas in the south of the country. U.S. Secretary of State Anthony Blinken claimed the attack, quote, appears to have been defeated and ineffective. The Iranian Republican Guard for their part said that this was the first use of hypersonic missiles and claimed that 90% of projectiles hit their targets. The targets were claimed to be three military bases, including the Telnaf air base, which

holds the majority of Israel's aircraft. Iran said the attack was a response to the recent assassinations of top Hezbollah and Iranian Republican Guard leaders. A senior official said that Iran's supreme leader Ayatollah Ali Khomeini had personally ordered the strike. Hours after the assault, Israeli Prime Minister Benjamin Njahou pledged further retaliation, stating, Iran made a big mistake tonight and we'll pay for it. The regime in Iran does not understand our determination to defend ourselves and our determination to retaliate against our enemies. Like the previous Iranian missile strike in April, this attack was telegraphed, but this time with significantly less time to prepare. This potentially explains why Israel's missile

defense system was somewhat less successful than last time, and some damage was caused. On Israel's side, the country has recently wiped out Hezbollah leadership and has begun bombing campaigns on the Lebanese capital of Beirut. Earlier this week, the Israeli army had boots on the ground in southern Lebanon for the first time since 2006. The Biden White House, for their part, appears to be stuck between Iraq and a hard place. Last month, there was further discussion of attempts to broker a ceasefire in Gaza. However, at this stage, the White House is unwilling to publicly display anything but support for Israel. Last night, following the attack, President Biden said, make no mistake, the United States is fully, fully, fully supportive of Israel. Until now, it has been an open question about whether a tit-for-tat

escalation between Israel and Iranian proxy forces will actually spiral into outright war. As recently as two weeks ago, geostrategist Peter Zahan asserted that there's few on either side who wish to escalate all the way to open conflict. Instead, he believes the Middle East is simply locked in a series of retaliations. Zeyon said, the danger, of course, is that everyone in the Middle East always wants the last word. Both sides, Israel and Hezbollah have been doing attacks on each other just like the Iranians in order to get the last word. But since no one will let anyone else have the last word, we keep having these layered attacks that escalate settle down, escalate again, and so on. I have no reason to believe that this is any different.

I don't think it's going to lead to a general war, but Hezbollah will feel like it has to respond, and then Israel will feel like it has to respond, which will make Hezbollah feel like it has to respond. Welcome to the Middle East. This is just what the place looks like on a good day. Demonstrating that point, late on Tuesday night, Iran's foreign minister, Abbasarokchi, posted on Twitter. Earlier this evening, we exercised self-defense under Article 51 of the UN charter targeting solely military and security sites in charge of genocide in Gaza and Lebanon. We did so after exercising tremendous restraint for almost two months to give space for a ceasefire in Gaza. Our action is concluded unless the Israel regime decides to invite further retaliation.

In that scenario, our response will be stronger and more powerful. Israel's enablers now have a heightened responsibility to rein in the warmongers in Tel Aviv instead of getting involved in their folly. So basically that is the necessary background, but let's talk now about market reaction. The big question right now is whether this is yet again another attempt to get the last word or alternatively something bigger, the start of a major regional conflict or even something that could drag in larger allies. Each of those outcomes has dramatically different implications, and that variance seems to be what markets are trying to price in. The shift in allocation was clear during the trading

day as market participants got ahead of the telegraphed escalation. The S&P 500 and NASDAQ each saw drawdowns of 0.9% and 1.5% respectively. The volatility index spiked, but only to level seen during the early September drawdown. This level is elevated enough to drive derisking on Wall Street, but not yet high enough to trigger a major sell-off. Once the missile strike began, a flight to safe haven assets was evident. Bonds, the U.S. dollar, and gold all rose sharply in Asian trading hours. Kathleen Brooks, research director at XTB said, markets are in wait and sea mode. The next 24 hours will be critical to see how far the situation escalates and whether the rush to safe havens was justified. Oil spiked following the attacks, jumping by 5.5% to head above $70 per barrel. This was the

largest intraday move since October of last year. The sharpness of the move could simply be a function of oil speculators unwinding their positions, which were bearish at record levels heading into this week. However, it could also represent the first time in the conflict that Iran's oil infrastructure could reasonably be expected to face disruptions or even a direct attack. Fawad Razakzada, an analyst at City Index said, oil prices could rise another $5 in the next few days if we don't see any ceasefire in the conflict. But for as long as there are no actual disruptions in supply, demand concerns and reduced risk appetite should keep the upside limited. This leads us to Bitcoin, which took a 4.5%

hit as the missiles started flying. Many noted that golden Bitcoin moved in opposite directions, suggesting that Bitcoin was not favored as a flight to safety asset. As with the previous escalation in April, the attack came after U.S. markets had closed. This means, of course, that selling Bitcoin was one of the easiest options available for broad derisking. We'll see how it plays out over the medium term, but at this stage in Bitcoin's adoption, it seems to be valued for 24-7 liquidity rather than its status as a hard asset. There's a ton of research that shows that Bitcoin tends to draw down hard in response to geopolitical risk, but tends to recover better and outperform stocks in the following months. The question will be whether this is another isolated geopolitical

risk event or the start of something much larger. Now, I have my own feelings about Bitcoin being a risk asset or a flight to safety asset. The short of it is that I think it's clearly both and it's different things to different people. Bitcoin more than at any point in its history is a weird melange of buyers, especially in the wake of the ETF. We now have a ton of Bitcoin investors who are interested in it for totally different reasons, who don't have the same philosophical basis for being interested in it that all of the core hoddlers do. For big chunks of that audience, then, Bitcoin is a risk asset. It is something that's fairly far out, in fact, in the risk spectrum of their portfolio. And I think that this notion that Bitcoin is the only thing available to buy

when things are good after market hours and the only thing to sell when things are bad after market hours is quintessentially one of the things that makes it incredibly valuable to people. I don't think that that is secondary. And so I think that there's a fairly strong argument that even if Bitcoin is for you or for me or for any of the listeners to this show, the quintessential flight to safety asset, it being available to sell as the missile started flying,

despite markets not being open, is part of what makes it so desirable to have in people's portfolios. This episode of The Breakdown is brought to you by XAT Network. As regular listeners know, one of the things that I think is really exciting right now is all of the new builder energy around Bitcoin, and XAT Network is a great example of that. Exat Network utilizes a combined consensus mechanism of POW and POS, enabling miners to earn

revenue and stakers to earn Bitcoin yield. Their state data index mirrors Bitcoin UTXO data, creating a venue for BTC to flourish and a platform to trade Bitcoin assets. ExSat Network partners with Matrixport committing 5,000 to 10,000 NBTC to the network, assisting with DAP development and enhancing security. Ultimately, the goal is for Exsat Network's decentralized asset custody to enable you to earn Bitcoin yield without sacrificing security or transparency. The X-Sat Network aims to unlock and scale the Bitcoin ecosystem without compromising Bitcoin ideology. Check out X-Sat.network or follow X-Sat on Twitter at X-Sat Network. That's E-X-S-A-T-N-E-T-W-R-K, and unlock Bitcoin Defi with X-Sat.

Hello, friends. Before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for Cryptonatives by CryptoNatives, and the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it. Literally now we are in a major political party's platform, which will lead ultimately to the creation of new financial products, new applications, and ultimately new adoption. permissionless is the conference for those using and building on-chain products. It's home to the power users,

the devs, and the builders. And perhaps more importantly, I will be there. The location is Salt Lake City, the dates are October 9th to the 11th, and tickets are just $499. If you want to get 10% off, use code breakdown 10. Go to the Blockworks website, blockworks.co. There will be links to register for the conference, and again, you can use Code Breakdown 10 to get 10% off. Heading into the final quarter, we have Bitcoin established primarily as a liquidity-sensitive asset. On one side of the market, we have global central bank easing, pushing liquidity higher, which many expect to trigger another leg up for Bitcoin. On the other side, we have conflict in the Middle East that threatens to bubble over

into full-scale war between two regional powers. Traders are basically placing their bets now on which driver proves the most important and taking their arguments to Twitter. Some are extremely dismissive of the idea that this conflict will spiral out of control and drag Bitcoin down with it. CoinDisk senior analyst James Van Straten tweeted, I love when Twitter becomes geopolitical experts. I'm Jewish and pretty well versed in Middle East Affairs,

and I still have very little knowledge on the depths of it. Easiest thing to do is fade geopolitical noise. Bitcoin is up over 100% on the year since this particular conflict started. Bitcoin underperforms, then overperforms. Earlier in the day, Bulli commented, For those of you who don't understand geopolitics, Iran want to avoid an escalation and a direct conflict with Israel in the U.S., that's why they are using proxies.

They'll probably do a demonstration by sending missiles and drones, but letting some Western countries know before like they did last time after the embassy thing, so Israel and the U.S. intercept them. This way, they can look strong in front of their allies without escalating the war. It's a non-event, basically, and I'm bidding more at the moment. People will fomo back in quickly, so much higher. Counterpoint, though, Bitcoin Jack responded, only in crypto will people say non-event while it's raining rockets. Over-the-counter trading desks are also seeing a massive buildup in Bitcoin inventory that could weigh on further positive moves. The amount of Bitcoin on OTC desks has doubled over the past five months to reach its highest

point since May 2022. Data from CryptoQuant shows 410,000 Bitcoin currently available. This run-up looks very similar to the one that took place in early 2021 as Bitcoin broke out to new highs. However, this run-up has come alongside the painful downwards chop over the summer. There are a lot of confounding factors around this data that could make it less of a cause for concern. During this cycle, we have the Bitcoin ETFs and the accompanying interest from Tradfai trading firms. The boost in liquidity in OTC markets could simply be an increase in demand to clear large trades directly. Since 2021, we've also seen a ban on Bitcoin exchanges in China. While it's debatable how much this policy decreased Bitcoin trading, one clear result was that trading has shifted to OTC desks.

Finally, some analysts outright reject this dataset and believes it classifies some wallets incorrectly. Still, a data point is a data point and this one is way up. James Van Stratton again, came to a clear conclusion writing, if Bitcoin is to continue its bull run into the fourth quarter, one factor will likely be the need to see a drop in OTC desk balances. In terms of trying to get a sense of where we are more broadly, according to multi-coin managing partner to Sharjane, the private markets are still working through the excesses of the last cycle. In 2021, crypto was the hottest sector on the planet, taking in $33 billion in startup funding representing 5% of all venture funding globally.

While public markets have recovered, CryptoVC is nowhere near those heights. Jane said, I would say the market still has a bit of an overhang to work through. This is true across all a venture, it's not just crypto. There was a lot of money pumped into the venture asset class in 2021 and 2022, and a lot of people don't want to take their medicine yet. Laddus Fund has released a post-mortem of this frothy era in crypto venture. They counted 1,200 companies that secured seed funding in 2022. Of those, 80% are still operating, 18% have shut down, but just 1% have found product market fit. Jane said that many of the term sheets at that part of the cycle were likely inflated, but he's not seeing a lot of startups

drop their valuation, saying we're not seeing that many down rounds. He continued, there's so much hype, so much excitement. At the same time, we've seen a real stagnation of prices, major token launches over the past year have plunged in value for a lot of them, and there's a lot of uncertainty around what the political situations look like right now. However, he adds, I still fundamentally believe in the core principles that underlie the industry and we've been through these cycles before. This is the most cyclical industry, possibly in the history of capitalism, and a lot of times people's emotions follow the price. So lots of interesting things right now. October obviously off to kind of a rough start, but not for reasons of Bitcoin specifically.

As I said at the beginning, the market dimension of this story is clearly less important than the human dimension and the geopolitical dimension of this, but it's the one that we're focused on here. And so hopefully you have a little bit better insight into at least right now how markets are thinking about this thing. I will of course keep following the situation and sharing what we're seeing here as it happens. However, for now, that's going to do it for today's breakdown. Until next time, be safe and take care of each other. Peace.