The Breakdown - The Radical Sentiment Dichotomy Between Degens & Institutions

Starting point is 00:00:00 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 Thursday, February 13th. And today we are talking about an interesting sentiment dichotomy. 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, throughout the week we've talked about the divergence between sentiment on crypto Twitter and perceived sentiment among institutional investors. The conversation was sparked by Bitwise CIO Matt Hogan, tweeting last weekend,

Starting point is 00:00:50 there is an absolutely massive disconnect between retail and professional sentiment in crypto right now. Retail sentiment is the worst it's been in years, while professional investors are extraordinarily bullish. It's like living in two completely separate worlds. Hogan unpacked this theory in a research note published on Wednesday, writing, Retail sentiment in crypto is terrible, even though the fundamentals are great. I smell opportunity. He discussed the headwinds that institutional investors are seeing.

Starting point is 00:01:14 Record ETF inflows over recent months, an environment in Washington that is entirely flipped, a nation-state adoption that feels somewhere between possible and imminent. At the same time, the existential risks have vaporized, things like government bans and legal threats to developers. Hogan wrote, from a risk-adjusted perspective, it is arguably the best time in history to invest in crypto. However, he recognized that retail investor sentiment is at multi-month lows and has dropped like a stone from the November highs. Hogan isn't just taking the pulse of crypto-Twitter. He presented a proprietary sentiment data set used by Bitwise.

Starting point is 00:01:48 The chart looks about as bad as anything you'll see in meme coins at the moment. Now, this data set isn't about measuring tweets like other popular sentiment analysis tools. Instead, it measures on-chain data, flows, and derivatives analytics. In other words, people aren't just grumbling on CT. They've actively stopped trading. Hogan tried to figure out whether institutions or retail are right. He noted the common thought that this cycle hasn't seen a true breakthrough product. Instead of ICOs or defy or NFTs, we got FARCoin.

Starting point is 00:02:15 However, over the longer term, Hogan thinks that altcoins, specifically the ones with actual use cases, are set for a strong resurgence. He pointed out that regulatory clarity is coming. Stable coins have become a national priority, and asset tokenization experiments are ramping up fast. He wrote, in a year or two, my guess is that you're not going to have to squint to see the transformation in all coins. The impact will be self-evident and overwhelming. So with that framing in mind, let's take a look at a few different headlines and flesh out why sentiment is diverging this dramatically. One of the central truisms in crypto is that sentiment follows price. Most crypto-twin

Starting point is 00:02:47 denizens aren't really complaining about the lack of direction from the Ethereum Foundation or the potentially extractive nature of Solana meme coins. Instead, they're looking for something or someone to blame for the negative price action. A few weeks ago, when sentiments started to shift, a key driver seemed to be that price wasn't responding to news. The day Crypto-Zar David Sachs held his press conference was one of the big turning points. The market rallied into the event expecting something big, and then sold off dramatically. Keep in mind, the announcement wasn't bad, it was just underwhelming. At the same time, we had a post of positive headlines coming out of Washington at a rapid clip.

Starting point is 00:03:19 The crypto-friendly SEC policy statement was the big one, but there were a host of others. People began to wonder if the market can't rally on this news, maybe it's actually over. So, sentiment follows price, and sometimes price is simply about flows rather than narrative. Earlier this week, we got a big hint that recent market action was simply about price-insensitive selling. Since the collapse of FTCS, Binance has been publishing proof of reserves on a monthly basis. We recently got the data for February showing a gigantic shift. Binance appears to have sold off billions worth of crypto during January. It looks like they sold around $4 billion in Bitcoin, $3 billion in Tether, $700 million in ETH, and around $100 million

Starting point is 00:03:54 in Solana for a total of around $8 billion. At the same time, time, Binance appears to have acquired around 500 million in USC. To be very clear, this is not customer funds. Binance displays their corporate treasury as excess reserves, and each asset's reserve ratio is still above 100%. Binance has essentially disposed of their entire corporate holdings other than B&B and USC. We don't have much information from the exchange on what's going on. When the news first broke, the Binance customer support account tweeted, "'Binance is not selling assets. This was simply an adjustment in the Binance Treasury's accounting process. User funds are Safu, as always. But Binance has ever been

Starting point is 00:04:27 responded to media requests for comment, which is extremely unusual. One simple explanation that comes to mind is that Binance could be liquidating assets to pay their fine. In November 2023, U.S. authorities settled their dispute with Binance who agreed to pay $4.3 billion in fines and forfeitures. According to court documents, Binance paid $900 million in May 2024, but still has $3.4 billion outstanding. The balance appears to be due in May of this year, according to court documents, but some are suggesting it's payable by March. The FTX estate is also chasing Binance for a $2 billion dollar clawback related to share buybacks in mid-2020. That one seems to be going nowhere fast, with FTX apparently unable to serve the lawsuit. Either way, Binance has a clear reason to raise

Starting point is 00:05:05 several billion dollars in cash that's completely agnostic of market sentiment. And if they have sold that many billions in crypto assets over the past month, that would go a long way to explaining the recent price action. Bulliesquire wrote, didn't even think about the fact that Binance had to pay their fine to the DOJ. This is a really good theory about why Binance liquidated all those assets. That's done now and the FTX creditors are about to get billions in cash. Clearbooth skies, send it. For institutions, a lot of sentiment indicators come from financial data rather than tweets. Q4 results are starting to come in, and they make it look like crypto enthusiasm is growing rapidly. Robin Hood reported a massive revenue beat earlier this week.

Starting point is 00:05:42 Quarterly revenue came in at a billion dollars, up 115% from Q4 of last year, and exceeding Wall Street forecasts. The bulk of the growth was in transaction-based revenues, otherwise known as trading fees, which grew by 200% compared to last year. Crypto was the major driver with a 700% increase in revenues related to crypto markets. Robin Hood reported 71 billion in crypto trading volume in Q4, a five-fold increase year over year. That's also roughly equivalent to their volume across the first three quarters of the year combined. Gabriel Bello of Van Eck wrote, Robin Hood's renewed focus on crypto is paying off big time. Crypto is now over 50% of their transaction-based revenues and is driving most of their growth. Those that were paying attention

Starting point is 00:06:18 over the last year saw this crypto transformation coming from a mile away. Hello, friends. I am thrilled to share that Ledger is once again partnering and sponsoring with the breakdown. Many of you know, but for those of you who don't, Ledger is the most secure hardware wallet for your crypto and logins. It's trusted by 7 million users and secures 20% of the world's digital assets. What's more, Ledger is a lot more than wallets. Over the recent years, they've built a comprehensive ecosystem of products and services, all of which are designed to make digital ownership more secure and accessible. You can buy your Bitcoin with Ledger and Ledger Live and so much more. Basically, not only did they want to keep your assets secure, they want you to be able to do more with

Starting point is 00:06:57 them. Ledger's newest devices, the Ledger Stacks and Ledger Flex introduced the world's first secure touchscreens, making it easier and safer to manage your transactions and assets. Alongside Ledger Stacks and Ledger Flex, the company also launched the Ledger Security Key app, offering a safer alternative to traditional passwords and enhancing your digital security. If you are in this space, you owe it to yourself to at least check out Ledger and their ecosystem what they have available to you. So thanks once again to Ledger for sponsoring the show. Coinbase is scheduled to report on Tuesday night and likely had an equally strong quarter. The institutional focus CME also had a blisteringly hot quarter. The exchange reported record

Starting point is 00:07:34 crypto volumes for Q4, averaging approximately 10 billion in daily trading volume for crypto derivatives, a 300% increase compared to the final quarter of last year. The CME saw growth in their crypto markets during each quarter of last year. Growth continued into this year, with January notching their highest ever-monthly volume. Crypto derivatives were also the fastest growing market on the exchange, outpacing all their stock and commodity derivatives. Last year, it seemed like the CME would be the dominant exchange after they established a comfy lead on crypto-nated venues. However, Binance is now firmly back at the top of the leaderboard, currently showing around $75 billion in daily volume. Around a third of that is just Bitcoin derivatives, too,

Starting point is 00:08:09 easily beating the CME on an apples-to-apples comparison. That said, a large part of Biden's growth has been driven by aggressive listing of all coin derivatives. The CME is feeling the pressure to stand up additional markets beyond just Bitcoin and ETH. CEO Terry Duffy said, there's an appetite out there for more listings, but quote, it's going to be really important for us to consult and work with the SEC to make sure we get their comfort level about what's deemed a security and what is not. Institutional product improvements are also coming along strong. This week, the CBOE filed for a rules change to allow staking in the 21 shares, ETHETF. This is the first application for ETH staking by an ETH issuer, but it's a safe.

Starting point is 00:08:43 bet that the rest will follow. Disallowing staking always seemed like an odd limitation imposed by the Gensler SEC. There was, perhaps a concern about technical complexity, especially when funds see outflows that will require ETH to be unstaked, but staked ETH funds have operated globally for years without a major problem. In addition, Coinbase is the custodian for almost all of the ETH ETFs and has a long history of offering institutional-grade staking. So it's not as though Tradfai ETF issuers would need to manage their own staking setup and take on technology risk themselves. Staking always seemed like a natural fit for buy-and-hold ETF investors. Yields for Ethereum have hovered around 3% for the past year. For investors who aren't trading, not staking or eth is just leaving money on the table.

Starting point is 00:09:21 The SEC Crypto Task Force has flagged that allowing stake DTFs is one of their priorities. Meanwhile, Franklin Templeton has added Solana support for their on-chain money market fund. The fund is now the third largest of its type with almost 600 million in assets under management. This group of products is largely used by crypto trading funds who manage their treasury on-chain, giving them access to an institutional-grade yield-bearing stablecoin. None of the ETF tokenization or institutional stories really move the needle by themselves, but together, they demonstrate that crypto products are steadily being built out to support a migration for institutional investors. There's more than a dozen crypto companies racing

Starting point is 00:09:52 to establish tokenized stock products, and that's to say nothing of Robin Hood and BlackRock, whose CEOs have each recognized that tokenization is the obvious evolution for capital markets. With this SEC, it's only a matter of time before regulations are set up to allow these products for U.S. retail customers. We're even starting to see TradFi institutions realize they have to compete for attention with crypto markets. Yesterday, Charles Schwab announced that they would be offering 24-hour trading on weekdays, joining Robin Hood and interactive brokers. The institutional buildout of crypto markets is only ramping up, and we should see a rush of products brought to market later this year. For Bitcoin, the big remaining catalyst for the cycle is the U.S. Bitcoin's Strategic Reserve.

Starting point is 00:10:28 That process likely won't move until the second quarter once Crypto-Zar David Sachs returns his report on the idea. But something that has gone under the rate, is just how much momentum is building behind state Bitcoin Reserve proposals. There are now 20 states with a proposed bill. Two states, Utah, and Arizona have bills currently in progress, with the Utah bill the first to pass a vote in the House. Van Eck assessed all the proposals to try to figure out how much Bitcoin they would buy. Head of research, Matthew Sellegrote, if enacted, they could drive $23 billion in buying. The sum is independent of any pension fund allocations likely to rise if legislators move forward. So, while the view from the seat of an institution or a Bitcoiner is

Starting point is 00:11:03 pretty optimistic, the locus of the sentiment collapse is in the Salana trenches. The numbers are starting to tell the story. Average daily trading volume for Pump.comfund fund tokens is now down to $560 million. That's the lowest point since Christmas and an 82% drop from its all-time high three weeks ago. The number of tokens getting enough interest to graduate from the launch pad has fallen by a third in two weeks. Fees paid to Jito, the leading execution infrastructure on Solana, have dropped by 70% in that time. The block wrote, it seems like the Salana trenches have been experiencing a euthanasia coaster of sorts. They're referring to the series of high-profile coins that have launched over the past month with progressive steeper and faster collapses. Starting with the Trump meme coin and

Starting point is 00:11:40 leading to Dave Portnoy's coin from last weekend, on-chain traders are lucky if they can find something they can hold for more than a couple days without getting decimated. One of the things that really stood out while preparing the show is that there was a category missing from the analysis. Matt Hogan separated his analysis between institutions and retail, pointing out the divergence as institutions stay bullish while retail sentiment gets crushed. There's arguably also Bitcoiners who have been watching their holdings float between 95K and 105K for the better part of two months, largely apathetic to the range-bound price action. But the group that Hogan missed, and I think one that no one ever thinks about, is the true retail traders. There's certainly a part of

Starting point is 00:12:13 retail retail Twitter, but that is a super-engaged subset of retail crypto-traders. There's another section that doesn't know anything about crypto-twitter, has never traded on chain, and likely doesn't even know what any of these coins do. Those investors are typically concentrated in the top 20 coins, but are usually weighted towards the ones that few crypto-natives have cared about in years. While the super online meme coin traders are down 80 or 90% in their portfolios, there's nothing in the top 20 down more than 30% over the past month. Most of that pain is concentrated on Ethereum, which is down 16%. There's even a few outliers like Lightcoin, which is up 23%. My point is that this just doesn't look like an end-of-cycle

Starting point is 00:12:48 washout like we saw in 2021. Most average crypto investors, the ones that hold mostly Bitcoin with a smattering of major alt, probably haven't noticed a significant drop in their portfolio so far this year, the decimation really is just concentrated in the trenches. I'm not so sure that retail sentiment is actually that dire out in the broader world. I think it might be just the DGens on crypto Twitter who are cashing out at this moment, but I want to know what you think. How are you viewing the sentiment? And what do you think happens next? For now, that's 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.

The Breakdown - The Radical Sentiment Dichotomy Between Degens & Institutions

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