The Breakdown - The Story in the Latest Bitcoin Price Action

Episode Date: September 11, 2024

NLW explores what recent price action in crypto suggests about the state of markets. 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 Tuesday, September 10th, and today we are checking in on price action. 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 in the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well, after a pretty dismal month of price action for Bitcoin, Monday's session actually showed some positive signs. The last two weeks saw Bitcoin steadily march down by 18%,

sweeping the lows below 53,000 on Friday. Following a stagnant weekend, however, Monday saw a 5.8% pump, with Bitcoin tapping 58,000. The census still that September will be negative due to seasonal effects. Bitcoin is still down 4% so far this month. However, an occasional rally is a good sign that we might not be tumbling towards another brutal bare market. This was the strongest rally in over three weeks and enough to give investors some hope. Analysts wrecked capital wrote, You just need to survive September, because if history repeats, Bitcoin may be heading for three straight months of positive upside monthly returns. Then again, while hopes might be high, catalysts for a continued uptrend are lacking. In his weekly note, Greg Cipillaro,

that global head of research at Nideg wrote, unfortunately potential upcoming near-term catalysts for Bitcoin are sparse at the moment. Most catalysts have to do with macroeconomic data or monetary decisions, and very few are crypto or Bitcoin-specific. He flagged that all major catalysts are clustered around November, with an election result expected to coincide with an acceleration in Fed rate cuts. Cipelaro concluded, We won't guess as to which candidate might win the election, but November might be a pivotal moment for the industry. Until that time, however, Bitcoin might be at the whims of the broader market backdrop. Speaking of the broader market, it's worth noting that both major U.S. stock indices had a positive Monday as well, each adding

more than 1%. The NASDAQ rally in particular occurred in the afternoon right alongside Bitcoin. Correlations had flipped negative over the past month with Bitcoin struggling as tech stocks were at higher. Firmly back in the positive over the past week, Bitcoin's correlation with stocks ticked higher on Monday. This suggests a common driver across all risk assets, implying that either macro or liquidity conditions are once again in the driver's seat. With Bitcoin attempting to break from the lows, some think the bottom might be in. Market depth data from high block capital showed liquidity drying up over the weekend. Both the buy and sell side of the order book are significantly down.

There's very little liquidity either close to market prices or within a 5% move in either direction. Shub Verma, the CEO of Highblock, said, We see a pattern where low liquidity in the order book often coincides with market bottoms. These low order book levels can be early indicators of a price reversal, frequently preceding a bullish trend. It's a signal worth monitoring for traders looking to catch significant movements before they unfold. Understanding these imbalances can help identify key turning points in the market. The London Crypto Club feels that sellers might be running out of firepower here. In their weekend newsletter, they wrote, positioning remains light, and with funding rates negative, the short-term

pain trade is perhaps higher. Negative funding rates mean that shorts are paying to hold their positions, which could lead bears to throw in the towel if Bitcoin moves higher. Their analysts are watching the Fed for the next catalyst, adding, we're nearing the point of massive global rate cuts and stimulus and artificial inflation of assets to help stimulate growth. Further, whilst the U.S. is slowing down and we continue to expect a mild recession, the combination of a disinflationary economy and a Fed with lots of firepower maintains the element of Goldilocks for risk. We do not hold the view that a sharper, deeper, more troublesome downturn that could deepen a short-term correction is on the horizon. This view is broadly held among traders in the space. It's not that

Bitcoin can't go lower or that taking risk is particularly comfortable here. It's that sentiment and price action are getting stretched to the downside and are running out of momentum to go much lower. We're also on the cusp of a macro regime shift. It's impossible to know whether the economy will fall off a cliff into recession, or if rate cuts will be enough to achieve a soft thing. landing. But we've seen Bitcoin do well in both scenarios. Trader OSF tweeted, Everyone is too fixated on next week's rate cut being priced in and not focused enough on what the next 12 to 18 months of monetary policy could look like. We've just been through two years of rate hikes. How about two years of rate cuts? BitMex co-founder Arthur Hayes very publicly

ended his barestance over the weekend, tweeting, close my Bitcoin short, made 3% profit enough to cover my food and bar tab for Korea Blockchain Week. With Bad Girl Yellen watching markets and releasing a weekend statement, if stuff continues to puke next week, Bitcoin might rise anticipating more dollar liquidity. While the big potential catalysts are still a few months off, many believe that Bitcoin is already underpriced at these levels. Presto Research took an interesting look at fundamentals in a Monday note, writing, amid macro factors dominating Bitcoin price talk lately, the market is overlooking one of the key fundamentals underpinning Bitcoin's value, network security. Bitcoin hash rate is currently at all-time highs and shows no signs of slowing

down. In the early days before Bitcoin became an established macro asset, hash rate was the best proxy for value. This valuation method even extended to proof-of-work altcoins, which often traded on network adoption for miners rather than users. Currently, there is a large divergence between price and hash rate, which is typically marked the bottoms. Presto Research suggested that strong hash rate makes Bitcoin the, quote, most secure network by far. They added, if you believe that trend will continue and the availability of Spot ETF means we are in a much better setup than ever before, Bitcoin seems grossly undervalued at the moment. 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.com. There will be links to register for the conference, and again, you can use code Breakdown 10 to get 10% off. Now, considering macro is the main focus this month, analysts are teasing out the potential bearish and bullish outcomes. Marcus Theelian of 10x research thinks a jumbo-size 50-bases point cut at next week's Fed meeting would be a very bad sign. He wrote, while a 50-bases point cut by the Fed might signal deeper concerns to the markets, the Fed's primary focus will be on mitigating economic risks rather than managing market reactions.

While the market is still pricing the odds of a double cut at less than 30 percent, Thelian believes it to be likely. He added, the chorus is growing louder that the Fed is behind the curve, having missed signs of labor market weakness after being caught off guard in July. At this point, consensus is building on Wall Street that the Fed should probably kick things off with a double cut, even if the economic situation doesn't call for it. Macro trader Craig Shapiro thinks markets are simply bullying the Fed, commenting, the Fed doesn't want to start with a 50 basis point cut because, frankly, at this point, the economy doesn't need them to panic. The market wants them to start with 50 and go bigger and

faster because the market acts like a petulant child in constant need of more liquidity. When the Fed doesn't deliver the liquidity, the market revolts sells off and finds the lower put-strike level that activates the Fed to deliver the liquidity again. We are back in this zone. Risk assets will correct until the Fed capitulates and gives it what it wants. We need to find the Fed-put strike price, but given where the economy is now and with risk-asset price is so elevated while the economic data is still slowly growing, I fear the levels are significantly lower. In my estimation, we are in a moment right now, where there is an aggressive jockeying for narrative supremacy. Last week, consensus was that 50 basis points was a sure sign of panic that would trigger a sell-off. But then now, we're starting

to see commentary that the economy is still too strong to justify a larger-than-normal cut. We've even seen some suggest that there isn't a need to cut right now. Anyways, the narrative targets are fast-moving, and so I don't think it's realistic to know exactly how any particular event is going to play out. But rather than narrative speculation, let's look at a little bit more data. One of the more tangible data points for Bitcoin this year has been ETF flows. Unfortunately, last week added to an increasingly weak period. Friday saw the streak of negative days extend to eight in a row, which is the longest since the Bitcoin ETFs were launched.

Last week had total outflows of $706 million, second only to a particularly bad week in March. That's especially bad news, considering it was a four-day trading week with markets closed on Monday. The funds have seen close to $1.2 billion redeemed over the past two weeks. Coin shares head of research, James Butterfield, commented that markets are trading heavily on each macro data point, writing, We believe this negative sentiment was driven by stronger than expected macroeconomic data from

the previous week, which increased the likelihood of a 25 basis point interest rate cut by the Fed. However, daily outflows slowed later in the week as employment data fell short of expectations, leaving market opinions on a potential 50 basis point cut highly divided. The markets are now awaiting Wednesday's CPI inflation report, with a 50 basis point cut more likely if inflation comes in below expectations. All that said, strong trading on Monday snapped the losing streak for the ETFs. The product saw $28 million in net inflows. While that may not break the bank, it's certainly a sign that conditions are improving.

Overall, the Bitcoin ETFs have now been available for eight months, so we're starting to get a sense of the level of adoption. Researcher Jim Bianco dug into the numbers, though, and didn't like what he saw. He highlighted that the bulk of inflows came in the first two months and have tailed off ever since. As of Friday's price action, Bianco claimed that ETF investors are now sitting on $2.2 billion in aggregate unrealized losses underwater by around 16%. He also noted that the average trade size is tiny compared to popular index funds at just 12,000.

For reference, the average GLD trade is almost 60,000, while the average SPY trade is close to 150,000. This led Bianco to the conclusion that the average Bitcoin ETF investor is small tourist online retail. His most controversial take was that adoption from investment advisors is still small. He pointed out that only 9% of Bitcoin ETF shares are held by RIAs. A further 12% are held by hedge funds, meaning that a whopping 85% of shares are held by entities other than large Tradfi institutions. Bianco concluded, the spot Bitcoin ETFs have not become a tool for Tradfey or Boomer adoption. BlackRock confirms this by saying that 80% of iBits inflows are from self-directed online accounts. Crypto-quant analysis suggests that most spot Bitcoin ETF inflows

were from on-chain holders moving back to Tradfai accounts, so very little new money has entered the crypto space. So far, these instruments have not lived up to the hype of here come the boomers. Very few have come, and those that have are holding losses and may now be leaving. Can these tools be an instrument of adoption? Yes. maybe after the next having, and after significant development of on-chain tools have occurred first. The first eight months of spot Bitcoin trading have shown that Builded and the boomers will come was never a thing. Patience and another couple of sessions, including a winter or two, and development breakthroughs are needed first. Bitwise CIO Matt Hogan rejected this take, tweeting,

Jim is wrong here. Investment advisors are adopting Bitcoin ETFs faster than any new ETF in history. Let's look at his own data focused on Ibit the BlackRock ETF. Per his table, Ibit has attracted $1.45 billion in net flows from investment advisors. He calls this small because it's a fraction of the $46 billion that has flowed into the Bitcoin ETFs in total. But if you excluded all other flows and just looked at the $1.45 billion linked to investment advisors, Ibit would be the second fastest growing ETF launched this year out of 300 plus launches. The only ETF that beats it on assets is KLMT, an ESG ETF that was seeded by a single investor with $2 billion, and trades on average 250 shares per day with zero investment advisor adoption. The truth is that investment advisors are adopting Bitcoin

ETFs faster than any other ETF in history. It's just that their historic flows are overshadowed by the even more historic purchases of other investors. It is accurate, then, to say that investment managers represent a small fraction of buyers of Bitcoin ETFs. But it is not accurate to say that investment manager purchases of Bitcoin ETFs are small. Nate Garassi, the president of the ETF store, Wade in, tweeting, I have a very simple take on the adoption of spot Bitcoin ETFs. Out of nearly 430 ETFs launched this year, All 10 new spot Bitcoin ETFs are in the top 35 by inflows, including the top four overall, and seven of the top 20. You simply don't put up these numbers without advisors allocating.

The other big point is that large advisory firms are only just starting to come online. Morgan Stanley approved their advisors to sell Bitcoin exposure at the beginning of last month, and we haven't heard anything from the other large advisory firms. It's also easy to imagine those sales calls are not going well at the moment with Bitcoin down 10% over the past two weeks. It may be more useful to consider that Bitcoin ETFs are readily available the next time the market picks up. If we get a strong rally next year, it's easy to imagine RIA's working the phones hard. For the bullish take, we go to analyst Brian Ross, who tweeted, this data could actually

be interpreted as bullish. If most ETF trades are not institutional, this means institutions aren't even here yet. And we could see massive institutional flows next time FOMO and Greeds show up. I think the most interesting part of Jim's questioning is what the catalyst will actually be. If advisors aren't here in size, what would it take to get them here in size? Is it just larger market action, or is it something about Bitcoin specifically? Alas, that is a question for the future. Because for now, whichever direction Bitcoin trends in next, most are expecting a ton of volatility over the short term. QCP capital flagged two major events this week, the CPI released on Wednesday morning, and the presidential debate taking place on Tuesday night. Analysts wrote,

Crypto has stabilized after last week's move, but implied volatilities are still elevated, and it seems the market is still anticipating volatility heading into this week's events. Traditional markets have also seen elevated volatility over the past month. The volatility index known as the VIX spiked massively at the beginning of August, alongside the unwind of the yen carry trade. Levels never dropped at the summer lows and had a second spike over the past week. Monday was a little calmer with analysts Caleb Franzen writing, I think the double VIX spike is over. The volatility index is down more than 13% today, and I think the recent acceleration is officially over. If the VIX continues to steadily decline from here, then asset prices should do well. Finally, today, as we head deeper into election season, it's undeniable that the outcome will impact Bitcoin's price. For the past few months, commentary has set hopes of a crypto pivot from the Harris camp against Trump's enthusiasm to pump our bags. On Monday, the Harris campaign website published

their policy platform featuring no mention of crypto. And with that clarity, investment bank Bernstein is confident enough to put some numbers around the election outcome. They predict a Harris win would see Bitcoin plunged to between 30 and 40,000 by the end of the year, whereas if Trump wins, they're forecasting Bitcoin to hit between 80,000 and 90,000. Burnstein analysts are in fact framing this election as, quote, determine the destiny of the industry. They added, while crypto leaders have been more open-minded with the Harris campaign and are hoping for a more constructive policy, we expect the delta between the two political outcomes to be wide. While Bernstein focused on Bitcoin pricing as their metric, they noted that a Trump victory could be even better for all coins,

writing, after the last three years of regulatory purge, a positive crypto regulatory policy can spur innovation again and bring the users back to financial products on the blog. blockchain. The next thing I am watching, of course, is whether we will get a mention of crypto during the debates tonight. I'm not holding my breath, but stranger things have happened. For now, though, that is going to do it for today's breakdown. Appreciate you listening, as always. And until next time, peace.