The Breakdown - The Top Five Crypto Stories This Week

Episode Date: January 27, 2024

Recorded live with Scott Melker on Friday 1.26.24 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 Saturday, January 27th, and that means it's time for the weekly recap. 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. Hello, friends. Back with another weekly recap conversation between Scott Melker and I, and there are lots of interesting topics this week.

We, of course, check in on the GPTC fund flows and the ETFs, we look at some China macro, and we look at the hidden centralization that tends to afflict crypto networks, specifically in the case of Ethereum. It's a great conversation. I know you'll enjoy it, so let's dive in. Are we so back, baby? Is it time? Are we celebrating yet? We never left. We never left. We just needed something else to talk about for a minute. That's right. But when in doubt, there is something we can always talk about in story number one on this Friday 5. Of course is the Bitcoin spot ETFs, right? I've got this dashboard here from the tie showing the market cap. Ibit. I shares Bitcoin Trust. That's obviously BlackRock over $2 billion now in market cap, which I was surprised. But more interestingly, I think, GBTC down to 20.95. It was 21 when I loaded this this morning. So clearly there's still some outflows happening here in Rio. real time and fidelity right in the race with 1.7. So the story obviously has been the outflows of GBTC that people are selling their GBTC and then Grayscale has to send their Bitcoin directly

to Coinbase to dump on the market on everybody's heads. This is not very dumping. People seem to think. This is just the mechanics of the ETF. But Grayscale's GDPTC profit taking likely over easing Bitcoin selling pressure. This is from Jamie Diamond's own JPMorgan. Do you think that we might finally be done with this temporary selling pressure and pain that we've been seeing? Well, it seems like, so there are a couple of cute sources of this, right? Last week we talked about the discounted NAV trade and that on one. That's what JP Morgan has been focused on, right? So people who came in just to sort of arbitrage that discount that was there for a little

while, and now that trade is over, right? So they're getting out. J.P. Morgan, I think, estimated that was about $3 billion. That's the one that they're sort of saying is largely gone. that we also learned this week, or last week, I can't even remember. I've lost track of time, that FTC was one of the big sellers, right? They had, you know, a huge grip of GBT that they had just been waiting to get rid of that they now have. So that's gone. And the sort of, there does seem to be some slowdown in the speed at which these sort of outflows are happening.

It's interesting, though, Eric Balcunis, who obviously everyone is, you know, paying attention to more than ever, had previously, you know, a while ago estimated that he thought that GBT was going to lose about 25%. And we're somewhere between 15 and 20% now, I think, of what they've lost. So there might still be a little bit to go, but if that estimate is anywhere near correct, we're certainly sort of starting to get closer to that sort of bottom part. But, you know, listen, it was always going, this was always going to be a part of this process. And to some extent, we just got to grip and bear it until it's done. Yeah, in my opinion, this is sort of ripping the Band-Aid off fast.

I actually love the way that it's happening much better than this being a sustained thing where they go down to zero over a really long period of time. We were literally watching 500 million to a billion dollars worth of Bitcoin being sent directly from Grayscale to Coinbase. This is as transparent of selling pressures we've ever seen. It's not amorphous like United States government unloading Silk Road, which we're seeing potentially this week. or the seven years of waiting for Mount Cox to finally dump on us.

Right. This is pretty clear. And so, yes, as it says here, as Bitcoin ETF flows show negative trend for first time since launch, but that's the natural tendency, obviously, of the people who are willing to get in really fast at the beginning, they've done so. And the people who are willing to exit really fast have done so. So I think over the next few weeks, we're going to start to see this, like, return back to inflows.

James Safer gave an update for day 10 of the Bitcoin ETF coin Tucky Derby, volumes and flows are both flowing down a bit. Another slight negative day on flows. Total net flows, Danny, at 744 million. Ibit likely crosses 2 billion in assets today. I believe that has technically happened. I know Falky made it over 100. I mean, take GBTC out of the equation,

and this is just an incredible success in my humble opinion. Absolutely. And listen, one of the things that we've sort of identified or one of the questions that we've had is how much the GPTC selling is just rotating into other assets. And it really does seem, at least, meaningfully disconnected. It's certainly some part of that is people, you know, moving their GBT into a lower fee option. But given that, you know, a billion or so was FTCs and three billion

or so might have been this sort of discounted now trade, that's a huge grip of the sort of the net inflows to the other ETFs that isn't accounted for, which means it's other people. Now, they could be existing market participants increasing their stack. And in some ways, you know, one of the interesting debates has been how much, you know, is this sort of a failure from a Normie perspective? So Jim Bianco had an interesting tweet earlier this week where he's sort of warning. It was a cautionary tale that, you know, when the spot ETFs launched, it was $49,000. Now we're, you know, down at $40,000. Some number of retail investors got rugged and what will it take to get back?

And the comments were largely, it just doesn't seem like retail was paying attention at all, right? It's just this didn't seem to represent some big boom of new retail investors starting to come in. And if that's the case, it really feels like even in spite of how exciting this was to all of us, this wasn't that sort of immediate catalytic event for a new set of buyers to come in, which makes all of these movements sort of much less significant in terms of the overall impact to sort of the broader growth dynamics of sort of the Bitcoin holder base. Yeah, I brought up the tweet. I'd seen it earlier this week as well. Crypto is now at real risk of seeing its great hope to get serious tradfai money fail. What can save it? Take out 49K. How long will that take? What if it's a year or more? I mean, this is just hyperbolic, I think,

a fundamental misunderstanding of what's happening. To your point, I don't think retail's even watching it all. They don't feel rug-pool. They probably don't even care. The real story here is that the marketing is about to take it, right? We know that most RIA platforms are not even offering this to their clients yet they're just still doing due diligence they waited for the approvals to even start wasting their time and resources on this they weren't going to spend their time in advance when we know that over 60% of them thought this wasn't even going to get approved based on the bitwise survey but now now we have the bitwise is and the black rocks of the world going out to educate these r ias from eric baltunus black rock is hosting an educational webinar friday on getting

btc access through an et f ibn this is where the education and the marketing starts. I had Hunter from Bitwise on the day that the ETS launch, and he told me they had already had 20,000 calls with RIAs and institutions before the approval, and that was just literally wetting their beak because they were about to, you know, 5, 10, X that in the coming years to educate these people. So I think any extreme take about this being a failure and people being rugged and trad by now is not going to believe in us is just nonsense.

Story number two, that was number one. I think we've ETFed ourselves to death once again, a little bit out of the cryptosphere, but certainly going to matter. China weighs stock market rescue package backed by $278 billion. China considers offshore money for stabilization fund sources, some policy measure to come as soon as this week. We've been long talking about the inevitable pivot in the United States while China is pivoting and pivoting hard, although my first reaction, I'm not going to lie, is why a billion

and why aren't we talking about trillions right now? Billions are so meaningless at this point in the world, aren't they? We had trillions in debt seemingly every couple months over here. That's largely been the reaction in China as well. It's a really interesting place that the country finds themselves where they've spent the last couple years talking about needing to move away from the sort of big bombastic packages that were happening in the 2010s. And there's been a lot more rhetoric around the importance of work

and all these sort of like things that you would hear from like the American right, you know, in terms of people's motivation and things like that. Like China is clearly trying to psychologically transition its audience to stop thinking about the government bazooka. However, the issues just keep stacking up, right? Last year, the story was over and over and over again, these giant real estate projects that were, you know, just sort of, you know, failing left and right and, you know, potentially cratering the economy.

They're doing all sorts of weird stuff. I mean, those have gone out of the news, but they haven't sort of stopped being an issue. You have the weirdest promotions going on in China right now where people are offering gold bars for buying a house and all these sort of things. But the stock market this week, or, you know, in advance of these moves hit its lowest point in a very long time. In fact, India's stock market, its total market cap is now bigger than the Hong Kong stock market for the first time ever, is a really significant sort of shift from a global perspective. The question is, can China sort of take half measures and get people back on board? So far, the reaction that almost everyone has had is the exact same one that you just had. Yeah, I mean, here you know, China stocks lost decade

means an uphill battle to regain trust. Effectively, their index is down 17% since 2013. This kind of reminds me of that the lost decades in Japan, and it seems that this is likely to accelerate with their population decline, but things obviously not looking good in China. But to your point, you know, the first story was this is really stock market stimulus, but there's also likely other stimulus that's going to be more targeted. So I think, like you said, people don't want to see the multi-trillion dollar package anymore in any country. They want to see small targeted amounts that probably add up to the same, but make for a

better media narrative. Yeah, we'll see. I mean, it's, you know, to some extent, the point of those, you know, it's like, power creep in a game or something like that where you keep going bigger and bigger and bigger and the psychological impact of 278 billion is nothing. And really a lot of the job of these sort of stimulus packages is not about what those dollars do. It's about what it provokes other investors in aggregate to do. And so you really are playing a sort of a game of psychological chicken where it just has to get bigger and bigger and bigger and you start to try to go the other direction. And you get the

situation that they have in China where, you know, they're basically just pouring $278 billion into the fire because it's not doing anything. Yeah. And for anybody who's on Team America, F yeah, U.S. extends lead over China and race for world's biggest economy. U.S. gross domestic product rose 6.3% in nominal terms. That is unadjusted for inflation. The cheating numbers. Last year, outpacing China's 4.6% gain. So anyone who's been extremely concerned with, China and their growing influence on the world and their massive economy, it seems like they may be on the way down and our economy is still somehow humming along strong. A whole different conversation to have about how quickly AI has become a massive geopolitical

player, but we'll save that for another time. All right. I'm earmarking that one for next week, except for I think there was something we earmarked last week for this week and forgot to talk about already. So, you know, I've been to actually start looking back. Number three, speaking of China and a non-Chinese Chinese company, Binance, SEC finds more favorable judge in D.C. As finance tries to dismiss lawsuit. Now, just over a week ago, we saw the SEC and Coinbase go to court. And every crypto lawyer in the world went to attend and have a little brodown and watch.

And they enjoyed how the judge dunked all over the SEC. see, this trial, or I shouldn't say this trial, this hearing, went off without anyone paying any attention. Why was the SEC and Coinbase such a big deal? And now we have SEC and Binance. And it seems like really nobody's talking about it at all. Well, there's a couple reasons. One is, I do think that at the end of this cycle in the beginning of the next cycle, So, Coinbase's importance as one of the rock-solid institutions at the center of this industry,

particularly the Western crypto industry, has been reified in a massive way, right? When you had FTX go down and Binance go partially down and just all of these sort of exchange failures, all of a sudden, Coinbase, you know, it's always been a significant player, but it looks much better. It feels its destiny feels more tied to the sort of destiny of this, in the United States. Second, it's a U.S.-based company. And to some extent, all of these things are being seen as proxies for U.S. policy, right? And so there's naturally sort of more attention being paid to this U.S. company that's listed on U.S. domestic markets, et cetera, et cetera, et cetera.

I think a third piece, though, is that Coinbase's case is a hell of a lot better than Binance's case. And part of the reason, you know, that this judge seems so much less favorable is that you have BNB at the center of this, right? And finance can talk about all these other things all at once. But at the end of the day, there is this very core thing, which is BNB feeling very clearly like a security to the judge, and that being sort of an inescapable part of this. I think that the healthiest reason, though, that we were paying less attention is that finance is still an incredibly important institution structurally for millions of people around the world to access crypto markets. It is no longer a significant institution

from an influential perspective. It's just gone. That went away with CZ retiring, I think. And we're going to see that influence, that relevance diminish more and more and more. And I almost don't think it matters whatever punishment he ends up, you know, whatever sentence he ends up getting.

Him being removed as the leader of that company, just finance no longer factors as a meaningful leader of the industry from a sort of a perception standpoint, even if it continues to have a big market share. That's my sense. And I think this sort of put a fine point on that. Yeah, actually, really interesting point. I never considered the very basic level that Binance has a token and Coinbase doesn't.

Yep. That is a huge differentiation that wasn't really even on my radar until you just said it. Also, I think that the fact that the SEC charged Binance in the first place so many months ago, already marginalized Binance and made them less relevant, as you sort of said, even in advance of Z retiring and that retiring. And then, of course, we have the fact that the DOJ has already sort of handicapped finance, right? Once the DOJ comes in, nobody really cares about the SEC civil complaint anymore. At this point, I think we're literally watching both of these cases just to find out what is and is not a security. Yep, 100%. 100%. And I think, you know,

here's the other thing. I think that preferentially, most of the crypto legal core really hopes that Coinbase gets decided before Binance, so it can move to the Supreme Court potentially before Binance because Binance is a bad case for us and Coinbase is a good case for us. It's pretty much as simple as that. Yeah, I think it is. If anyone's looking for a really good summary, met a lawman James Murphy, who's often on the show, did two tweets here. You can go back and find these, but he basically summarized this. Didn't seem like anything hugely groundbreaking like the Coinbase case. And I think that's probably why it sort of got lost in this. in the ether.

Along these same vein, this isn't a new story, but FTCS must appoint watchdog to probe reasons for its collapse. Judge says, I just find this story amazing because the guys who took over, obviously, have said, we got this,

we're not involved with FTX. Trust me, bro. The judges say, no, we actually want to see what happens. Yeah, I mean, listen, this is a dumb story, really, because I think that the broad perception was that even if it is redundant and even if it does end up costing some additional amount of the sort of, you know, the debtor or the creditors estate, that the world needs to know all of the details. And the fact that Sullivan and Cromwell, like, look, I don't think that you have to conspiratorially think that Sullivan and Cromwell was up doing things with Sam. I don't think that they were. I think that just the, the, the, the, the, the reality is that from a prudence and a sort of reasonable standpoint, with the stakes this

high, unfortunately, part of the tax to be paid for those creditors is that independent examiner, even if it takes, you know, $50 million or whatever, right? So I think that people basically think that this should have happened right away. And John J. Ray should have dealt with the fact that it's going to be duplicative and annoying to him. But listen, John J. Ray gets to be sort of, you know, advocating for where he is advocating for, but there needs to be someone who's advocating for the broader public interest. And that's what an independent examiner does. Yeah, I don't think there's anything nefarious here. I just think that there's no reason for the bankruptcy estate to dig as deep as there is reason for the government to dig, to get answers.

It's just that that's not their mandate, not what they're going to do. Now we do have to talk about our favorite security, non-security Ethereum. We could have put this one at the top. Spot Ether ETF applications, decisions delayed by SEC. We chose to keep the Bitcoin Spot ETF separate. Grayscale and BlackRock are among the companies trying to bring Spot Ether ETFs to the market. They were both delayed.

This is just the Bitcoin Spot ETF playbook, right? There's nobody on the planet who expects the SEC to jump ahead of this decision until the last possible second. Then we'll dig more than Ethereum. What everyone's waiting for is May, when there's an actual final deadline for the Vannock application, which is the first final deadline to come up. And the question is, or the sentiment is,

how could the SEC possibly deny this when they've approved a futures ETF and the whole decision in the gray scale case was about it being arbitrary and capricious that you could approve a futures ETF and not a spot ETF, right? You still have Bloomberg handicapping it at like 70% for May, which feels intuitively higher than the signals the SEC is sending. We're not seeing any of the engagement with issuers like we saw starting in last October

with the Bitcoin ETF issuers. Gensler continues to use his made-up word of Cabin to talk about how his strategy was cabined to Bitcoin. I don't think that they're going to approve in May. And the question then becomes, are they just okay with another court case because they just want to drag it out, do they think that they can sort of make the argument that Ethereum is sufficiently different, you know, to Bitcoin that it, you know, there's more space. But it's, it's a weird one to me. It's weird because nothing about the SEC's posture right now indicates

that they are even considering this with any meaningful sort of, you know, intensity. But it's very hard to see how they don't just see a wave of lawsuits the day after a denial, you know? Yeah, it's sad that we can say there's no indication from the SEC because that really means there's no indication from Gary Gensler because of the way that the SEC is structured. Because, of course, this week we did have Hester Purr saying that the SEC will apply precedent when making decision on spot E3 ETFs. She effectively said we won't wait for a court case, right, but she's not in power. Yeah. Right? So we've seen this language from her and Yeda for everything crypto-related for seemingly years now.

and that doesn't change the way the SEC operates. So I think you're actually correct. It is just important to note that we do have friends at the SEC who understand this and would, in theory, if they had the power, push this for an earlier approval. You know, one of the things that's interesting, I think in our sort of dream speculation about the future of the SEC, I don't think that Hester Pers's behavior and position and, you know, sort of stance on all these issues has been lost on traditional market investors who are also frustrated with the way that the SEC has.

behaved in the context of traditional markets where they've chosen to focus, what they've chosen to go after. She looks very vindicated, let's put it that way. And I think that that's a net good thing for markets, not just for crypto. I heard her name a lot this week from unexpected sources, for sure, which was nice to see. So finally, to wrap this up, the end of the Ethereum story is a humongous story that is seemingly being untold until we said, hey, what five stories should we discuss this week? I hadn't even heard about this. And this article, I think, is from Monday. That's how off the radar it was for me.

But Bub that took down 8% of Ethereum's validators sparks worries about even bigger outage. You've got some pretty incredible Twitter threads about it. And even Coinbase confronting client diversity risk following the nether mind. Well, dude, I am a boomer. I have no idea what's happening here. I read it twice, a little bit over my head. I conceptually understand what is going on. here. Look, the part that's understandable for anyone without getting into sort of like the super

deep mechanics of how the Ethereum network works is that decentralized networks, one of their risks is centralized infrastructure choices that happen over time because the market chooses a best option. Geph is the chosen market validator. It has a huge, huge portion of the Ethereum market. It's used by the big custodians, the big staking partners. And it creates de facto concentration and centralization out of something that's good. Like, it's a better product or people have determined it to be a better product, and so they use it. But the problem is, it creates less redundancy in the system.

And so the problem, or what we've seen is that these sort of smaller minority validators have suffered some of these bugs and these issues. And it hasn't been an issue for the Ethereum network because they represent such a small portion of validators, you know, that doesn't stop the network from confirming blocks. if that were to happen with the sort of majority validator and geth, it would be hugely, there would be huge potential issues. So the way that sort of the positive spin from folks who are concerned about client diversity and issues like that in Ethereum is that these situations create a, they're a test run. They are warning shot to help people try to think differently about things like client diversity, which would stay at the bottom of the to do list forever until something like this bumps it up. And I think that you can see that in, you know, the response of Coinbase as a particular.

You know, it's clearly that this is not, they're not, like, shocked that this is an issue. It's now potentially has a sort of a context and a reason to become a bigger issue that they actually try to figure out and solve, even though it's going to involve time, cost, resources in the short term. But this is a, there is always the Achilles heel of these decentralized networks when they get to scale is, is sort of accidental pieces of centralized infrastructure around them. And that's what we saw with this. Yeah, they say here, when a minority client fails, the penalty is losing ETH at the same rate as you gained it. But if Geth fails because it instantly stops the chain

from finalizing the penalty is much harsher. So as you explain this and as I've dug into it myself, this seems like one of those things where we had a exceptionally manageable incident that was sort of a shot across the bow for what could possibly happen. and now we're likely going to get a solution for it well in advance of it becoming a problem now that's on everyone's radar. Maybe that's my glass half full optimistic view, but it sounds like hopefully this happened in the right way that it gave a warning and it will be dealt with. That's the hope. I mean, listen, the Ethereum Network is full of people who are serious about these

issues. And, you know, Geth didn't become dominant in this way because of some, you know, Joe Lubin conspiracy and everyone deciding to do it. It came, It became dominant because people voluntarily independently chose a thing that they think is best. It's just there's a different set of dynamics that play in crypto markets, in the sort of markets that surround decentralized networks that constantly needs to be addressed for, even if it's sort of market inefficient in the way that we normally think about it. So, you know, I think that there's things like this. This is a that which does not kill us could make a stronger type of moment if people kind

use it for what it could what what it could represent for them how much of this just curious uh as a result obviously of the move from proof of work to proof of stake is this one of those things where you wouldn't have had any sort of issue without the merge i mean obviously this is unique to proof of stake but is this going to give the uh i guess the proof of proof of uh the pOS truthers more uh ammo or is that just a dead battle no no i mean it is for sure but it's almost uh it's sort of like there is an a priority understanding that staking creates a new set of infrastructure that could end up centralized, and this is that playing out. I mean, we're talking about the validators, but the sort of the actual stakers like Lido, you know, is, and the concentration there is another source of sort of,

you know, independent centralization that can come in. Decisions come with consequences and, you know, having to deal with the new consequences of those decisions doesn't mean the decisions were wrong. You just have to deal with the new consequences of those decisions. And that's sort of, the place that I think Ethereum finds itself after the transition to POS. Yeah, and I think we're being intellectually honest, we have similar debates with proof of work, mining pools, and other sort of de facto forms of centralization with that decentralized network. Sure. It's also, listen, it's a, it's a totally reasonable argument for the POW people to say, the reason that we find POW superior is that it doesn't have this set of risks in the same way. And sure, we do have our centralization

infrastructure risks, but they're very different and they're ones that we can handle, right? That's a, That is a great argument for why you would like proof of work versus proof of sake versus, for example, I hate Ethereum and Vitalik sucks, you know, which is sort of what these conversations denigrated to. So, you know, listen, if everyone is having conversations about proof of work versus proof of stake because of the concentration risk of validators, we'd be in a much better place than I think our general discourses. Totally agree. Still, when you see an headline that says, you know, 8% down and millions of risk. Why wasn't I thinking about this all week? Definitely scary. All right, guys, that's the Friday 5.

That's everything that we've got for you today. Of course, you can listen to this on the breakdown this weekend and all of his other shows at LW on his channels. Check those out. And we will be back next Friday with the next Friday 5, man. Thank you. This was great. We cooked through it.

Hopefully next week it'll be net inflows that we're talking about. Or maybe we won't talk about the ETF at all. Could happen. Good luck with that. But great to see you guys. Talk soon. Thank you. See you next week.