The Breakdown - The Top Narratives Driving Crypto Market Growth feat. Travis Kling

Episode Date: February 14, 2020

There’s no denying that 2020 is off to a roaring start. From prices to volume to social media, sentiment is up up up.  But what’s driving it? On this special Valentine’s Day episode, @nlw reacts to listeners votes about which narratives are most driving the shift in energy, discussing:  The BTC halving Coronavirus and volatility Fed action Central bank digital currency intrigue Ethereum and DeFi Price reflexivity and Lindy effects  The episode finishes up with some hot takes on what is driving the markets and what we should be most concerned about and most excited for with Ikigai Asset Management’s Travis Kling.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Friday, February 14th. Happy Valentine's Day lovers. And speaking of love, those of you who have listened to me before know that one of my greatest interest is narratives. Narratives are the ways that we explain complex phenomenon simply. It's the way we make sense of the world around us. In the context of markets, it's how we explain what's happening and why and what

might happen next. I think narratives have incredible power across all markets, but especially in emerging markets where there's simply less data and simply less history to really have stronger basis in fact, right? It's just a game of interpretation. And these narrative battles have real implications in the context of crypto markets because there's limited time, attention, and money to go around, and the narratives that shape what we believe shape what we do and how we spend those resources. So narratives are an incredibly important part of this market. What I wanted to do today, then, is take a look back across this week, which is the culmination in some ways of an incredible shift in sentiment and excitement that started at the beginning of January,

and has gone right through to the middle of February where we are now. Across almost every vertical from volume to price, there is just so much more action in crypto markets now. And this was inspired in part by Dan McArdle. He responded to my tweet about the CNBC Fast Money show that we listened to a couple days ago, where in less than two minutes, they hit almost every bull Bitcoin narrative that you can imagine.

They talked about weak hands moving out of the market. They talked about institutions coming into the market. They talked about gold rallying, so why shouldn't Bitcoin? They talked about central banks going nuts as a bull case for Bitcoin. They talked about the Safe Haven narrative. They talked about Chinese citizens buying because of corona. They talked about central banks rushing in to devalue their currencies, which is good for Bitcoin.

It was a narrative smorgasbord, a narrative parade. And so this got me thinking, what do you guys, the listeners to this show, think, are the narratives that actually explain this new excitement and energy and shift and sentiment? What are the narratives that you think can explain why there is so much more activity now? So I took to Twitter and just asked you guys. I said, which narratives do you think best explain why the crypto markets are on fire? Is it A, the Bitcoin having, B, the coronavirus and volatility, C, Fed Policy, or D, digital currency battles? I also invited people to write in the answers if I didn't include them for some reason in the poll. What I want to do now is go through the

answers in the reverse order of how many people thought that they were the most important explanatory narrative, and just give my take on why that might be important in the context of this market action. Bringing up the rear at 10.8% of you was this idea of digital currency battles. So obviously, since the introduction of Libra, there has been so much more focus from governments around their digital currency strategy. And this has created a lot more energy, or at least attention around our part of the market cryptocurrencies. However, it must be said that cryptocurrencies and these digital currencies from central banks are in some ways philosophically opposite, right? Digital currencies represent a tool for governments to extend their power in some ways in surveillance

by giving customers or consumers or citizens a perhaps more convenient option. But it's a trade-off, right? It's a trade-off of convenience for surveillance and a threatening of privacy, whereas cryptocurrencies that most of us work on are options for opting out of local monetary regimes. So it's hard to say that there's a direct correlation in some ways. But at the same time, you know, we had Fed Chair Jerome Powell talking this week in Congress about how Libra had lit a fire under them around digital currencies. So it does bring exposure to the space. Speaking of Fed Chair Jerome Powell, our number two response, or in second to last place, rather, with 14.9 percent of the votes, was Fed policies. Over the last year, we've seen the Fed pretty much capitulate

to pressure in particular from President Trump, but just to the aides of the markets in general, that Fed policy is clearly going to be looser and easier and continue to inject money into the markets to juice them up. For many in particularly the Bitcoin community, there is nothing that could better describe the right context for a non-debasable fixed supply, non-sovereign currency, right? When you see central banks continuing to inject money into economies even far outside crisis time, it sort of makes the case for this different type of asset that Bitcoin represents. So like I said, 14.9% of you guys thought it was about Fed policy. 22.7% of you thought it was about coronavirus slash volatility. And I'll admit.

here that I made a bit of a goof by lumping these together, because on the one hand, I think volatility refers to this idea that in a world that feels increasingly chaotic, does something like Bitcoin start to have a higher cachet? Does it feel like a good way to opt out of that chaotic world? That's a general feeling, and I think a general narrative that certainly could apply to now. The coronavirus safe haven narrative is something that's much more specific, and I have heard some people make specific arguments that the coronavirus has had an impact in that Chinese citizens, perhaps who are quarantined or perhaps who are just worried about being quarantined and who haven't had access to the regular sort of equity markets that they participate in have been moving

money into Bitcoin as a way to, again, escape that local monetary chaos. Now, I haven't seen a particularly compelling evidence of this or even really evidence beyond conjecture at all. However, we're talking about narratives. And to the extent that, that people think that this is happening, perhaps they are behaving accordingly, right? Perhaps they are hedging into Bitcoin more because of that. So I think it probably would have been smarter for me to perhaps separate the specific issue of coronavirus from the larger general issue of volatility. But regardless, I didn't. And 22.7% of you think that that's the major reason why the markets are so hot. The number one answer, though, by a whopping margin,

was the Bitcoin halving. 51.5% of you think that the energy and excitement around the Bitcoin having is the primary factor that is driving so much attention in these markets, which I think maybe is also a little interesting piece of evidence around this constant debate about whether the having is priced in or not. But regardless, 51.5% of you think that that is the driving cause. Now, what about the write-ins? What about the things that I didn't include? Well, there are three that I want to make specific mention of. The first is Ethereum and excitement around Defi. Defi has hit recently in the last couple weeks this important psychological milestone of a billion dollars locked in Defi, which to me is akin in some ways to price milestones in Bitcoin

like 10,000. It may not matter ultimately that much from a real perspective, but it matters from a psychological perspective. When Defi hit a billion, I guarantee that there were some number of people who were watching on the sides who were like, I'm going to take that more seriously now. Or perhaps institutions who had been keeping an eye on Ethereum who are saying to themselves, maybe we should be paying a little more attention to that now. So I do think that it's important to note that Defi has had a good year. Ethereum has had a good year, right? Bitcoin is up something like 40, 44% on the year, but Ethereum's up something like 80, 85, 86%. on the year. And the reason that I didn't put Ethereum as one of my major choices is that, well, two

things. One, I tend to have a bias towards the macro explanations, rightly or wrongly. And two, we have lived in a paradigm, I believe, where Bitcoin has in general been the major driver that ripples out and trickles down to the rest of the market. And I don't know that I think that Ethereum is there yet as a force that can actually drive prices across the asset, not just within Ethereum itself. But perhaps that's wrong. Perhaps 2020 is the year where Ethereum and DFI specifically show that when they're doing well, they can be doing well even uncoupled from Bitcoin and have impact on the rest of the market. So something that's certainly worth watching. A second write-in that a number of people mentioned was price and price reflexivity,

which is the idea that when prices start to move, they move in either direction, right? When prices go down, they tend to go down more. When prices go up, they tend to go up more. Because more and more people get excited. And this is almost so obvious and so important that I didn't include it, but it is worth noting. No matter how strong narratives are in this market, in these crypto markets, the thing that gets people most jazz that increases energy in any way you look at it from volume to social media volume is price, price action. We've talked about this earlier this week even. And so I think that in some ways what I was looking for with this poll is almost a question of what maybe got the ball rolling down the hill, but I do think that once momentum

starts, it really is pretty reflexive to price. Now, one additional amendment to this that I thought was worth mentioning was the idea that it wasn't just price, but Lindy effect in the context of price, right? The Lindy effect is the idea that the longer that something has existed, the more that it feels like it will continue to exist. And so, you know, the popular narrative in mainstream media of Bitcoin is that it's constantly on the verge of dying, right? And so, when it hits some new big milestone again, like 10,000, something that has a big psychological impact, and people have heard a million times before that it's going to die, it starts to trigger this feeling of, hey, maybe this thing is really here to stay. And every single time this happens,

that feeling gets stronger. So the idea of price and the reflexivity of price plus a side of the Lindy effect was the second write-in that I wanted to mention. The third write-in, I think, has to be said, is for sure just the right answer, which is all of the above. I, created this poll to see what people thought was the most significant narrative, but the reality, and of course, this is why CNBC Fast Money could blast off so many of these narratives in such a short couple minute period, is that they are all happening simultaneously. There are these global fears around the coronavirus and suspicions that that may have an impact. There is this Fed action that people are nervous about because where does it end? There are these battles going on around

what the digital currency of the future is going to look like. And there is a ton of attention on the Bitcoin halving. So take all that together and then combine these right in things, right? Ethereum hitting these new milestones in Defi and so much else. And it really does feel like a perfect storm type moment more than just any one factor or another. So that's what you guys thought. But I also love getting expert opinions on the show directly. And so I asked Travis Kling, the CIO of Aikai Asset Management, who is now, I think, our most frequented guest on the breakdown to come and give his thoughts. And I started by asking him about Fed Chair Jerome Powell's comments because, as I admitted before, I'm so interested in the macro context right now, rightly or

wrongly. So let's see what Travis had to say about those comments earlier this week as their relation to this market. So the comments from Jay Powell and Steve Mnuchin this week are the first time since summer of 2019 that they've really cranked back up some very pointed commentary addressing, I'd say one, the crypto asset ecosystem and two central bank digital currencies. I don't know whether or not it is a coincidence that Bitcoin's up 40-something percent in the first 50 days of 2020 that has them sort of stepping back up into the, into the limelight to discuss this stuff. It's pretty coincidental that that's happening.

You know, Powell said specifically Libra lit a fire. And that, I think, was pretty apparent from the commentary in the summertime. And then the fact that President Xi, with his kind of blockchain is good edict at the end of October and a lot of the movements around the digital Remembe that they're looking to roll out, it's apparent that both Treasury and the Fed realized that they've got to get a clear path and a handle on how they're going to address these things. As I was listening to Travis, and as we were talking, though, it felt to me like there was clearly something different that he thought was perhaps the real explanatory factor in

this shift in sentiment into energy. So instead of trying to pin him down to one answer like Jerome Powell's testimony, I just asked him what he thought were the biggest factors that were actually driving this shift in sentiment. So let's hear what he had to say about that. I think you can't overstate how much all of the airtime that the halving is getting plays into reflexivity. You know, reflexivity is just means that higher prices beget higher prices and lower prices beget lower prices. And the way that reflexivity is intertwined. with narratives is a pretty fascinating thing. And I like to say Bitcoin is the most reflexive asset on the planet.

And for good reason, it's because network effect drives such a significant portion of the value of the technology as a whole. And the narrative set up for Bitcoin prices to head higher and around and after the halving, it's just too clear of a setup. And what you can have is whales, dominate the Bitcoin market, and whales have the ability to manufacture reflexivity. You can get prices moving to the upside, and then because Bitcoin acts so reflexively, higher prices beget higher prices, and you start getting this snowball effect to the upside.

And I mean, that's exactly what January of this year kicked off with. it's just too easy to take prices meaningfully higher in between now and the halving, and whether that's 14K or 20K or 30K, I'm not really going to sit here and make a call on that. But the setup for prices to move much higher into that was just kind of too apparent in the first part of this year. As you can tell, Travis reinforces a lot of the points that you guys were making online, right? He's saying that having is a major factor and this reflexivity is such a major factor as well. Before letting him go, though, I really wanted to get his take on one more thing. It can be incredibly hard when you're in these excitable moments to think about how fast it

could shift again, right? And the longer that you've been here, the more that you know this, but these markets are chaotic and they're roller coasters and they can go down as fast as they go up. So I asked Travis one last question. I asked him, what made him most concerned around where we were in this specific moment, whether it was a narrative or a specific type of action or something else. But then I also asked him what made him most optimistic about it. The most concerning thing, I think, is how much our little space is getting levered up. You are seeing the signs of a levered Bitcoin market in a lot of different places. You're seeing it in the the interest rates for stable coins.

You're seeing it in contango, the contango curve for Bitcoin. You're seeing it in funding rates across derivative platforms. You're hearing about it anecdotally. The entire Bitcoin mining industry is now levered up because the sort of cottage financing industry is popped up around providing cash loans to the Bitcoin mining ecosystem. The whole world is levered to the gills. So I guess some argument could be made that, what's wrong with a little leverage in Bitcoin, but it is, you know, it does kind of make me a little

nervous because you're talking about an underlying asset that's like 15 times more volatile than the S&P 500 when it gets moving. So you couple leverage with that type of volatility. And that can be a recipe for fireworks. So that's certainly something that we're watching. You know, on the positive side of things, look, the macro backdrop for a non-sovereign form of money, to go get mass adoption over the next couple of years. You really couldn't paint a more bullish kind of macro picture for that. I like to say that it appears that Bitcoin was created for such a time as this. So there you have it.

Most concerning is perhaps just how levered we are and how much that could be bad if it goes the other direction. But that optimism, the idea that the macro environment is so well suited for this. Well, I couldn't agree with Travis Moore. And I think that it was really interesting to hear from all of you guys about what you thought was the reason behind so much new energy. So thank you to everyone on Twitter who participated in the poll and who wrote in answers. Thanks to all of you guys for listening. And if I miss something or if you disagree, hit me up on Twitter.

I am there at NLW. I would love to hear what you think. But for now, guys, it's Valentine's Day. Get out of here. Go spend some time with the people you love. I will catch you not on Monday. We'll be off for President's Day and a travel day for me, so we will catch you here on the breakdown on Tuesday.

Have a great weekend, guys. Peace.