The Breakdown - This Bitcoin Dip Was Not Caused by FUD

Episode Date: January 23, 2021

Today on the Brief: Home sales up, home supply down Biden’s first test on the stimulus Euro pessimism  Our main discussion: Why the bitcoin dip wasn’t caused by FUD.  Anyone paying attention this week had reasons for frenetic worry. Janet Yellen’s comments on criminal activity. Persistent questions around Tether. A non-story about a double-spend that got amplified by mainstream media.  In this episode, NLW argues that none of these actually explains the dip. Instead, he argues, they were used by sophisticated traders to amplify the dip’s impact.  -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com  

Are these fud stories having an impact? Certainly some, especially with nervous new buyers. But their biggest impact is in being fodder for two opposite but equally relevant narrative engines. On the one hand, those who are trying their next explanation for why Bitcoin sucks, and on the other hand, those who are simply trying to capture it low. 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. The breakdown is sponsored by nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Friday, January 22nd, and today we are reinterpreting the dip that we've seen this week away from the popular narrative.

First up, however, let's do the brief. Let's look at the U.S. housing market. This is a topic that I've seen a lot of interest in, even though it's obviously decidedly far away from the world of crypto. But U.S. home sales reached their highest level in 14 years last month. Sales of previously owned homes were up 22% between December 2019 and December 2020. The important driver, of course, has been low mortgages thanks to ultra-low interest rates. At the same time, there is a huge inventory problem. There were 100.07 million homes for sale at the end of December, which is down 16.4% from November

and 23% from December 2019. At the current sales pace, there is a 1.9 month supply of homes, which is a record low. So two interesting things about this. First, again, we're seeing the tail of two markets, those who have the savings to buy versus those who have to rent. Even within the buy market, I think the tail is a little bit more complex. Some are taking advantage of rising prices to sell for a profit, while others are nervously holding on.

the average length spent in homes has increased significantly. Second is, of course, the phenomenon of remote work. The first response to COVID as it relates to remote work was this changes everything. We're never going to go back to offices the same way. The second response was, that was probably overblown. We're definitely going to go back to offices. I don't think it's overblown. I think this is the most significant structural change in how we work in modern American history.

And I think that we're still just barely beginning to see the operational. If you're interested in this, I talked about it with Tony Greer in my interview around the beginning of this month. Next up on the brief today, Biden's stimulus test. President Biden's first test in many ways is whether he can get his proposed $1.9 trillion stimulus package through. Right now, Republican leadership is consolidating against it with Susan Collins of Maine, a person who has positioned themselves as the perpetual swingboat, the latest to say they don't

see the need to push it through quickly. layer on top of this a big question of whether the Trump impeachment trial, which is set to begin in the Senate next week, will actually distract from that agenda. It matters, of course, because Wall Street is watching these moves very closely. Markets are down today, although the narrative is about new, more viral strains of the virus arising in places like South Africa, and additional restrictions more than a delay in stimulus. Last on this very macro brief today, a little bit of Euro pessimism. The European Central Bank kept its monetary stimulus unchanged in its policy meeting this week. It will continue to buy up to $1.85 trillion

euros worth of Eurozone bonds through March 2022, which is the same plan they initiated in December. Their key interest rate remains at negative 0.5%. Some analysts think that the ECB is not acting quickly enough and aggressively enough and worry about a slide back into recession. James Athi from Aberdeen Standard Investments said communication from the central bank is supposed to be transparent, so investors can interpret the data. What she said, she being Christine Lagarde, of course, was that things could change based on criteria that we're not going to tell you about. Laurent Krosnier, the chief investment officer at Amundi in London, said, what stressed the market was the fact that Ms. Lagarde was saying they won't be obliged

to use in full its bond buying program. This is another reminder that it's not just the Fed that markets hang on every word of. It is every central bank in the world. But with that, let's shift back to Bitcoin and talk about. what has been causing the dip this week. I tweeted this morning, literally not one part of me feels like this price dip was actually related to the fud being cited as explanation. Anyone else feel like this?

Turns out a lot of you did as there are 100 plus comments going right now. So let's go back and talk about the story of markets over the last few weeks and I'll break down what I mean by this dip not being caused by the fud it's being blamed on. First couple of the weeks of the year, absolutely gangbusters, right? Extending a streak that started at the end of December. We punched above 30,000 at the very beginning of the year, and then just kept flying, reaching as high as nearly 42,000 before crashing back down all the way under 30,000 again in a 24-hour period. That was a

Sunday into a Monday. Then by last Thursday, we had touched 40,000 again. Since then, it's been a lot uglier. The Ethereum's had a moment when Eith touched previous all-time highs on Tuesday, but that fun was also sort of short-lived. In Bitcoin, we were clinging to 35 or 36,000 for a while, but then that gave way, and on Thursday, we really finally started to hemorrhage for real, getting down under 30,000 again. Looking for the best way to stay on top of your investment game? nexo.io has you covered in three easy steps, with their high-yield savings account for digital assets. Step one, create an account at nexo.io. Step two, transfer assets to your secure nexus

wallet with no minimum or maximum limits on funds deposited. Step three, sit back, relax, and earn up to 12% compounding interest paid out daily on your crypto and fiat. Your passive income made simple. Get started at nexo.io. We also saw some mainstream sentiment shifts. The people showing up on TV shows were talking about Bitcoin being overbought, expecting retraces back down potentially to 20,000, although we'll come back to that specific interview in a minute. On top of that, a Deutsche Bank study came out saying that Bitcoin, along with Tesla, was the biggest bubble right now. By the narrative at least, if you've listened to media over the last week, this was the product of fud taking hold. What were the fud categories driving it in their estimation?

First, there was the persistence of this tether fud. I've talked about this a fair bit, particularly how I wish folks could separate tether as an organization with opaque processes and tether manipulation as the cause of Bitcoin price appreciation. The new macro folks exploring the space are like a dog with a bone on this one, and I just want to point out that the people who aren't fighting tether, include the companies that actually redeem them on a very regular basis. The people who aren't fighting tether are people who have been in the space for a few years and already did their research. The people who aren't fighting tether are the people who are talking to institutional investors where actual demand is coming from. In fact, I think this week the Tether

fud really made something clear to me. One of the realities of having an entirely new group of people here who more or less started paying attention in 2020 means we're going to have to re-litigate a lot of battles we thought were in the past. In so doing, we're going to be dealing with both good faith and bad faith arguments. The bad faith arguments will come from actors who have long been against Bitcoin and will seize on anything to justify their previous beliefs. The irony, of course, is that one of the complaints that these type of traditional finance people have with Bitcoiners is they accuse this group of being sort of sky is falling chicken littles with regard to things like inflation and the negative impacts of running big deficits. However, the same

seizing on any current fud to justify why one has been against Bitcoin for years with an ever-rotating set of justifications is exactly that sort of how long before you're right mentality that they supposedly dislike. Anyway, I don't want to overstate how significant this group is, but they're there. Now, the good faith actors we're going to have to deal with is something different. These are the folks that just got involved, are incredibly excited, are going down the rabbit hole, they're on the crash course. But for them, these things are new and they're scary, and I don't think it's just going to be tether. I think environment might be another one like this. I think this crime question might be another one like this, although that one seems pretty easy to address.

And really, that's what it comes down to is ultimately it has to be someone's job to be willing to take the time to engage with those good faith concerns from new people who aren't just trying to fud this into the ground. Moving on to other types of fud that the dip was ascribed to, let's talk about the Janet Yellen fud. Wednesday's show was all about Janet Yellen's comments in front of Congress, and I emphasized a lot. The issue was particularly around the use of the word mainly, that crypto is mainly used for illicit transactions. A lot of hay was made out of this, but Yellen clarified her position in written comments. When asked the question, Dr. Yellen, what do you view as the potential threats and benefits these innovations and

technologies will have on U.S. national security? Do you think more needs to be done to ensure we have appropriate safeguards and regulations for digital and cryptocurrencies in place? This is how Yellen responded. I think it important we consider the benefits of cryptocurrencies and other digital assets and the potential they have to improve the efficiency of the financial system. At the same time, we know they can be used to finance terrorism, facilitate money laundering, and support malign activities that threaten U.S. national security interests and the integrity of the U.S. and international financial systems. I think we need to look closely at how to encourage their use for legitimate activities while curtailing their use for malign and illegal

activities. If confirmed, I intend to work closely with the Federal Reserve Board and the other federal banking and securities regulators on how to implement an effective regulatory framework for these and other fintech innovations. This is totally milk-toast boilerplate, like, of course we don't want it to be used for terrorism, but of course we want innovation to flourish, which is what I think many of us hoped was the best case scenario for a Yellen coming in. So here again, we have a fud that doesn't really hold water. Finally, there was the Thursday conversation about a double spend, And so far as I can tell, this was an example of a news organization running the most incendiary version of a story, that story being picked up by a larger outlet, and a bunch of people with more technical knowledge than anyone involved in either of those publications,

spending the day explaining it to everyone else and explaining why we shouldn't be worried. By far, the two best resources on this were an article that Hasu published and a thread from Andreas, who really took it upon himself to be the champion of solving this fight yesterday. Now coming back to the main thrust of my argument that the Bitcoin dip was not caused by these fuds despite the articles that you might have seen that said something like Bitcoin down on Yellen or Bitcoin down on Tetherfud or Bitcoin down on double spend concerns. Why am I saying that this dip wasn't about those things? First, Bitcoin's grasp on 40,000 was very tenuous before all this started.

And why wouldn't it have been? It took three years to get back to an all-time high and three weeks. weeks to double it. There's almost no way in that context that things aren't overheated. And now, of course, a big part of this presumably was driven by large institutional buys, but another part that was quieter, at least quieter than the 2017 FOMO cycle, were probably a lot of new retail investors buying alongside that institutional narrative. It's very hard to see an asset ascend that fast and not want to get in, and it's also very hard to see an asset ascend that fast and not be terrified that things are going to turn around, because usually they are. What's more, it's very

hard to see an asset move that fast and not want to take some profit. As Nick Carter put it, I think people were looking for a pretext to sell. And speaking of that pretext, let's go to another thing that happened this week. I mentioned it earlier. The people who were showing up on TV were talking about how Bitcoin needed to go back down to 20,000. This is exemplified of course by Guggenheim CIO Scott Minard, who I mentioned on a previous show. As we discussed, then, Guggenheim announced that it was going to be buying Bitcoin but wouldn't be authorized to do so until the end of January beginning of February and then went and ran its mouth about a $400,000 price target, which was part of the fuel that set the fire that pushed the prices up. So all

of a sudden you have the CIO who's contributed to making it much harder for them to accumulate and much more expensive to accumulate an asset that they now had a mandate to accumulate. Of course he's going to go on TV and talk about how it needs to go back to $20,000 where he thought he could buy it in the first place. The point is that you have here not just fud, but a combination of things. First, a feeling like something's got to give, that any move this fast has to have some sort of retrace. Second, you have some amount of comparatively weak hands who have just FOMOed in. Third, you have institutions that have newly committed to the space and want to accumulate more, but not at the top. Fourth, you have a whole

group of buyers who've never climbed a wall of worry around Bitcoin or dealt with these types of Bitcoin fuds. And fifth, on top of all of this, you have a massive professional trading class that is ready to take advantage all the way down. My point is that the fud wasn't the cause of this dip. This dip was always going to happen based on the aggressive rip-up. The fud, I believe, has been used to accelerate it and for people who are sophisticated traders to take advantage of it. I think we should be extremely skeptical of causal arguments like Bitcoin is down on Yellen's crime worries and tether fud. Bitcoin is down because it went up extremely fast, because a lot of people with deep pockets want it cheaper, and because a lot of people can take advantage of and amplify a seemingly

bad set of news cycles all packed together to drive it down. These are market games, not simple narratives. And I think it's important to separate, or at least do our best to separate, cause and effect, correlation and causation. Are these fud stories having an impact? Certainly some, especially with nervous new buyers. But their biggest impact is in being fodder for two opposite but equally relevant narrative engines. On the one hand, those who are trying their next explanation for why Bitcoin sucks, and on the other hand, those who are simply trying to capture it low. We are swimming with sharks and we need to understand what's going on around us and not buy in too far to overly simplistic explanations. Anyways, guys, let me know what you think. Maybe I'm way off base and it was actually

these specific fun narratives that were driving this price all the way down. Either way, I appreciate you listening. I hope you're headed to have a great weekend. Until tomorrow, be safe and take care of each other. Peace.