The Breakdown - Understanding Bitcoin's Blistering Rise Past $30,000

Episode Date: January 5, 2021

The end of December was a momentous time in bitcoin’s history. Not content to clear the psychological barrier of $20,000, bitcoin’s price smashed up almost all the way to $30,000, although it would take the turn to the new year to hit that new high-water mark.  In this episode, NLW looks at interpretations of why bitcoin is rising, why it dipped today and what analysts and investors think will happen next. This analysis includes: Evidence of institutional FOMO including a rise in bitcoin whale addresses Massive outflows from Coinbase Pro over the weekend  The impact of derivatives liquidations that occurred Monday morning  Commentary from OTC desks on Q1 2021 possibilities

Bloomberg again, published a piece this morning called Bitcoin's Rally comes to a halt as prices fall most since March. Their talking head quote of choice was today's sell-off is a reminder that this is a relatively new asset, highly volatile and still yet to find its place in the market. There are many major hurdles for it to overcome for it to be a useful mainstream asset. Maybe so, but in my estimation, this volatility narrative and more specifically this volatility dismissal from some asset managers is at this point an excuse for why, they haven't gotten themselves or their fiduciaries involved. 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 Monday, January 4th, 2021, and after the long holiday break, I am so excited to be back with you. I don't think this will come as a surprise to anyone, given that we've had this great series of interviews, but I haven't had a chance to talk with you about what's been going on. Today's episode could only be about understanding Bitcoin's blistering rise past 30,000. Later this week, I'll be back with the normal brief format. I'll have a couple interviews for you guys that you'll really enjoy. But today, we just have to dig into

why number go up, and more specifically how people are interpreting that rise and what happens next. I hardly need to give you the play-by-play if you're alive and you're listening to the show and you've been watching what's going on. But the way I might get into this conversation is let's go back to November 30th when we hit a new technical all-time high. It really brought shockingly little attention, at least from mainstream press, right? For whatever reason, Bitcoin smashing through 19,783 or whatever it was, just didn't really do it. Sure, it got a handful of press mentions, but there wasn't that same sort of FOMO that you felt in 2017. Everyone, including me on this show, argued that at least a part of that was the fact that the real psychological barrier was 20,000.

Shorthand for three years, we had been referring to 20,000 as the big number that Bitcoin needed to get back to. Well, once Bitcoin pushed through that, there was still only modest media attention. And of course, maybe it just coincided with the end of the year and everyone being out, but I still think it was noticeable. Bitcoin then decided to go on an absolutely monstrous tear, smashing up past 25K, then 26k, then 27K. For a while, it looked like each of the last days of December was going to hit its equivalent number in thousands as per the value of a single Bitcoin. Ultimately, of course, it took until January and this past weekend to punch above 30,000, but man, then it just kept punching. Bitcoin got as high as nearly 34,500 yesterday, the 12-year anniversary of the Genesis

block, no less, before having a huge dip down this morning to just under 30K again, only to pop back up to about 32,000 where it is at the time of this recording. Keep in mind that 34,000 high hit less than 24 hours after even hitting 30,000 for the first time. Now, this crazy action has finally started to drive some serious mainstream media attention. The Financial Times front page lead story in their print edition today was high flyer. Bitcoin value tops 30,000 with a big, beautiful chart right there above Boris Johnson telling England to prepare for tighter COVID-19 restrictions. And I mean, think about the number story to close the year. Bitcoin up 300% over 3,000, over 300% in 2020 and up thousands of dollars past 30K in the first day of the year. But of course,

as you know, as listeners of this show, as interesting as the number is, and it is undeniably interesting right now. For me personally, I'm as interested in the interpretations of the number and the popular narratives because those narratives show you how different people are competing to shape the future. Narratives are not just interpretation, their attempts to shape what happens next. So let's actually dive into those attempts to shape the future. And first, let's talk about what's driving the big moves, the narrative that most people agree on. It's about institutional fomo. The managing director of 21 shares, Laurent Kisses, told CoinDesk, Bitcoin's price is being driven by institutional money and there is not enough supply. The number of family offices asking

to invest in our exchange traded product is just staggering. I've never seen this before. In 2017, it was just retail knocking out the door, now it's only institutional. This, of course, reflects something we've talked about a lot, the difference between the demand and the supply, right? That simple factor of math. This was reinforced in another quote from Kinetic Capital CEO, Jayhans Chu, who said the final land grab has started, and by this time next year, accumulating over a thousand Bitcoin will be nearly impossible for most people. In other words, if you are a big institution who wants to have a seat, serious position or a corporation who's interested in the idea of getting some of your balance

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Get started at nexo.io. What other evidence of this institutional phomo driving things is there? Well, whales, i.e. clusters of addresses held by a single participant that hold at least 1,000 Bitcoin, rose to a record high of 1994 last week. Overall, in 2020, whale entities increased 16%. And in Q4 alone, they increased 7.3%. Then there was what was happening on Coinbase this weekend, which seems extremely relevant to me. On Saturday, January 2nd, the Block's head of research, Larry Sermak tweeted, So who the fuck is accumulating massive size on Coinbase? So what was Larry talking about?

Well, typeurbly tweeted 50K BTC leaving Coinbase in the past three days, according to GlassNode. That's 1.65 billion in withdrawals, or around 6% of their total balances over a hollow weekend. This sort of massive outflow tends to suggest that an institution is moving Bitcoin that they've purchased into cold wallets for custody. And again, we're just dealing with math here. 47,000 bitcoins or so leaving Coinbase in the first two days of the year while miners mint just over 1,700 in the same time period. There are some other interesting narratives that I've seen floating around around the institutional fomo in increased economic uncertainty. We're seeing some amount of new turmoil around the election with a handful of senators saying they'll reject the vote

from certain states. We're seeing the first reports of a mutated COVID-19 virus strand, which is putting even more urgency on vaccine distribution. And finally, we're seeing related ideas show up in other places than just the Bitcoin price. For example, Bloomberg published today an article entitled Treasury inflation gauge exceeds 2% for the first time since 2018. So it's not hard to understand this, at least in part, as part of a larger economic set of factors. So if it's institutional fomo that's been driving this rally, let's talk then about how people are interpreting this dip. There's five or so narratives that I'm seeing. The first is just the market catching its breath, which I think is completely reasonable. This has been such a rocket up.

You have to think that at some point there's going to be pauses. A second narrative that relates to that that's more specific is the idea of profit taking. In the past 24 hours, a number of alts have outperformed Bitcoin. ETH in particular has had a monster 24 hours, so it is entirely possible that many of the trader class are set to take some profits out and rotating into alts. Heath additionally has had its highest search volume on Google since January of 2018, so that may be an interesting factor to look at as well. A third interpretation of this dip is derivative positions getting liquidated. More than 1.1 billion of open interest was liquidated in the span of just an hour this morning. So basically you have traders who are over-leveraged

and got wrecked, causing a more severe dip, which could also help explain the quick rebound. A fourth interpretation, let's pour one out for the mainstream media, still trying to use this to push a too volatile narrative. Bloomberg again published a piece this morning called Bitcoin's rally comes to a halt as prices fall most since March. Their talking head quote of choice was today's sell-off is a reminder that this is a relatively new asset, highly volatile and still yet to find its place in the market. There are many major hurdles for it to overcome for it to be a useful mainstream asset. Maybe so, but in my estimation, this volatility narrative and more specifically this volatility dismissal from some asset managers is at this point an excuse for why they haven't gotten themselves

or their fiduciaries involved. Lastly, and this is the one I'm most interested in, are questions of whether the dip was caused by the specifics of institutional buying. Joseph Young tweets, Wales and Asia have likely been selling Bitcoin heavily in the last few hours. Minus 3,000 BTC, or around $100 million in value deposit into Bit Hum, Coinbase premium disappears, no aggressive buyer demand. All the while, the futures market is very overheated and overcrowded. He followed that up and said, Coinbase is now trading $50 lower than Binance. This means the aggressive accumulation isn't there anymore. A few days ago, Coinbase had a premium of around 150 to 350 at its peak. Doesn't have to be a correction, but I expect a market cooldown. So basically, another way

of reading this is that there was a specific actor or set of actors who were driving the price this weekend because of that massive accumulation specifically through Coinbase. That accumulation, despite the best efforts of, you have to assume, Coinbase's OTC desk, drove price up, which got the futures markets really excited, which further drove the price up, and then people came in to short and correct it. To me, obviously, this type of interpretation

is much more interesting than just the pure narrative stuff, especially where the pure narrative stuff is just relying on things that have been talking points for years and years and years. But with that, let's move to what happens next, because obviously that's even more interesting than what happened this morning. The key thing here is, I think, an expectation of volatility. According to Skew, Bitcoin's

one-month implied volatility has risen to nearly 100%, which is the highest level since March 2020. Sui Chong, the CEO of CF Benchmark, said, Bitcoin's implied volatility has hit a 10-month high because options traders assume that the major moves in the price action over the past 10 days will continue. At the same time, Sui and other analysts and investors don't necessarily think that means volatility down. Frank Chaparro from the block has been tweeting a lot about his conversation with trading desks and OTC desks, and he said, trading desks are insanely busy in crypto right now. I typically ping four to five every other day or so, and they would typically respond in minutes. Those responses are taking longer. Yesterday, only one desk got back to me with one word,

crazy. He then gave anonymous quotes from three specific desks. The first was, quote, I think we see high volatility within a 25k to 60k range for Q1. The next one was from Wintermute trading that said, similar, our expected range is 20K to 50K next three months, see more selling than buying via OTC for sure on our end. And one more, quote, my experience tells me that it may be a bit overdone so I would not be surprised to see a correction,

as much as 15 to 20% would not be too surprising. Longer term, I do think the rally continues, but probably not at this pace. Of course, make of that what's. you will. Just a few more interpretations or expectations of what happens next that aren't just strictly related to Bitcoin. The first is an interesting question about whether there will be finally a retail move into the space. Lewis gave the co-founder of GaveCal Research and that same Bloomberg piece I mentioned above said, Bitcoin's growing market cap has to come at someone's

expense. Will the marginal retail dollars start to forego 2020's Robin Hood Darling's and instead shift toward the roaring crypto market. Another article this time from CNN business wrote that perhaps the Bitcoin rally is a sign for what's in store for markets in 2021, a sign of larger volatility and more aggressive moves. Of course, it's understandable why they might feel this way, given that all of this has happened before the first day of trading of 2021 for the traditional finance folks. Anyways, guys, there is a lot more to get into. We have an even talked about the Mnuchin stuff and self-hosting wallets, although I have a guest that's going to speak very eloquently to that later this week. It's a crazy start to 2021, and I'm so excited

to be starting it with you. I hope you had an awesome holiday season. If you're enjoying the breakdown, please go like, rate, review it. It makes a huge difference. I'm excited for a 2021 that is interesting, dynamic, unexpected, and of course, I'll be here breaking it down the whole time. So until tomorrow, guys, be safe and take care of each other. Peace.