The Breakdown - Up 40% YTD, Bitcoin Is 2023’s Best-Performing Asset

Starting point is 00:00:00 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 produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, January 24th, and today we are talking about why Bitcoin is 2023's best-performing asset. 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 conference. 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. All right, friends, today we are talking price action. Bitcoin is up almost

Starting point is 00:00:48 40% on the year. It is 2023's best performing major asset. And of course, this being the breakdown, we are not going to dig deep into TA or anything like that. Instead, what I want to explore are the big questions. First, what's driving this Bitcoin and crypto price action? Is it a bull trap? Is it a mean reversion? Is it the beginning of a new bull run? And then maybe the biggest question, how much is it Bitcoin and crypto-specific versus part of a broader shift in market sentiment? And finally, to the extent that it is part of a broader shift, how real is that shift, and what might change the tides? In other words, are things really turning around? All right, so first off, let's talk just a little bit about where things are.

Starting point is 00:01:31 Bitcoin's 40% gain has been its strongest rally since October 2021, which of course might not saying much as markets were decidedly bearish after the $69,000 peak the following month. On the other hand, it could be meaningful that January's gains have outpaced all other bare market and relief rallies during the last year. Some technical analysts are pointing to the relative ease with which Bitcoin has cleared resistance levels as reason that the rally can continue. Katie Stockton, founder and managing partner at Fair Lead Strategies, said in a note to clients this week that, quote, Bitcoin has extended its sharp relief rally, clearing resistance near 21,000. The next resistance is more significant at the August high of 25,000. At the same time,

Starting point is 00:02:08 however, Stockton viewed current weekly conditions as overbought and ripe for a pullback. Dave Duong, head of institutional research at Coinbase, said that any rally towards 25,000 was dependent on traditional risk assets confirming bullish sentiment. The NASDAQ has made a 9.4% gain so far this year, while the S&P 500 has advanced by 5.1%. And so obviously you're seeing here, the same question that I have around whether this is related to larger market conditions. So what does crypto Twitter think? The default point of view for days, if not weeks now, has been that this is some sort of bulltrap. Capo of Crypto writes, I've been checking charts all the time, avoiding noise from Twitter. The way the upward movement is happening, the way HTF resistances

Starting point is 00:02:50 are being tested, it clearly looks manipulated, no real demand. Once again, the biggest bull trap I've ever seen, but they won't trap me. Now, some are pointing to the scary accuracy of Inverse Kramer, i.e. the idea that mad money TV star Jim Kramer always has it wrong. WSB chairman writes, Bitcoin is up nearly 40% since Jim Kramer said to get out of crypto 14 days ago. Inverse Kramer never fails. It really is impressive how accurate he is at being inaccurate. Kramer, meanwhile, is doing his part to stay bearish, tweeting on January 18th, the manipulation higher of crypto shows you that this is truly a sham market. Now, this manipulation theme is a big one. James Stratton at Cryptoslate says people are calling bull market. This spot buying slash selling has been coming from Binance all week.

Starting point is 00:03:37 Manipulation in order to bring some volatility to the market. Also, traders were the most short they've ever been. But not everyone agrees. Investor Andrew Kang says you know the market is going to go higher when people make conspiracy theories about why price is going up instead of being happy. The Binance cartel sends its regards. See you at 25. K. Grinding Poet writes, so we were in a range for months. You had months to buy, even DCA, and you kept waiting for lower and lower and lower. And now that we are breaking out of the range, all of a sudden this move is finance manipulation or U.S. government buying? That last one refers, of course, to Tucker Carlson's theory that the U.S. government had to buy Bitcoin to buy off FAA hackers from a

Starting point is 00:04:15 couple weeks ago. Tree of Alpha writes, you can smell the bare market PTSD from some of the reactions to the pump. 75% price drop is normal, but a 30% pump from the bottom. as manipulation by the Binance Mafia to save their insolvent exchange? Eventually, when the moment is right, the copium turns into fuel. This sentiment was echoed by macro CRG who writes, market goes down from institutions blowing up and foreselling, perfectly healthy. Market mean reverts to the upside slightly. Binance cartel manipulation. And this, I think, gets us to another important interpretation, which is that this is simple mean reversion. This is basically the point from research firm Bernstein, who, in a report released on Monday, argued that this,

Starting point is 00:04:54 recent price action is just a mean reversion rally. They noted that Bitcoin had fallen 65% last year and had some room left to move to catch up to a longer run average price. For this reason, the firm advised caution with getting too bearish at these levels and pointed out that Bitcoin has never had two consecutive years of negative returns. They echoed a popular thesis that with the bankruptcy of FTX and now Genesis, quote, the potential overhang on the liquid crypto markets has receded, end quote. They said that much of the expected selling pressure has been in illiquid private crypto assets rather than larger market cap publicly traded tokens. With the Chapter 11 process now underway for Genesis, Bernstein said that the risk of immediate

Starting point is 00:05:31 sell-offs of grayscale Bitcoin trust shares had subsided. Quote, public crypto markets seem to have felt some relief from any force-selling narratives. Now, at the same time, they don't have a lot of confidence in the longevity of this rally. They suggest that the price action is being driven by, quote, capital internal to crypto, i.e. sideline stable coins being deployed. We have not yet seen any new capital allocations to sustain this rally. So overall, this analysis is both more pessimistic and more optimistic than some others out there. It's pessimistic in the sense that it's not some big call for a new bull run, but it's optimistic in the sense that it's a sort of common-sense interpretation that sees this rally as a natural fallout from what's happened in

Starting point is 00:06:09 markets over the last couple weeks versus being some market manipulation or other nefarious thing. To me, I think this is a pretty compelling interpretation. And here's why. Bitcoin and Crypto were driven lower last year based on two broad categories of things. The first was the secular shift from easy monetary policy to monetary tightening. The Fed engaged in the most aggressive tightening cycle in 40 years, which drove all risk assets down. Very naturally, the things that were the farthest out on the risk curve that had benefited the most from easy monetary policy were hit the hardest on the reset. However, crypto also created its very own force for decoupling, which were the acute credit crises caused by a combination of protocol misdesign in the case of Luna and UST, over leverage at best

Starting point is 00:06:51 and deception at worst in the case of three arrows capital, and outright fraud in the case of FTX. If the overall direction of risk assets in general was dictated by the Fed and the broader macro environment, each of these events drove Bitcoin and crypto down further than might have been expected as just the farthest out asset on the risk curve. And so then the interpretation of this rally becomes that the crypto markets are resetting to their proper place in the overall macro environment. In this interpretation, anything that fills in missing information or lowers the perception that there is more contagion to come, such as Genesis filing for bankruptcy, is a positive signal. So let's go with this as a working theory, that Bitcoin and crypto are mean reverting to their

Starting point is 00:07:29 proper place as a far-out risk asset relative to the overall cycle. Well, then, of course, the question becomes what's happening in that overall cycle, and is the bullishness of crypto reflective not only of our cool sweeping relief that we're not seemingly going to be wiped entirely off the face of the planet, but also of a broader market optimism. Join CoinDesk's Consensus 2023, the most important conversation in crypto and Web3, happening April 26 through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse.

Starting point is 00:08:06 Immerse yourself in all that blockchain technology has to offer creators, builders, founders, founders, brand leaders, entrepreneurs, and more. Use code Breakdown to get 15% off. your pass. Visit consensus.coindex.com or check the link in the show notes. One market interpretation that relates specifically to crypto that I did at least want to give some breath to is the debt ceiling debate. Some are viewing the debt ceiling debate in Congress as potentially creating a QE-like event. Andrew Kang again writes debt ceiling gridlock is going to inject 350 billion plus of liquidity from the Treasury General account into the economy over the next

Starting point is 00:08:47 one to two months. We have essentially QE but sidelineers are worried about the macro as non-macro experts. And importantly, it's not just crypto people discussing this. Bloomberg today published debt limit fight risks early end to Fed quantitative tightening. And here's how they describe it. Quote, through a complex series of reactions, constraints imposed on the Treasury Department by the debt limit could end up amplifying some of the impact of QT later this year. Commercial bank reserves parked at the Fed form a part of the U.S. financial bedrock. And when the Fed's first foray with QT caused them to shrink in 2018 and 2019, stock saw declines and money markets seized up. Dynamics caused by the debt limit could have the effect of a more rapid shrinking of reserves

Starting point is 00:09:27 later this year, potentially bringing forward the end of QT even if the U.S. avoids a default. Now, this is really complex macro stuff, but the TLDR is that some economists are concerned that a byproduct of hitting the debt ceiling is that certain behaviors that will be demanded of the Treasury Department will have the effect of making the Fed's quantitative tightening functionally even tighter faster, which could then have undesirable knock-on effects in markets that aren't just stock prices going down which the Fed can handle, but actual liquidity issues which cause key market functioning to seize up. That could then force the Fed's hand in a way that just stocks going down couldn't. For now, however, let's hold this as an emerging narrative, if anything

Starting point is 00:10:03 at all. Are there any other indicators that market attitudes might be shifting more broadly? Bloomberg's Joe Wisenthal thinks yes. Yesterday he wrote, for some reason, over the last several days, an increasing number of prominent voices have expressed optimism that the U.S. can avoid a recession and pull off the proverbial soft landing. Maybe inflation can actually come down without a substantial increase in the unemployment rate. He points to Larry Summers at Davos, who said, quote, we have to recognize the figures are better than what someone like me would have expected three months ago. It's still a very, very difficult job for the Fed, but the situation does look a bit better. IMF managing director, Kristolina Georgieva, said the economy is, quote, less bad than we feared a couple

Starting point is 00:10:42 months ago. But the big one he references is from Fed Governor Christopher Waller from last Friday. He said in a speech, quote, Six months ago when inflation was escalating and economic output had flattened, I argued that a soft landing was still possible, that it was quite possible to make progress on inflation without seriously damaging the labor market. So far, we have managed to do so, and I remain optimistic that this progress can continue. Joe sums up Waller's speech saying the basic gist is that a soft landing is possible and that he doesn't see the need for much more hiking at this point. Joe suggests that the market is interpreting this as a clear indication that the Fed won't do more than a 25-bases-point hike at their upcoming FOMC meeting.

Starting point is 00:11:20 All of that said, the meeting minutes from the December FOMC made it clear that the Fed fears the stock market getting over-exuberant. It worries that loosening financial conditions could undermine its attempt to keep tamping down inflation, so who knows. What's more, despite the rise of this soft-landing narrative, which is definitely notable for people who watch market sentiment analysis all the time, it's definitely not universal. Yesterday, Macro-Alf shared a chart from the Conference Board Top 10 leading indicator index, adding in his tweet, New lows for the U.S. leading indicator index. This indicator has a 100% hit rate on anticipating recessions with the six-to-eight-eight-month lag. It's now pointing to a recession starting in Q2 on par with the 2001 recession.

Starting point is 00:12:01 Markets, in the meantime, Soft Landing and La La Land. B&P Parabas said soft landing has been the catchphrase of a still-young 2023, but we think it will go out the window in the same fashion as transitory inflation did in 2022. As growth slows more noticeably in the months ahead, the markets look vulnerable. Nick Carter writes, what do the soft landing people think of the largest and most profitable tech companies doing massive layoffs? Former hedge fund manager Hugh Hendry writes, the soft landing will not be televised, which my best guess means he thinks that people are so wired on their calls of a recession,

Starting point is 00:12:33 that they're not going to go back off that narrative even if evidence points in the other direction. income sharks takes their reasonable inverse Kramer but for all media point of view, saying, when the media says we are going into a recession and keeps pushing doom and gloom, you can keep holding. When they say the economy is fixed again, time to get out. And to bring it all the way back around, 10 T's Dan Tapiero is bullish for digital assets regardless. He tweets, stocks will have a good year. Friendly macro backdrop supports growth in digital asset ecosystem even with Tradfai recession. Crypto use cases exploding in both tech and finance. Now, we will have a a lot more on all of this next week. January 31st to February 1st is the next FOMC meeting.

Starting point is 00:13:13 Nick Timrose, who's widely considered the journalist with the best access to what the Fed is thinking, previewed it over the weekend for the Wall Street Journal, saying, In recent public statements and interviews, Fed officials have said slowing the pace of rate increases to a more traditional quarter percentage point would give them more time to assess the impact of their increases so far as they determine where to stop. The central bank's rate increases are aimed at slowing down inflation by reducing demand. Quote, and there is ample evidence that this is exactly what is going on in the business sector Fed Governor Christopher Waller, an early and vocal advocate for aggressive rate rises

Starting point is 00:13:45 last year, said on Friday. Mr. Waller said he would favor a quarter point rate rise at the coming meeting. Now, one other important thing that I noticed about this piece from Nick is that for the first time, I'm starting to see the narrative about what happens after a pause in rate cuts. In other words, the Fed has been very careful to try to control the narrative around when they will pause and what that will mean, but they haven't talked a lot about what happens after they pause. To the extent that Nick really is the quote-unquote Fed whisperer, and that what he says has a better chance of reflecting what's actually going through the minds of Powell and Co. It was notable to me that he wrote, quote, some have also suggested that even if they

Starting point is 00:14:26 hold rates steady this summer, they will indicate they remain more likely to lift rates than to cut them. After the Fed pauses, quote, we'll need to remain flexible and raise rates further if changes in the economic outlook or financial conditions call for it, said Dallas Fed President Lori Logan in a recent speech. So for those of you Fed watchers out there, just something to keep track of whether we're starting to see more commentary on what happens after rate pauses, and what that might mean for when those rate pauses start. But for the bears out there who think the Fed might surprise, Nick throws a bone. He writes, divisions have surfaced. St. Louis Fed President James Bullard said recently he would prefer a larger half-point rate

Starting point is 00:15:04 increase at the coming meeting because he doesn't think rate hikes are high enough to thoroughly beat inflation. He said in an interview, you'd probably have to get over 5% to say with a straight face that we've got the right level. Why not go to where we're supposed to go? Why stall and not get quite to that level? So there you have it, a little red meat for the bears as well, but all of that ultimately will be debated next week, first at the Fed meeting and then, of course, on Twitter. I will bring you all those updates as they happen, but for now, I appreciate you listening as always, and until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Up 40% YTD, Bitcoin Is 2023’s Best-Performing Asset

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