The Breakdown - What Drove Bitcoin's Dip Under $60K

Episode Date: November 17, 2021

This episode is sponsored by NYDIG. Bitcoin has been on a journey over the last 24 hours, from nearly $65,000 all the way down to $58,000 and everywhere in between. On today’s episode, NLW explores what’s driving it, including:  Leveraged traders left over from last week’s all-time high Twitter CFO saying no investments in crypto President Biden signing the U.S. infrastructure bill with crypto broker redefinition  Inflation questions Federal Reserve leadership questions  Finally, he points to Marathon’s offering of a half billion dollars in debt to buy more BTC and rigs as a counter-indicator.  NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. 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=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: Malte Mueller/Getty Images, modified by CoinDesk.

Now we've got the Twitter CFO throwing cold water on being a new domino on the Bitcoin treasury thing. We've got perhaps recognition of the longness of the ensuing regulatory battle headed our way. That's maybe enough for some pause in the momentum of Bitcoin, but we had so much momentum going into last week with that big inflation print, right? Well, sort of, and that's the thing we need to talk about. Macroinsecurity and mixed signals. 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 Nidig and produced and distributed by CoinDes. What's going on, guys? It is Tuesday, November 16th, and let's be honest. Bitcoin has been on a bit of a journey over the last 24 hours. In that period, its high was 64,875. Its low was 58,641. And it is currently 61,000. 130. Now, on the one hand, this sort of volatility is part and parcel of the crypto markets. It doesn't take much time hanging out here to get a little inoculated to these sort of moves as stressful or anything really other than just part of the game. It's also, by the way, that while no financial advice, for almost everyone the right crypto market strategy is some version of buy and hold or

dollar cost averaging. But still, I think it's worth asking what's driving, even what might be ultimately a pretty regular move for the crypto markets, as the price action helps give a lens to understand what else might be happening that surrounds the crypto markets that could be influencing it. So with that in mind, the setup to what's happening now came last week. Remember, I told you the story of that crazy day where a greater than expected inflation print sent Bitcoin to a new all-time high around 69,000, only to be just walled backwards by rumors of Evergrand defaulting. By way of a quick recap, consumer price inflation came in at something like 6.2%.

It was the highest number in more than 30 years, and it really captured huge headlines. Inflation has already been in the discourse, and you see people who are not markets, people, who are not economics people, feeling the actual pinch of changing prices. What's more, you had a lot of discourse about how, if we were measuring, in the same way they measure, In the 1970s, we'd actually be above 14%, numbers that remind us of that 70s period, which is associated with such high inflation. When Bitcoin surged on the news, some like Alex Kruger called it the first time they had seen Bitcoin truly trade as an inflation hedge in the short term like that.

Now, the problem was that a whole bunch of people, when we went to new all-time highs, opened up longs with big leverage, and they ran straight. into a risk-off moment in the broader markets, when stories started to come out of Evergrand, the large Chinese real estate developer that has been in the news for months now, defaulting on its loans. Now, Evergrand was able to pull off some last-minute miracle. It didn't end up defaulting, but the damage had been done, and the markets had gone risk-off, at least relative to where they were. Traders were wiped out, and we were all of a sudden back to $63,000. There was a small bounce over the weekend, but still, some who focus on the technical side of things have been saying

that we looked ready for a bit of a reset. Funding rates had been hovering around 0.05%, which was just a little down from a six-month high of 0.0589% from earlier in the month. Now, those high funding rates for perpetual swap type products can cause problems for traders as market momentum stalls. But coming back to today, as is almost the case, this sell-off looked to be a combination of some news moments, larger macro intrigue, and market structure. So last night, East Coast time, aka Asia Morning Time, the Wall Street Journal ran a piece called Twitter CFO says investing in crypto, quote, doesn't make sense right now. Ned Siegel, the CFO, was focused on volatility, as well as lack of accounting rules, saying we would have to change our investment policy

and choose to own assets that are more volatile. This, to me on its own doesn't seem to represent enough of a catalyst for an actual move, though. In the sense that no one was particularly expecting Twitter to announce that they were suddenly getting into the Bitcoin Treasury game, so why would them not announcing that or confirming that they're not announcing that push people out? The short answer, I think, is that it probably wouldn't, at least not alone. But what if instead, it was just another slightly negative news story that came at the perfect moment to contribute to an overall notion of taking some risk off the table. That, to me, seems more likely. And if that was the case, what else happened? Well, of course, the infrastructure

bill was signed. NIDIG sponsors this podcast, and they are the go-to Bitcoin company for banks and credit unions as well as corporate treasuries, fintechs, and hedge funds. Learn more at nidig.com slash NLW. That's nydig.com slash NLW. The infrastructure bill was one of the most defining events of Bitcoin's 2021, and really for the crypto industry as a whole. It was a seminal moment in which the White House and their Senate allies tried to force a provision in that would redefine the meaning of broker in the context of the crypto industry. When we saw this language, many people thought at first it was just a mistake, a lack of understanding. It became clear pretty soon that it wasn't, that the Treasury Department was trying to give itself extremely wide latitude, particularly

around issues of stable coins and of defy. I've done numerous podcasts about the fight that ensued. A bipartisan group of senators came together to try to amend that particular provision. Another bipartisan group of senators offered their own competing provision. Janet Yellen was involved trying to whip people for the alternative provision. It was a whole thing, and we ended up delaying this bill by weeks. We then ran, however, into procedural issues and nothing was actually changed when push came to shove. Last night, when Biden signed the infrastructure bill, he signed that crypto provision into reality. There are people still fighting, and we're going to have a number of battles over the next

couple years before anything actually comes to fruition. One of those lines of attack is being pursued by Senator Cynthia Lummis and Senator Ron Wyden, two of the biggest advocates for an amendment during the infrastructure bill planning process. On Monday, they introduced legislation that would narrow the crypto broker clause, basically trying to exempt the same people that amendments were trying to exempt like validators, non-custodial hardware and software providers and protocol developers. Senator Lummis said we need to be fostering innovation, not stifling it, if we were going to maintain America's position as the global financial leader.

I'm proud to introduce this bipartisan bill to ensure that our tax system reflects the realities of digital assets and distributed ledger technology. It's clear that these folks are not giving up, but I have to say going back to catalytic factors for why investors might want to take some risk off right now, the infrastructure bill really does create a new battle to fight, a new challenge that will be dogging us for the foreseeable future. So now we've got the Twitter CFO throwing cold water on being a new domino on the Bitcoin treasury thing.

We've got perhaps recognition of the longness of the ensuing regulatory battle headed our way. That's maybe enough for some pause in the momentum of Bitcoin, but we had so much momentum going into last week with that big inflate. print, right? Well, sort of, and that's the thing we need to talk about, macro insecurity and mixed signals. Cryptobabi Rob Payone tweeted this morning, inflation is basically front page news every single day now. With a Wall Street article that reads, in inflation denial, you're not alone in wanting to keep your budget the same. Americans haven't had to worry about inflation

for decades. Some still aren't. That should be good for Bitcoin, right? We've been talking about how we saw a big bump in the Bitcoin price on the inflation print news. But Bitcoin is actually quite divergent here. On the one hand, there absolutely is that inflation hedge trade, a trade which tends to be pretty long term. In the short term, however, Bitcoin tends to also trade as a risk asset, and in general, there's been a move to risk off. The Wall Street Journal led this morning with Bitcoin price briefly drops below 60,000 as strong dollar weighs on crypto. The piece points to market nervousness about not only inflation concerns, but also rising COVID-19 cases with winter coming, European restrictions, etc. Other assets they show are really telling the story right now.

Both the U.S. dollar and gold are up. In fact, the Wall Street Journal's dollar index, which measures the U.S. dollar against a basket of currencies, reached its highest level since July of last year. What's driving dollar's strength is basically that investors are betting that the Fed's hand will be forced and that they'll have to raise interest rates faster than they want to in order to beat back inflation. Those higher rates would attract capital looking for yield to the U.S., especially given the global context of trillions of dollars of negative yielding debt. It's really ultimately pretty simple. Martha Reyes, the head of research at Bequant, which is a digital asset brokerage, said a lot of people view crypto as a risk on investment.

And that means, she said, when we're in a period of stress, quote, people will be looking to raise cash and they will raise cash where they've maybe had the most profits. It's important to note that this is coming off a new all-time high and a Bitcoin in the 60Ks, which has almost everyone in the black. This is not a difficult time, in other words, for people to actually take some profit and move some of their capital to the sidelines. However, there's another piece of this puzzle in terms of Fed policy, which is who's going to actually be making that policy. There has been a huge amount of speculation about this. Will Biden continue with Powell or will he bring someone else in? And really at this point, the only

realistic alternative is Lael Braynard. Bloomberg is running today with a headline, Biden's Fed chair pick is imminent, Senate banking chair says. The piece quotes Senator Sherrod Brown, an Ohio Democrat who said, I hear it's imminent. I'm not going to speculate who I think it might be. I assume the decision's been made and they haven't announced it, but I don't even know that. Now, Janet Yellen, the Treasury Secretary, has said that both Brainerd and Powell are credible, but gives her nod to Powell. She doesn't want this to be seen as political and Brainerd is a dem and she wants the continuity.

But Brainerd being a dem and having the backing of the progressive wing has to be a part of the political calculus. In general, Brainerd is seen as maybe perhaps more aggressive on financial regulation, but more doveish in terms of monetary policy. Tavi Costa summed up a lot of what you can see on FinTwit right now saying, imagine adding Brainerd to this, plus $400 billion of Q.

E, 0% rates, twin deficits and GDP at double digits, no cap-ex growth among commodity producers, green revolution, and ESG policies in full mode. This is a macro regime change. So, like I said, the market broadly perceives that Braynard would be even more dovish, but they don't necessarily think that she'll have the opportunity. Bloomberg published this morning, inflation prompts growing chorus to call on Fed to speed taper. They point to Bill Dudley, the former New York Fed president, who writes, To change their mind, they have to accelerate the taper. They're going to have to get the taper done quickly.

Lawrence Summers, the former U.S. Treasury Secretary, said the Fed should signal that the primary risk is overheating and accelerate tapering of its asset purchases. Given the house price boom, mortgage-related purchases, should stop immediately. James Bullard, the St. Louis Fed president said, if we had to, we could end the taper somewhat sooner. We have done a lot to move the policy in a more hawkish direction. We can do more, but that will be data-dependent. Finally, Jeffrey Lacky, a former Richmond Fed president said they're on track to a major policy blunder,

and that to avoid that outcome and risk a recession, that, quote, they need to pivot, recalibrate pretty rapidly. They need to accelerate the taper, get rate increases started earlier next year in the first half, and they're going to need some good luck. Connor Sen writes about the irony of the situation that might be coming up, saying, what would be dumb is if they pick Brainerd and the Fed ends up hiking rates two to three times in 2022, and we get, quote, why did progressives push Biden to pick a hawk discourse? In any case, that's a little bit of behind the scenes, but I do think it's relevant,

and I think that the point is that the lack of clarity is another market insecurity context that leads to risk-off behavior. So I think now it's all making sense. You had an initial Bitcoin boost on the inflation print numbers, but that's now being peeled back with the risk-off drag in general as the insecurity sets in. And as I mentioned, there's a market structure side to the story as well, there always is. We had high funding rates, but on top of that, there have been significant long positions. Laurent Kisses from CEC Capital said that they'd seen substantial long positions on crypto exchanges, and that this move was, quote, a combination of long liquidations and market

makers getting rid of their risky, i.e. bullish, exposure. Leverage in Delta hedging became more expensive as more orders flood the market. Amber Funds said the market was quite complacent and probably over-leveraged, as evidence from last week's high funding rates. So as I said, you're starting to get a picture of how in the short term this combination of macro insecurity and market leverage led to this move down. But those are short-term things, and I'd like to end with one counterpoint that is perhaps a bit longer of a view. Publicly traded marathon of Bitcoin mining operation is following the Saylor playbook. The company is offering $500 million of senior convertible five-year notes to buy more Bitcoin and Bitcoin miners.

Saylor himself commented saying a publicly traded Bitcoin miner is raising $500 million in a debt offering to acquire Bitcoin and Bitcoin mining machines. This is not factored into anyone's model. Dennis Porter said Marathon is going to buy the top of the Bitcoin market with $500 million in leverage while you wait for a correction. Ask yourself why and if the answer doesn't end with you buying more Bitcoin, you ask yourself the same question until it does. Marathon is buying more miners and more Bitcoin at all-time highs. This is counterintuitive to what have done in the past. This means their perception of Bitcoin has changed. They aren't waiting for bottoms or pullbacks, and neither should you. I think that's a really interesting and provocative

point, and it seems to be borne out that they are viewing this cycle in a different way, either seeing a lot more upside to come or seeing a fundamental difference in how the market is going to play out over time, perhaps a move away from the same sort of four-year cycles that we've had in the past. For me, at the end of the day, it's always about timescale, and another quote to close out from Martha Ray as the head of research at Biquant. She writes, Bitcoin has rallied 50% in the last two months with ETH not far behind, given its high correlation to digital gold. That rally got overextended on the higher than expected CPI print in the U.S., and we are now in a reassessment phase. However, real rates remain near historic lows,

and inflation is likely to accelerate as seen by the spike in short-term yields. In Q4, companies will pass more of their costs on to consumers in the context of strong demand. The hunt for yield will continue unabated, and thus we will see good support for Bitcoin at 60K. Until tomorrow, guys, be safe and take care of each other. Peace.