The Breakdown - Who Matters More to Bitcoin: Whales or Plebs?

Episode Date: June 5, 2021

Today on the Brief: May’s middling jobs report A ransomware update Square building a bitcoin hardware wallet Our main discussion looks at the various constituencies within bitcoin and asks who has what type of power to shape the network. Specifically, NLW homes in on recent price action and the divergent actions of large holders and small holders over the month of May. -- 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

The steady march of Bitcoin's number go-up technology is a simple fact of supply and demand. We all know about and talk about Bitcoin's programmatic supply, but we miss something essential if we don't also recognize that because of the passionate belief of long-term hoddlers, many of whom haven't even been able to stack one full coin yet, the true supply available for trading is radically less. The size and passion of this group continues to increase, and as it does so, it resets the price floor up with it. 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 nexus.io and produced and distributed by CoinDes. What's going on, guys? It is Friday, June 4th, and today we are asking the all-important question, who matters more to Bitcoin, the whales or the plebs? First up, let's do the brief. First on the brief today, we have the jobs report for May, and it's kind of mixed news. U.S. employers added 559,000 jobs last month, which is less than expected, but up from 278,000 in April, but still down from March when 785,000 jobs were added. Matthew Luzetti, the chief economist for Deutsche Bank, said, quote, it's a middle of the road

report. It is disappointing relative to where we were a few months ago, where we were anticipating you could see a million plus type prints over these coming months, we have had to ratchet down our expectations about what job gains are likely to be going forward. Now, this should matter to you if you're in the Bitcoin space because it has a meaningful impact on monetary policy going forward. Aggressive, accommodated monetary policy has allowed stock valuations to rise as high as they are. It's pushed people farther out on the risk curve. A booming market featuring full employment and high inflation would force the Fed to change those policies. As rates rose, stock prices and risk-on assets in general could see a fall, and Bitcoin is enough of a macro

asset now that it would likely be caught in some of that. However, the Fed has signal that until jobs are fully recovered to a degree much farther than this, they will be keeping policies the same even at the cost of a little extra inflation. Next up on the brief today, one more ransomware update. More goodish news, I think, in terms of how this is playing out on the national conversation. On the one hand, yes, we're seeing a lot of the sort of op-eds I predicted calling for a banning of crypto, and I don't think we're anywhere near out of the woods on that front. However, the policy discussion seems to be more focused around how companies make decisions to pay these ransoms or not than on crypto specifically. In other words, if there is a ban coming, it looks more likely

to be on companies saying yes to paying the bounties in the first place, regardless of what currencies they use. Carolyn Maloney, a dem from New York, has sent letters asking Colonial Pipeline and CNA financial to disclose the decision-making process that led them to pay significant ransoms over the last few months. She said, quote, I am extremely concerned that the decision to pay international criminal actors sets a dangerous precedent that will put an even bigger target on the back of critical infrastructure going forward. As I said, I don't think crypto is off the hook in many people's minds, but I'm certainly encouraged that there seems to be more of a focus on the first-order issue of companies deciding to pay rather than the side question of how that ransom was.

paid. Finally, some news out of Square that I think is relevant for the larger conversation as well, so I'm just going to read Jack's thread. Square is considering making a hardware wallet for Bitcoin. If we do it, we would build it entirely in the open, from software to hardware design and in collaboration with the community. We want to kick off this thinking the right way by sharing some of our guiding principles. One, Bitcoin is for everyone. It's important to us to build an inclusive product that brings a non-custodial solution to the global market. Much respect to everyone who has gotten us this far. What are the biggest blockers to get a non-custodial solution to the next 100 million people? Two, no keys, no cheese. The exchange you use to buy your Bitcoin probably

attends to your security with good intent, but circumstances may reveal custody actually means IOU. Deciding to take custody and security of your Bitcoin is complicated. What's the number one problem here? Three, custody doesn't have to be all or nothing. We can probably simplify custody through assisted self-custody. Assisted requires great product design, minimal set-up time, relying on existing devices, and end-to-end reliability. How should we be thinking about assisted solutions? Four, most people access the internet on mobile. Any solution we build must provide an excellent experience when using mobile despite its shortcomings and liabilities. An uncompromising focus on mobile interaction is likely to include the most people. What are the dangers here?

Six, blend availability and security. Make it easy for customers to keep the funds they want, quick access to at their fingertips, spendable with phone-only permissions, while keeping the remainder under tighter less available but more secure controls. What's the right balance? Seven, safety is complicated. For any wallet product, we consider safety failures to stem from one of three types of events. Availability features, sunken gold, security features, pirated gold, and discretionary actions, confiscated gold. What threats are we missing? Eight. Today's recovery mechanisms burn money. Customers have to protect recovery information from damage, loss, and theft, and store secrets.

In practice, this is not yet mainstream ready. We don't want more passwords on Post-its. What's best-of-class solutions we should consider? Nine, are small displays necessary? Expecting mainstream consumers to validate details on a small display is unlikely to increase security and likely to reduce device reliability, increasing device cost, and decrease accessibility.

Is the product better if a display isn't required? 10. Trust can't be required. Today, customers depend heavily on the continued function of infrastructure provided by third parties. We want mainstream customers to be able to lean on us when they want to, but we won't exclude those who don't. How should we think about this flow? 11. Layer 2 is essential for growth. The orders of magnitude growth we imagine require a mix of custodial, off-chain, and second-layer solutions that allow people to get off zero. What tech investments can enable seamless scalable L2 native support for a hardware wallet.

12. Cash app integration is obvious for us, but is only part of the solution. A smooth experience likely depends on a custom-built app, but it doesn't need to be owned by Square. We can imagine apps that work without Square and maybe also without permission from Apple or Google. You? With that, I and team will listen and continue the conversation. We'll set up a dedicated Twitter and GitHub account if we decide to build. We'll update this thread with that information when we're ready. Looking for the best way to unlock your crypto's liquidity?

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This is more than anything, square signaling and Jack signaling, that they care about the self-sovereign aspect of Bitcoin, not just the corporatized Wall Street ties number go up. That's what Jack is telling you. I wrote that line before I read that on the stage at Bitcoin 2021 in Miami, Jack said this. My goal is to remove as much as possible the corporateness of our company and better align ourselves with the open source community. I know you don't believe me.

I hear you calling me a liar, but I'm going to prove it to you. And that leads perfectly into our main topic. Who matters more to Bitcoin, the whales or the plebs? By the way, I know that PLEBS comes from the root of plebeian, so presumably it would be plebs, but PLEBs just sounds so much better. So that's what we're going with. Anyway, as a permissionless open financial network, what we call Bitcoin has a variety of different constituencies.

These constituencies don't always have the same priorities. This was of course greatly exemplified by the 2017 block size wars and the New York Agreement in particular, in which a group of large companies in the Bitcoin space wanted to increase block size, while the average smallholder and node operator were intensely opposed. The resolution of that, a victory for the small guys, showed that Bitcoin is not as susceptible to big money interest as traditional finance, or at least it wasn't then. This year, we've had had more occasion to understand different groups that all interact in this big sandbox of Bitcoin. After years of waiting, institutions actually started arriving. It was traditional hedge funds first.

They were followed by a handful of corporate treasuries. This was all followed by more risk-averse investors like insurance fund general accounts. One of the questions lurking behind the beautiful price action of the early part of this bull market was whether these new actors would share the same values as other parts of the Bitcoin community. Or would, as Ben Hunt warned, we see a split between Bitcoin, a community-driven, permissionless censorship-resistant self-sovereign financial system, and Bitcoin TM, a money-making machine, fully compliant with all regulatory regimes, but ultimately just another table at the Wall Street casino. Interestingly, the Wall Street institutions haven't really been the constituency to challenge the rest of us this time. Instead, that challenge

has come from a fickle, meme-obsessed billionaire, desperate for adulation and praise. And yes, of course, I'm talking about Elon. Last night he tweeted out a Lincoln Park-themed breakup meme with a Bitcoin and a broken heart emoji. Stupidly, the market sold off in the immediate wake of the post, but the sentiment wasn't surprised or sad on Twitter. Mostly, it was just somewhere between annoyed and fatigued. The tweets suggesting that Elon is playing some 4D chess here are getting fewer and farther between. Instead, most are coming around to a perspective shared by Dan McArdle, who tweeted, I think Bitcoiners legit hurt Elon's ego. Amazing. What's more, most people are realizing that this is a real Elon cries Bitcoin situation where every time he tweets something, it moves the

markets less and less. So maybe the real 4D chess here is that Elon's reminding us that Bitcoin is the no hero's asset. Now, on top of all of Elon's Twitter shenanigans, we also had the introduction of the Bitcoin Mining Council a couple weeks ago, which was a strange combination of this billionaire megaphone thing and a PTSD-inducing redo of the closed doors New York agreement. At least, that was the initial reaction that many had. mining companies that were in that meeting have subsequently gone to pains to say that the only thing they agreed to was working together for a common approach to energy disclosures to ensure that the industry can't be defamed with bad data. Still, all of this brings up an interesting

conversation about who matters most to Bitcoin. I've discussed the power balance of miners versus nodes versus general community social consensus before, but I want to add another dimension that may be resonant right now as we watch prices fall. This is, of course, the financial dimension. When we discuss Bitcoin price movements, we tend to discuss them monolithically, as though the whole market is moving in the same direction at once. This, of course, isn't really how it works. Instead, different groups move in different directions at once, counter-trading one another. Let's look at the last month. May was the third biggest monthly price decline in Bitcoin's history. Enough of a painful event that some have started reasonably to claim that this bull market is well and

truly over. During that time, whales were selling fiercely. According to data from Glassnote, as shared by William Clemente, who, by the way, has been crushing data and doing awesome data work with Pomp, cohorts who had 10 to 100,000 bitcoins reduce their holdings by 157,545 Bitcoin. That's obviously a lot of selling pressure. Now, it's worth noting that we don't necessarily know who these whales are based on this analysis alone. They could be individuals. They could be those institutions that had gotten involved. They could be minors.

For example, we saw a significant amount of selling from known minor addresses around the China announcements a couple weeks ago. But net net, large holders have been reducing their holdings. On the flip side, however, in that same period, cohorts with less than 10 Bitcoin have been accumulating, adding 8,049 BTC to their holdings. Will goes further to break it down by the age of holders as well, summing up, Young Whale selling older retail accumulating. In Palm's newsletter, he pointed out a spike in selling coins that are aged between three and six months and coins aged one to three months, which are all being sold at a loss. In the meantime, the long-term holders continue to add to their stack.

158,641 new BTC over the last week, 305,305 Bitcoin over the last month. So let's come back to the question. Who matters more to Bitcoin, Wales or Plex? Based on the divergence in buying and selling we just laid out, and the fact that the net result was the third worst monthly price decline in Bitcoin's history, you'd have to say whales matter more to Bitcoin's price, right? But don't forget, this is the low-time-preference asset. Let's hold aside a single month and instead zoom out to the beginning of this bull market. Famed investor, Stanley Drucken-Miller, was the second of the big hedge funders to publicly come out for Bitcoin last year after Paul Tudor Jones with his great monetary inflation thesis. Druckin-Miller recently did an interview where he discussed the beginnings of his involvement

around the time of the COVID-19 crash. Here's how the excellent John Street Capital Twitter account summed up what he said. Paul Tudor Jones called and he said, do you know that when Bitcoin went from 17,000 to 3,000 that 86% of the people that owned it at 17,000, never sold it? Well, this was huge in my mind. So here's something with a finite supply and 86% of the owners are religious zealots? I mean, who the hell holds something through 17,000 to 3,000? And it turns out of them, the 86% sold it. So what's the point? Wales do play an outsized role in the eye-popping rises of Bitcoin during bull markets. They also add to the volatility on the downside. But inevitably, wherever those downlegs land, there is an ever-increasing group of hoddlers who have taken on the

mission of accumulating as much Bitcoin as they possibly can. These are never-sellers, who functionally reduce the supply of Bitcoin even farther than its reported 21 million hard cap. Remember, the steady march of Bitcoin's number-go-up technology is a simple fact of supply and demand. We all know about and talk about Bitcoin's programmatic supply, but we miss something essential if we don't also recognize that because of the passionate belief of, of long-term hoddlers, many of whom haven't even been able to stack one full coin yet. The true supply available for trading is radically less. The size and passion of this group continues to increase, and as it does so, it resets the

price floor up with it. Like the power to change the protocol, power to shape the price ultimately rests with the plebs as well. As always, if you're feeling weird, zoom out. For now, guys, I appreciate you listening. I hope you're heading into a great weekend until tomorrow. safe and take care of each other. Peace.