The Breakdown - Why Bitcoin Investors Aren’t Worried About This Price Pullback

Episode Date: September 9, 2020

Today on the Brief: Stock market continues its descent Insider stock selling reached five-year high in August President Trump promises more aggressive decoupling from China Our main discussion: Investors and the BTC price dip. Over the last several weeks, bitcoin has pulled back from $12,400 to around $10,000. This dip has happened alongside a broader retracement in equities, led by falling tech stocks.  While some have levied correlation to equities as a failure of bitcoin, NLW argues this critique misunderstands the narrative that has driven accumulation from new holders over the last six months.   

My answer really comes down to that, one, we should have expected Bitcoin to get more correlated to equities over time, and two, the reason for that has to do with what people are hedging with Bitcoin. Paul Tudor Jones didn't come out with a big think piece about how Bitcoin hedges against falling stock prices. He came out with a big think piece and a large announced position in Bitcoin with the concern being currency debasement, the concern being the future of fiat currency and its ability to continue to hold value. 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 crypto.com, BitStamp, and nexo.io, and produced and distributed by CoinDess. What's going on, guys? It is Tuesday, September 8th, and today we are looking at. Bitcoin, specifically why investors don't seem particularly spooked by the last week or so of a Bitcoin dip. First, however, let's do the brief. First up on the brief today, the U.S. markets, the traditional markets, that is, continue their downturn. What happened? Well, last week, the S&P 500 fell 4.3% over the last two sessions, while the NASDAQ 100 has fallen 9% over the last three

sessions, including 2.2% today. Tesla, one of the emblematic stocks of this time, fell 13% after after being snubbed for S&P 500 inclusion and is down 20% overall in September. Alongside this, the dollar has strengthened and treasury yields have gone down as investors move more into those risk-off type assets. So why is this relevant? Well, I see a bit of a new narrative starting to creep in that I think combines old fears and new fears. The old fears have to do with the U.S. in China, which we'll get into in a minute, and questions of the durability of the rally we've had since the coronavirus crash. The new fears, I think, have to do with this fall chaos idea and concerns about what happens around the election. And this is obviously relevant because

when we have a system where the stock market is the report card, it could get a little bit wild to see what sort of pressure is brought to bear on trying to get these markets right-sided going into November. As we'll see a little bit later, it also seems like equities more broadly are going to be correlated with Bitcoin as well. Next up on the brief today, a kind of a continuation of that first story, which is that we saw massive insider selling during the rally in August. Insiders sold 6.7 billion of their own company's stock in August, which is the most for that number since November 2015. This suggests that those inside companies who are seeing what's actually going on with those companies don't have that much confidence in the longevity of this rally. Another way to interpret it is they think that things are relatively overpriced and want to take some gains while the market thinks that they're so.

hot. In general, I think this is a really important signal because it runs contra to public narratives. If you have a raft of insider selling, while everyone on TV is trying to tell you that the rally is real and durable, those two things just don't really hold up, and one's going to be right and one's going to be wrong. Last up on the brief today, let's complete our triumvirate of focusing on implications for the U.S. stock market by looking at Trump's latest statements on China and the U.S. Going into the elections, the anti-China rhetoric is being ramped up. President Trump has now threatened to punish American companies that create jobs overseas, saying,

Will manufacture our critical manufacturing supplies in the United States? We'll create made-in-America tax credits and bring our jobs back to the United States, and will impose a tariff on companies that desert America to create jobs in China and other countries. Additionally, President Trump said that they were going to prohibit federal contracts from going to companies that outsource to China. Additionally, he brought the military into this saying, I don't want them building a military like they're building right now and using our money to build it.

Interestingly, both sides Biden and Trump are accusing each other of being soft on China. This is, in fact, one of the few bipartisan issues, at least based on the rhetoric from the leading candidates. China is an interesting head turner for American politics because it doesn't quite fit the mold of other issues in that even people who don't like President Trump will often think that he's at least correct that we need some rejiggering, some fundamental shift in our relationship with China. In the wake of the coronavirus crisis, seeing the over-reliance on just-in-time supply chains has made many people look at that issue as not just one of economics, but one of national security.

In many ways, then, what we're watching right now is the two parties clamoring to be the party that brings that narrative home and connects it with their own pursuits. But if you're in markets, what you're seeing by the fact that both parties are taking this same line is that the economic disruptions that inevitably come from this decoupling are likely to come to pass, no matter who gets elected. That, I think, is part of why it's driving some of this market tension and market nervousness. With that, however, let's move to our main topic. Why Bitcoin holders aren't worried about this dip? First, what's actually happened? Well, we've seen a Bitcoin price pullback from a little over 12,000, around 12,400, all the way to 10,000. In fact,

Over the weekend, the price of Bitcoin dipped below $10,000 very briefly before coming back. Now, my argument is that people don't seem particularly concerned about this, and so let's talk about why I say that. First of all, there's Skew who uses options flows to have some sense of where sentiment actually is in terms of what people are doing, not just what they're saying. So Skew summed it up like this. they said Bitcoin options flows show one, short-term bearish, two, medium-term neutral, three, long-term bullish. The way that CoinDesk interpreted skews data was this. They said that

this pullback has failed to weaken investor confidence in Bitcoin's long-term prospects. However, the one-month skew has crossed above zero, a sign of investors adding put-options to position for a deeper short-term price decline. The argument there, is that that short-term decline expectation has to do with a sense or a fear of a broader market pullback. In other words, traditional markets, stock markets, not just crypto and not just Bitcoin. What's going on guys? I'm excited to share that one of this month's breakdown sponsors is crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases. What's more? With

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Get started at nexo.io. The Glasnoe Network Index is a measure that includes network health, liquidity, and sentiment. and in their estimation all remained healthy except sentiment, which did see some drop alongside prices. At the same time, however, savings behavior, i.e. accumulation, at lower prices has actually increased, which suggests that people are, in fact, buying the dip. Glass node also publishes something called Compass, which is a four-quadrant look at the overall health of the space. The four quadrants have bullish and bearish on one side with transition quadrants in the middle. And overall, despite this price decline, the glass node compass remains in the overall bullish quadrant.

Lunar Crush is another proprietary score that incorporates price sentiment and more. It has been bouncing around 70 for the past few weeks, and that's out of 100 with higher being better, and remains there despite this price decline. They attribute that to strong fundamentals, speaking of which, hash rate just hit a new all-time high, which does a number on any sort of mining death spiral narrative, which is this idea that price goes down, miners take their mining devices offline, which further reduces prices and so on. That seems just not to be happening, given that we're seeing all-time highs on the hash rate. But let's also discuss the main critique that you're seeing

swirling on FinTwit, right? Not necessarily Bitcoin Twitter, but FinTwit more broadly. It has to do with the correlation to stocks. People like Joe Wisenthal from Bloomberg have continuously pointed out how closely correlated it seems to them Bitcoin is to something like the NASDAQ 100. An interesting analysis actually comes from Sonu Vargis who did a six-month correlation showing that the correlation between Bitcoin and stocks during that period was 0.49. Interestingly, however, were the numbers around downcapture and upcapture. Down capture for Bitcoin is. 78%, meaning that it falls only 78% as far as equities, while upcapture is 92%, meaning that it gains 92% of the total upside as equities rise. As you can see then, Bitcoin is correlated but in a way

where there's less of the downside and more of the upside. Still, this doesn't answer the question of why we're seeing this type of correlation, why over the last six months has Bitcoin gotten more correlated to equities? And should that be something we're concerned about? My answer really comes down to that, one, we should have expected Bitcoin to get more correlated to equities over time, and two, the reason for that has to do with what people are hedging with Bitcoin. If people are hedging stock market prices, that's one thing, but it's not what they're hedging. We had years of people trying to get big institutional buyers, traditional investors, into the Bitcoin space. That has started to happen. So concordantly,

course there's a higher correlation. But the reason they got involved matters as well. Paul Tudor Jones didn't come out with a big think piece about how Bitcoin hedges against falling stock prices. He came out with a big think piece and a large announced position in Bitcoin with the concern being currency debasement, the concern being the future of fiat currency and its ability to continue to hold value. In a world where you expect Bitcoin to play the role of a hedge against currency debasement against potential inflation, or at least you assume through some sort of common knowledge game that that's the prevailing narrative among people who are accumulating Bitcoin, it shouldn't particularly matter whether it has a correlation to stocks, which also can serve as a beneficiary

in that type of inflationary kind of anti-fiat environment. Interestingly, Willy Wu showed a chart. He tweeted it out showing the number of Bitcoin controlled by high net worth entities has closely tracked the USD monetary expansion this year and tweeted alongside it, many look at the Bitcoin price and doubt it's a hedge. High net worth individuals and funds certainly consider it to be true and are betting on that with real money. Since this latest round of USD money supply expansion, whale entities have increased their holdings of BTC, marketly. This is why I think investors aren't concerned about a falling temporary Bitcoin price, nor are they concerned with its correlation to the larger markets. In fact, they see those things

as helping explain why Bitcoin is going down now. Some portion of the people, the investor base, of Bitcoin, who has an impact on prices, are more closely aligned with traditional equities markets. That is a sign of the maturation of the asset, not a failure of the asset. It's also a sign of where the narrative has been in terms of why people in those other parts of traditional markets are getting into this asset. And just for the sake of answering the critique that this is a new narrative shift that Bitcoiners haven't been on this until this year, I'm going to read Dan McCartle's thread, he's a co-founder at Masari and the creator of On Chain FX. I'm going to read his thread from June 22nd, 2018. He says, I figure I should get out ahead of this issue. Bitcoin is a hedge

against inflation and loss of confidence in fiat, not a hedge against a typical recession. Its value over the long haul stems from inflation resistance, being able to function as money if confidence in fiat is lost, and inability for banks and governments to seize it. In the short run, it's mostly a speculative asset. So in the liquidity crunch of a typical recession, people will sell Bitcoin to pay off fiat denominated debts, bills, etc. I think many people have this generic notion that, quote, Bitcoin is a hedge against traditional markets, and they intuitively think that means it'll perform well in a recession. I think that's probably false. We saw this with Gold in 08-09, it tanked. What subsequently led to gold's 2011 all-time high run was people wanting to hedge European and other

fiat collapse scenarios. Same dynamic seems likely with Bitcoin. Sell off under liquidity crisis scenarios ramp on sovereign debt, fiat confidence crises. Just want to lay this out now so I can point back to it down the road when Bitcoin haters are trying to take a victory lap because Bitcoin is underperforming in a typical recession. There you have it. This pullback is not a cause for concern. It doesn't change the long-term narrative. It reinforces the fact that we have a new category of investors in this space who are more closely aligned and correlated and connected to traditional markets, but it certainly doesn't say that somehow Bitcoin is failing. Anyways, guys, I hope you enjoyed that take on what's going on in markets right now.

I'm glad to be back for these regular shows. I loved having a little break, but it's awesome to be with you again every day. So until tomorrow, be safe and take care of each other. Peace.