The Breakdown - Why Bitcoin Rallied 11% on Wednesday

Episode Date: February 17, 2023

In this episode of “The Breakdown,” NLW examines the various explanations for Wednesday's 11% increase in BTC’s price, including: Market structure Global liquidity conditions Stablecoin concerns  Ordinals Debt ceiling debates The Asian bid  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 and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh. Image credit: Prasong Maulae/Getty Images, modified by CoinDesk.  Join the discussion at discord.gg/VrKRrfKCz8.   Join the most important conversation in crypto and Web3 at Consensus 2023, happening April 26-28 in Austin, Texas. Come and immerse yourself in all that Web3, crypto, blockchain and the metaverse have to offer. Use code BREAKDOWN to get 15% off your pass.  Visit consensus.coindesk.com.  

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 CoinDest. What's going on, guys? It is Thursday, February 16th, and today we are talking about why Bitcoin rallied over 11% yesterday. 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 conversation, come join us on the Breakers Discord. You can find a link of the show notes or go to bit.ly slash

breakdown pod. All right guys, well listen, if you had asked me if we'd see a good old-fashioned face ripping rally in this of all weeks, I might have been skeptical. The week opened up with news of major regulatory actions against Paxos around BUSD, which is of course the third biggest stable coin, and many are wondering if the SEC has a broader attack on stablecoins in its sights. Then, of course, there was the antagonistic hearing in the Senate Banking Committee that showed just how much more rhetorically emboldened crypto critics have become. And yet, just a day later, Bitcoin ripped up more than 11% in its biggest one-day rally since last September, reaching over 24,700, its highest price since a short-lived post-luna recovery

in August of last year. One hourly candle in the afternoon yesterday showed a 3.5% move all on its own, larger than any other entire day so far in February. Now, usually I wouldn't dedicate an entire show or even most of a single day to price action, but I think that the various interpretations of why Bitcoin is rallying actually creates a very interesting lens through which to explore pretty much everything happening around Bitcoin right now. Yesterday, I tweeted, why is Bitcoin going up, right, answers only, and got more than 160 responses. So let's chat about some of the big categories of how this move is being explained. And we'll start with the most boring, and often the most true, which is just

market structure. One of the universal truths of Bitcoin moves is that for as much as we believe or want to believe, they're narrative or event-driven, there is usually at least a big dose of market structure there as well. As you'd guess on a day with such big moves, there were pretty significant leverage on wines yesterday. Coinglass data clocked Bitcoin short liquidations at over 77 million for the day. Now, that is a large total, but still smaller than it was during a few of the biggest trading days on January. It's worth asking then how much correlation there was with stocks, i.e. was this a broader risk-on move? It appears to have been isolated to crypto and the riskier end of equity markets. The S&P 500 and NASDAQ indices only managed moderately positive days,

both increasing by less than 1%. Cryptocentric equities, on the other hand, enjoyed the tailwind, with Coinbase up 17%, and Bitcoin Minor Marathon Digital up 18%. Michael Saylor's micro strategy increased by more than 9%. So let's jump to some of these larger macro factors. On the one hand, it's not like there's some broader narrative shift that makes this week great for risk assets in Bitcoin specifically. In fact, kind of the most that can be said about the macro setup right now is that it's not an immediate soul-crushing headwind.

At the FOMC meeting at the start of this month, Jerome Powell declined to jawbone markets lower, instead saying that financial conditions were still very tight, in what seems like kind of a mistaken statement. Since then, the non-farm payroll report described a red-hot labor market, and this week's CPI report showed month-over-month inflation re-accelerating to 0.5% for January. Now, opinions were mixed as to whether these data points would be enough to justify another round of aggressive rate hikes from the Fed,

or if Fed officials will instead remain in wait-in-C mode, hoping for a soft landing. There won't be another Fed rate decision until the end of March, so we have a few weeks to speculate. Anyway, the point here is that there is definitely not some big narrative shift. However, when we're talking about macro, it's not just a question of Fed discourse and sentiment. It's also a question of liquidity. Dmitri Kofinus from Hidden Forces responded to my tweet, saying the most compelling explanation

is that the global liquidity cycle has bottomed. So let's take now a look at Bitcoin in a slightly different way. One of the key takeaways of this halving cycle has been that while Bitcoin is a long-term inflation hedge, or more accurately described, a debase. basement hedge. In the shorter term, Bitcoin also acts as one of the most sensitive liquidity gauges in financial markets. As Paul Tudor Jones put it, Bitcoin was the quote, fastest horse when liquidity taps were wide open, and subsequently it reacted the most violently when they were slammed shut early last year. Starting in April, the Fed has now run down its balance sheet

by a little more than $500 billion during its quantitative tightening program. While this might pale in comparison to the $8.4 trillion remaining on the balance sheet, the incremental reduction on the balance sheet has had a noticeable effect on global dollar liquidity. During this balance sheet runoff, nothing major has seemed to break domestically, but internationally there have been some clear signs of stress. In October, the UK government bond market had an acute liquidity crisis, which required the Bank of England to launch an emergency bond buying program. In December, after being repeatedly tested by markets, the Bank of Japan expanded the range of its yield curve control program. It allowed the 10-year rate to move up to 0.5 percent, its highest level since

2014. In their efforts to fight the market, the BOJ conducted unscheduled bond buying throughout December. Since September, the BOJ has bought at least $336 billion worth of Japanese government bonds, going a long way towards counteracting the Fed's QT all by themselves. And while it's always difficult to know exactly what is going on in the Chinese economy, according to published policy, the People's Bank of China injected $400 billion in December alone via liquidity operations. The European Central Bank has supplied 300 billion euros since August via, via, drawing down government deposits, akin to the U.S. government drawing down the Treasury General account, which we'll get into in just a minute. Even the Fed is seeing some liquidity enter markets,

though not through their own decision-making. Over the last two days, $95 billion was drained out of the reverse repo facility ready to boost liquidity in the financial system. While global liquidity measurements are something of a dark art, Citibank estimates that overall around $1 trillion in liquidity has been injected by worldwide central banks in recent months. There is a lot of commentary about all of this on financial Twitter. Andreas Steno-Larsin tweets, Has global liquidity already bottomed? It ought to have massive consequences for asset allocation in case.

We're seeing an increasing discrepancy between the big three western central banks and Transcene elsewhere, Asia versus the West. The BOE, the ECB, and the Fed are all still trying to bring down the balance sheet, while the Bank of Japan and the People's Bank of China now actively move in the opposite direction. Macro pundits in the U.S. spend countless hours in U.S. liquidity forecasting and Fed watching, but as balanced sheets of other big central banks have grown substantially more impactful in recent years, we obviously need to track liquidity on a global scale and not on a local. China and Japan are printing money currently, and it's worth noting since we are

talking about the second and third biggest economies on the globe. Combination of PBOC liquidity injections, massive BOJYCC efforts, and the U.S. Treasury drawing down the TGA has been enough to already turn the tide on global liquidity. If global liquidity truly bottomed out in November of 2022, it ought to be massive news for asset allocation. Noel Atchison, the former head of markets insights at Galaxy Digital writes, really interesting, yield and Bitcoin going up. It's about liquidity. Bitcoin is one of the most sensitive liquidity plays right now.

It's whopping drawdown last year, its lack of cash flows to discount, its strong floor given its various use cases. Unpacking this some more, how can liquidity be improving if rates are still going up? Because one, stock and bond volatility is coming down. This release is collateral. two, oil price coming down, gives people more money to spend on other things, three, USD trending down, four, TGA account moving into the economy. There are other risk assets out

there also sensitive to a liquidity recovery, but none that have already suffered a greater than 70% drawdown and that have a strong support floor for long-term accumulators who see Bitcoin as a store of value. Bitcoin has no cash flows to discount, so unlike stocks, higher rates don't really hurt it much. It's more about liquidity, because Bitcoin doesn't have to be important. portfolios, and because it's an easy high-return asset to dump, it suffers when investors reduce exposure. That easy exit experience positions it to be a strong beneficiary of an increase in risk asset positions, almost a safer bet than a liquid venture equity, for instance. And its recent resilience in the face of bad news is another strong support signal.

And whatever bad economic news lies ahead won't affect Bitcoin's quote-unquote fundamental valuation, because again, it has no cash flows. What it has is actual, potential, and growing utility, the valuation of which will move on narrative more than data. Finally, Bitcoin's narrative is multifaceted. This also lends its floor strong support. For some, it's a store of value. For others, an early-stage liquid tech investment. For many, pure speculation, partly based on narratives driven by the first two. Complicated and fascinating. Olico Urban writes, Crypto's rip might be all that liquidity pumping from Asian funds. Who knows?

And with that one, that shifts to our next interpretation, the Asian bid. Join CoinDesk's Consensus 20203, 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. Immerse yourself in all that blockchain technology has to offer creators, builders, founders, brand leaders, entrepreneurs, and more. Use code breakdown to get 15% off your paths. Visit consensus.coindex.com or check the link in the show notes. We've already discussed that there is a break between U.S. central banks and China and Japan,

with much of central bank liquidity injections coming from the two big Asian central banks, the Bank of Japan and the People's Bank of China. That's not all, however, that has been happening in the Eastern Hemisphere. A large Chinese-language crypto account called Noodle of Binance tweeted this unconfirmed rumor on Wednesday morning. On June 1st, 2023, Hong Kong will officially make crypto purchase and sell, trading fully legal for all its citizens. Expect a huge influx of big money from the east, Asian currency-based stablecoin coming out of HK will be a certainty as well. Normally, these sorts of rumors could be easily dismissed, but this one lines up with recent policy announcements from government officials. In January, Paul Chan, the city's financial

secretary said at a Web 3 conference, quote, we have recently completed the legislative work for licensing virtual asset service providers, and the new measure will come into effect in June. Now, this is still worth taking with a grain of salt. Colin Wu of Wu blockchain tweeted, this is a misunderstanding, which actually means that Hong Kong will also start to fully comply with regulators, such as requiring exchanges to operate with licenses, reviewing the types of coins listed, and prohibiting cryptocurrency advertisements. Although Hong Kong is promoting Web3, it will be even stricter than the United States at that time. For example, Coinbase can list a large number of altcoins, but licensed exchanges in Hong Kong only allow trading of a very small number

of cryptocurrencies such as BTC and ETH. Still, even that clarification or caution hasn't thrown water on the fire. Icebergie tweeted, spin up the capital flight narrative machine, and while that might not be what's driving this rally, it's certainly something to keep an eye on. One more answer to the what's behind the Bitcoin move that's sort of related to liquidity as well is the debt ceiling debate. Little progress has so far been made in that debate. And in the background of that, the U.S. Treasury has been taking what's known as extraordinary measures to continue funding the government. Specifically, they've been drawing down the Treasury's general account, aka the TGA, and spending cash on hand rather than issuing new bonds to keep the Treasury

topped up. The U.S. government is forecast to run out of available cash sometime in the third quarter of this year if an agreement to raise the debt ceiling isn't reached. By spending the cash it has on hand, the Treasury is effectively injecting additional money into the economy without the offset of selling bonds to investors. So basically what we have here is something that is both narrative driver and might also be a technical driver. When people in media spend a lot of time talking about U.S. government debt, it connects right back to Bitcoin narratives. And when the Treasury is spending money, it also improves liquidity conditions which benefits risk assets. The old twofer. Now, this may not last a very long time.

Uri and Timor, the director of global macro at Fidelity writes, with the prospect of the Treasury drawing down its TGA balance at the Fed, liquidity conditions may start to improve. But that will likely change this summer when the Treasury starts to build up its cash balance again, after a debt-sealing deal, presuming one is reached. In theory, as the Treasury conducts emergency measures, it will spend down its cash at the Fed, which presumably is stimulative. Then the opposite happens once the debt ceiling is raised. Next up on our list of possible explanations is stable coins.

In the wake of Paxos earlier this week, the big question is whether regulators are looking to enforce a broader stable coin crackdown. On Monday, BUSD traded off its dollar peg by around 2%. prior to the NYDFS and Paxos confirming that redemptions would still be available for at least the next year. On my thread, J. Feldes wrote, Stablecoins are not looking very safe from the SEC right now. Exchange is also looking risky. Bitcoin is playing its role as the reserve asset during flight to safety.

And indeed, when people talked about maybe switching off of U.S.D. stablecoins, CMS Holdings tweeted, for people pitching alternative currencies to U.S.D. stablecoins like Swiss franc and Singapore dollar, I really think the world would rather trade against Bitcoin pairs. So now we are so deep into these explanations and you can kind of see why it's a fun lens through which to look at all the things happening in Bitcoin, and no conversation in that lens would be complete without, of course, Ordinals. Ordinals were easy, the most posted answer on my Twitter question, and love them

or hate them, they're definitely driving demand and interest to the Bitcoin blockchain. Since the hacky Bitcoin NFT platform launched in January, more than 10,000 digital artifacts have been inscribed onto stats. A rudimentary OTC trading venue has popped up with traders making deal on an order book housed in a shared spreadsheet. Interests really picked up towards the end of last week, with more than 20,000 inscriptions being made last Thursday. While Bitcoiners reasonably argue about the merits of monkey pictures on Bitcoin, the demand is driving up additional fees across the network. On Tuesday, Bitcoin miners raked in $114,000 in fees from ordinals alone. Ordinals are also supercharging new wallet addresses with a record 44 million addresses with non-zero balances now in existence.

a gain of around a million in the last month. Now, the debate around Ordinals remains pretty intense. You have on the one hand folks like CK Snark from Bitcoin Magazine who says, Many Bitcoiners, no matter what they say, are scrambling to mint a pre-100K inscription. Hilarious how people have two faces. You all would be better served to just maintain one face and be honest. It's a better life. Then on the other hand is the excitement.

Muneb, the co-creator of Stacks, writes Ordinals is a Trojan horse that can take Bitcoin to a billion people. Meanwhile, from the creator side, you have folks like Wob, the founder of Sappy Seals, who says, Bitcoin Ordinals are an opening for teams to establish a legacy. There's no guide, no manual, no tools, no standards. Teams have to get creative and double down on their vision to create something authentic and truly historic. I haven't been this excited in a long time. Now, as we wrap up, I think it's always worth pointing out that the answer to this question about why Bitcoin is going up or down is almost always some combination of all of the above. It very rarely happens for a narrative or event reasons alone, and even if those things are the triggers, market structure amplifies and shapes the extent of the

move. What's more, I think at this point, it's clear that global liquidity conditions and the global macro do have an impact on Bitcoin, even if it is part of an industry that's more likely to move around in weird, counterintuitive ways, even in those contexts. But still, it's hard not to feel like there's a sense that maybe a corner has been turned. earned, and that this is also an expression of general strength. Investor Joey Krug writes, there's probably going to continue to be some chop in markets as inflation doesn't go as fast as people hoped. But my view is things got oversold last summer and they're finally bouncing back. The second half of the year is going to be bullish for

crypto. Most people who are going to sell crypto have already sold. Cryptodon alt, writes, Binance got absolutely manhandled by regulators and prices up 6%. This is a different market than it was a couple months ago. It's pretty clear to see for anyone that isn't holding their ears shut while throwing a tantrum. I don't know where we go from here, guys, but I do know that it's going to keep being interesting. So for now, I will say thank you for listening. I appreciate it as always. And until tomorrow, be safe and take care of each other. Peace.