The Breakdown - Why Bitcoin's Longest Run Above $10,000 Matters

Episode Date: September 29, 2020

Today on the Brief: After four weeks down, bitcoin bounces back on suspicions that recent bearishness was overblown KuCoin exchange gets hacked for somewhere between $150 million and $280 million Jack Dorsey outlines Twitter’s blockchain and bitcoin beliefs during Oslo Freedom Forum appearance Our main discussion: Digging in to bitcoin’s 64-day run over $10,000 Bitcoin has been above $10,000 for longer than any time in its history. Its volatility is also at recent historic lows. In this episode, NLW puts this in the context of broader market movements and explains why new price floors are self-reinforcing. 

The psychological confidence that comes with what feels like a price floor around 10,000 is huge. And this is, of course, not to say that Bitcoin couldn't dip below 10,000. However, at some point, Hottlenauts joke, where he's said, you know, I don't think we're ever going to see Bitcoin below 10,000 again. Which, by the way, he said probably more than a half dozen times now, so it's become its own meme. at some point he's going to be right. And the longer that Bitcoin stays above that magical, easy psychological number, the more likely it is that it reassures the holders who keep it there,

who are also the people who, when it goes below that, are going to scoop and gobble it all up because they think it's on the cheap. So this isn't just some other random number. I think that when it comes to market psychology, Bitcoin's longest run above 10,000 matters. It matters not just for long-term holders, but new people who have been brought in over the course of this year based on their concerns about long-term currency debasement and the great monetary inflation. 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 coin desk. What's going on guys? It is Monday, September 28th, and today we are talking about Bitcoin's record run above 10,000 and why it matters. First, however, let's do the brief. First up on the brief today, after four weeks of continuous losses, global stock markets are starting to turn around. This morning, stocks climbed in Europe, and the U.S. quickly followed suit, and interestingly, it was autos and banks that have led the charge. Banks especially have had an extremely difficult run of it coming off of the COVID-19 crisis. Now, obviously, there's a move, so there's a narrative, and the prevailing narrative seems to be

that things got a little too bearish over the last few weeks. Mark Doubting, the chief investment officer at Blue Bay Asset Management said, it is hard to become too bearish. As we look into 2021, growth should be stronger. Policy will stay supportive with further fiscal spending. A vaccine is also expected to be deployed and life to return closer to normal by the middle of next year. Echoing this idea that policy will remain supportive with further fiscal spending was Christine Lagarde from the ECB saying that the ECB stood ready to do what Europe needed when it came to further potential dislocations in markets. Alex Kruger had a very similar comment in a tweet over the weekend saying,

It's impossible to be bearish when we are coming out of the biggest recession in history. The world economy will roar in 2021. Once the uncertainty driven by the U.S. elections is behind us, we are once again off to the races. Next up on the brief today, a coup coin hack. So what happened? $150 million of the Singapore headquartered exchange was compromised in a security breach. Ku-coin became known during the ICO boom as it had a very similar strategy to Binance of rapidly listing all these ICO coins.

Today it lists over 200 assets and has $100 million in daily volume, so it's still a very active global exchange. In the follow-up to the news, Ku-coin said that an insurance fund will completely cover the losses, but the exchange token fell at least 14% very quickly. Interestingly, Larry from the block, Larry Sermak, thinks that the hack is actually much bigger than the reported 150 million. He tweeted, so I did some accounting of the Ku-coin hack based on the wallets very likely associated, and based on my estimation, there was nearly 280 million of assets stolen,

not 150 million. This would make it the third largest hack in history and seven times larger than the Binance hack last year. Now, a couple dimensions that I think make this interesting. The first is that some of the assets that had been compromised saw themselves freezing contracts so as to avoid giving the hackers access to those coins. Not everyone was super cool with that, though, and I think Theta Seek on Twitter put it really well. They said all these tokens freezing their contracts to render the Ku-coin hack feels extremely

bullish for Bitcoin and ETH. You can't freeze a decentralized system. So obviously the idea here is that if a central entity can change the protocol to freeze those contracts, to make those tokens null and void, it calls into question the immutability, the compromisability of the protocol as a whole. The second, however, an even more significant point, I think, is the collective shrug about this. Ryan Selkis from Masari tweeted, The Ku-coin hack feels like a tipping point.

The crypto markets shrugged off of 150 million loss like, quote, well, that was dumb, but we should have been trading on decentralized exchanges this year anyway. That collective shrug is definitely what the news felt like to me, and it may mean that there's a new level, a new perception of maturity around the role of exchanges in this ecosystem. Last up on the brief today, we got an interesting look at Twitter's blockchain and Bitcoin strategy with Jack Dorsey speaking at the Oslo Freedom Forum. The key note, I think, that he struck was the idea that data shouldn't be centralized.

Dorsey said, blockchain and Bitcoin point to a future, point to a world where content exists forever. We're not in the content hosting business anymore. We're in the discovery business. Now, the point here is that Twitter doesn't want to own your data. They don't want to own the data of the people who are using it. They want to help people discover each other's data and information that they're putting out into the public. The mechanism by which they're going about this is the Blue Sky Project. Twitter's Blue Sky is a separate non-profit that's expected to create an open Twitter protocol that Twitter will then use as the base of the Twitter ecosystem. Jack also talked about the importance of protecting pseudonyms, which he called, quote,

built identity. He was specifically talking about Bitcoin Twitter in this context as a leading indicator, a leading edge of people who want to have more privacy, even as they're building a public persona. There really was a conception underlying all of these ideas of a rise of the concept of individual keys for more than just the Bitcoin or the assets themselves. I'm interested in what Twitter is doing because in 2017 and 2018, we saw a lot of efforts around decentralized social networks. But of course, these models didn't address the fundamental reason that social networks work,

which is network effects. Most of them had some conception of paying users for content, but ultimately, the little tiny bit that you get from users who are in that same ecosystem isn't enough to justify not being where the majority of the users are, so there's a real chicken and egg challenge. Therefore, one of the major social networks effectively attempting to decentralize itself by ripping out the data hosting guts from its own protocol in order to put it in something that is user-owned and controlled,

is potentially a really important change in how social networks are organized. And I think that it may be more than just Twitter, as in if they pull it off, it gives license to regulators, for example, who don't want companies like Facebook to have as much control over data as they do to have to follow suit in some way. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is crypto.com.

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Get started at nexo.io. Let's look to our main conversation, and I'm going to kick it off with a tweet from Pomp over the weekend. Dear Bitcoin haters, Bitcoin has spent a record 63 days straight above 10,000, and is only showing signs of going higher. The market is proving your bearishness wrong. There is always time to capitulate and join the party. Smiley face, love Pomp. So what happened here? Well, Bitcoin has now spent 63, actually now 64 days in a row, above 10,000.

thousand dollars per Bitcoin. The previous record was 62 days, which happened between December 1st, 2017, and January 31st, 2018. Obviously, Bitcoin hit its all-time high during that period, almost doubling to 20,000. It's also been far less volatile recently. According to coin metrics, the 120-day volatility has gone down 41% already in September. So why does this matter? First, let's address. the major fud you're likely hearing right now if you're noticing Bitcoin fud, which is stock market correlation fud. You might see some say something to the effect of, well, the stock market has been going down for four weeks. Shouldn't Bitcoin be shining? To which you might reply that Bitcoin isn't seen by its investors as a hedge against stock prices.

It's seen as a hedge against currency debasement and inflation. And in fact, what we should probably be doing rather than looking first at the correlation between Bitcoin and the stock market is trying to understand what has been driving the stock market down. Over the last four weeks, the concerns that were driving the stock market down included, one, a sense of being overvalued, a sense that maybe the rally had gotten too hot. Well, obviously, valuation concerns have nothing to do with Bitcoin. Bitcoin is not related except through shared underline. circumstances to individual asset prices. But a second concern that was driving the stock market

down included a return of lockdown fears. We've seen the implementation of smaller-scale lockdowns all over Europe and even one large-scale secondary lockdown in Israel. And so it may be worth asking, what is a lockdown fear really in terms of economic implications? lockdowns mean a dramatic shift away from consumption. They are a reduction of economic activity. Put differently, they are deflationary concerns. The concerns that arise from lockdowns have to do with the general slowdown of the economy, which tips it into a deflationary mode potentially. Now, of course, there is an inflationary other side potential to deflationary concerns, which is that central banks tend to be terrified of deflationary spirals,

and so they go out of their way to pump a ton of money into the system whenever they have that fear. At some point, the concern goes that deflationary environment shifts radically, quickly, and outside of our control into an inflationary environment. Earlier this year, that fear of that switch is what drove people like Paul Tudor Jones and his great monetary inflation thesis to look at Bitcoin. What's more, we've seen evidence that this concern is driving broader interest in Bitcoin as well. The Bitwise Bitcoin fund has doubled to $9 million.

And Matt Hogan, the head of research at Bitwise, put it like this. With the unprecedented expansion of the Fed's balance sheet, the radical amounts of fiscal stimulus and the Fed's new and significantly more dovish inflation policy, Bitwise clients are looking for a hedge. Bitcoin is the most efficient hedge for inflation that exists in today's market. So then what you have here is a short to medium term deflationary concern that was driving those stock prices down, warring with a longer-term inflationary concern. Now put on top of that, you have just the straight volatility concerns of the election. where people aren't really willing to move too much in advance of knowing just what the heck is going to happen.

Even today, as stock prices are returning, so too is the volatility index. So what would you expect an inflation hedging asset to do in that context of a short-to-medium-term deflationary concern warring with a longer-term inflationary concern? You'd probably expect it to stay pretty flat. And what has Bitcoin done? stay pretty flat. In fact, one of the flattest periods it's ever been. In addition to the stats mentioned the 30-day historic volatility has been flatlined near 55%, and the 30-day implied volatility, which, in other words, is how volatile investors expect the price of Bitcoin to be, has declined to

44%, which is the lowest level in almost two years. There is another thing here, though, that's really important to note. There is nothing that drives in new investors to Bitcoin, like growth and ultimately new price highs. When you see Bitcoin start to re-approach its all-time high of 20,000, you can expect an absolute flood of people into the market. However, there's another side to this as well. There is nothing that assures long-term holders and people who are maybe newer but still getting into the mode of long-term holding, like new price floors. The psychological confidence that comes with what feels like a price floor around 10,000 is huge. And this is, of course, not to say that Bitcoin couldn't dip below 10,000. However, at some point,

Hottlenauts joke, where he's said, you know, I don't think we're ever going to see Bitcoin below 10,000 again, which, by the way, he said probably more than a half dozen times now, so it's become its own meme, at some point he's going to be right. And the longer that Bitcoin stays above that magical, easy psychological number, the more likely it is that it reassures the holders who keep it there, who are also the people who, when it goes below that, are going to scoop and gobble it all up because they think it's on the cheap. So this isn't just some other random numbers.

I think that when it comes to market psychology, Bitcoin's longest run above 10,000 matters. It matters not just for long-term holders, but new people who have been brought in over the course of this year, based on their concerns about long-term currency debasement and the great monetary inflation. Anyways, guys, let me know what you think. Does this actually matter? Is it just a market game? Hit me up on Twitter.

Let me know. And as always, thanks for listening. Until tomorrow, guys, be safe and take care of each other. Peace.