The Breakdown - Why Citi Thinks Bitcoin Is at a Tipping Point

Starting point is 00:00:04 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 nexo.io and Casper and produced and distributed by CoinDesk. What's going on, guys? It is Monday, March 1st. Welcome to a new month. Today we are talking about why City thinks that Bitcoin is at a tipping point. First up, however, let's do the brief. All three parts of the brief today are actually follow-up stories from last week. So first, let's talk about Michael Saylor buying the dip. The entire point of one of my shows last week was that at

Starting point is 00:00:48 this stage, if you sell your Bitcoin when the price goes down, it's going to be bought by big players like Square and Micro Strategy. Well, this morning, Saylor announced that the company had bought another $328 Bitcoin for around $15 million or $45,710 per BTC. That brings their total holdings to 90,859 Bitcoin. And I'm mostly meaming, but also you actually have to consider these types of purchases when you think about selling decisions now. There is a buyer who will hoover up anything we sell at this price, which means a price floor that is much higher than anything previously. Next up on the brief today, Inner Mongolia banning Bitcoin mining. The South China Morning Post writes that Bitcoin mining in the northern Chinese province is to be stopped to save energy. This has to do with larger

Starting point is 00:01:43 concerns from the Chinese government around energy consumption in Inner Mongolia. Bad news, right, Bitcoin mining being banned? Well, not necessarily. Here's Nick Carter's argument in a tweet about it. There's two dirty provinces in China, Xinjiang and Inner Mongolia, where BTC is primarily but not exclusively coal, lots of wind as well in Inner Mongolia. Sichuan and Yunnan are clean, hydro. This is great news. Very positive to see fossil fuel Bitcoin mining squeezed. Ultimately, the only Bitcoin mining will be off-grid using stranded assets because it's

Starting point is 00:02:17 just good policy. ESG, eat your heart out. Now, some are inevitably going to scream, damn, you Bitcoiners can turn any. anything negative into a positive, and there is some truth to that. However, on this one, I am genuinely with Nick. The more that Bitcoin moves to renewables and stranded energy sources, the better for the world and the better for Bitcoin. Finally on the brief today is Wall Street Betts moving off of Reddit? This morning, the at-WSB-mod account on Twitter published decentralizedwesb.com, and I'm going to read a few excerpts from the page. Over the past few weeks, Wall Street Betts has shown

Starting point is 00:02:55 the world that a group of individuals all acting in their own self-interest can coordinate in a decentralized way and compete with large institutions. However, the tools that were used to do this are rudimentary, centralized and prone to failure. Robin Hood, Discord, Reddit, each one of these centralized tools played an important role but ultimately showed their weaknesses. It's time to stop using centralized platforms that can shut us down without warning. It's time to stop using a broken financial system that is archaic and inefficient. It's time to decentralize. If you like what you see, if you see the potential of a decentralized Wall Street bets powered by smart contracts, a decentralized community, a decentralized hedge fund, then join us.

Starting point is 00:03:34 Now, this comes after a splinter with the mods that happened in the wake of Ben Mesrick and the Winklevosses optioning a script about what happened in the context of GameStop. There was a big dust-up with some claiming that the mods were trying to profit. In point of fact, the receipts have shown that the mods were actually trying to reach out to Reddit co-founder Alexis O'Hanian to help them figure out how to set up a charitable trust around any money that came from anything related to this movie script. From my standpoint, this continues to be one of the most fascinating and important power stories in the world, so you can bet I'm going to keep paying attention to it.

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Starting point is 00:05:04 Learn more at casper.network. With that, let's shift to our main discussion why Citi thinks Bitcoin is at a tipping point, but to get there, we actually need to situate ourselves in the larger February context of institutional adoption. Each month investor Travis Kling does a highlight real of the biggest events from the month previous, and late last night he tweeted, well, Crypto, you did it again. The pace of positive news flow continues to be simply astonishing. February brought several of the most impactful events ever for crypto, Bring on March. Here are some of the highlights that Travis listed. First and most obvious, I think, to all of us, was Tesla buying $1.5 billion of Bitcoin. In many ways, Tesla and Elon make sense as the next

Starting point is 00:05:55 domino to fall when it comes to Bitcoin treasuries, but it's still hard to overstate the impact and influence that that decision might have in other corporate boardrooms, particularly in technology. Micro Strategy raised another billion dollars in convertible debt to buy Bitcoin. I've said before that I'm not sure micro strategy buys have any more power to influence the markets per se, at least from an inspiration perspective, but the mechanics of borrowing money for zero percent interest in order to buy Bitcoin are something that I can see many corporate treasury. officers being pretty interested in. We found out that Square had purchased another $170 million of Bitcoin for its balance sheet over the course of Q4 2020. We discovered that BNY Mellon was starting

Starting point is 00:06:37 their foray into the field with crypto custody with the intention to go much bigger. We found out that Black Rock was dabbling with Bitcoin, whatever that means. We discovered that Deutsche Bank was building a new offering around crypto custody and prime brokerage. That MasterCard was going to enable crypto purchases for all merchants this year, that Jack Dorsey and Jay-Z had allocated $23.5 million in Bitcoin to fund Bitcoin development. We also had big news on the regulatory front, with Bitcoin Senator Cynthia Lummis being named to the Senate Banking Committee, exactly the place that we would like to see a Bitcoin advocate. And perhaps biggest of all in some ways, we had tether settling with the New York Attorney General, which leads, among other things, to tether agreeing to future quarterly audits of

Starting point is 00:07:24 reserves, which is a huge boon for the transparency of this space. All in all, if you were feeling a little raw this weekend after seeing Bitcoin dip from 58,000 last Saturday to like 43,000, 44,000 this Saturday, just roll through these highlights and remember where we are in this cycle. Indeed, there's been so much going on that somehow we sort of missed the JP Morgan analyst note from last Wednesday that had this choice that a line. In a multi-asset portfolio, investors can let likely add up to 1% of their allocations to cryptocurrencies in order to achieve any efficiency gain in the overall risk-adjusted returns of the portfolio. J.P. Morgan is historically perhaps the slowest mover among their peers as it relates to Bitcoin specifically, so this is a pretty

Starting point is 00:08:10 meaningful note. Now, as I've mentioned, this type of news should start to lose some of its power to capture our attention, because what matters is not the individual research report, what matters is the aggregate. But in that light, the aggregate momentum is clearly pointed in one direction, which brings us to the city piece published today. This is not just a small analyst note like the JPMorgan piece I was just mentioning. This is a 108-page report from city's global perspectives and solutions or GPS group, and it's called Bitcoin at the tipping point. They start off by owning their own history with Bitcoin, writing that the first city GPS report on Bitcoin was in 2014 in their disruptive innovations newsletter. At that time, Bitcoin had a total market cap of

Starting point is 00:08:55 $6.2 billion, and they focused on the fact that it wasn't appealing to institutions and that, frankly, it had a high likelihood in their estimation of getting disrupted by a generic alternative or a fork. Since then, they said, quote, the uptake of Bitcoin in the past almost seven years has been nothing but extraordinary. Here's what they chose to highlight from this huge report in terms of their conclusions. quote, in the report attached, the authors note the biggest change with Bitcoin is the shift from it being primarily a retail-focused endeavor to something that looks attractive to institutional investors. In a search for yield and alternative assets, investors are drawn to Bitcoin's

Starting point is 00:09:32 inflation hedging properties, and it is recognized as a source of digital gold due to its finite supply. Specific enhancements to exchanges, trading, data, and custody services are increasing in being revamped to accommodate the requirements of institutional investors. Now, that's all pretty hot, but here's the line that people are really focused on. Where could Bitcoin be in another seven years or so? The report notes the advantages of Bitcoin and global payments, including its decentralized design, lack of foreign exchange exposure, fast and potentially cheaper money movements, secure payment channels and traceability.

Starting point is 00:10:07 These attributes combined with Bitcoin's global reach and neutrality could spur it to become the currency of choice for international trade. Part of why this report is capturing so much more attention than some of these other things is not just the significance and depth of it, although that's a piece of it. Part of it is that they're actually zooming out to a world in which central bank digital currencies exist, and these digital fiats are competing for the attention of private corporate actors. City is taking seriously the idea that an independent, non-sovereign settlement mechanism might be more appealing for a variety of reasons.

Starting point is 00:10:46 Another quote from the report that gets at this. If these efforts progress to the actual issuance of central bank digital currency, blockchain would become a mainstream offering. Individuals and businesses would have digital wallets holding a variety of cryptocurrencies, stablecoins, and CBDCs, just like today, they have checking, savings, and treasury accounts. Connectivity between the traditional fiat currency economy, public cryptocurrency networks, and private stablecoin communities would become fully enabled. In this scenario, Bitcoin may be optimally positioned to become the preferred currency for global trade.

Starting point is 00:11:18 It is immune from both fiscal and monetary policy, avoids the need for cross-border foreign exchange transactions, enables near-instantaneous payments, and eliminates concerns about defaults or cancellations, as the coins must be in the payer's wallet before the transaction is initiated. I think it's hard to overstate how important this is. city is not just talking about the narrative that we've had for the last year of Bitcoin as inflation hedge. They're actually looking at it in the context of global foreign exchange settlement and the benefits that it has there. This is not the transactional narrative of Bitcoin as the thing you buy coffee with. This is something much bigger. And while in some ways it's

Starting point is 00:12:00 amazing that it's only now that these big institutions are starting to look at it in this context, the implications of that, later not, are massive. The other part of the report that people have been quoting extensively is the concluding few paragraphs. Quote, the philosopher Schopenhauer once remarked, all truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident. Though the sentiment was expressed more than 150 years before the emergence of Bitcoin, the introduction and evolution of the cryptocurrency illustrates this very human response to change. The idea that a new payment system relying on a decentralized cryptographic approach to facilitate transactions in an extrajudicial manner

Starting point is 00:12:44 that might gain traction and challenge traditional payment rails seemed like a pipe dream in the early days of its release. This gave way to denouncements and restrictions as governments, banks, and regulators sought to limit its growth. As recent events have shown, however, that resistance may be now melting away. Large institutional investors and organizations are choosing to participate in and support Bitcoin. Regulators are beginning to lay the groundwork for the asset to potentially enter the mainstream. Governments themselves are being pressured and many are reconsidering their own currency offerings. The vision of Bitcoin as a force that will transform the world may seem self-evident in just a few more years. The fact this progression has occurred in just over a decade makes Bitcoin

Starting point is 00:13:23 remarkable regardless of its future. The idea in this report, this tipping point idea, is extremely apt, and I wouldn't be surprised if we see this report itself as something of a tipping point in the way that these institutions write and speak about Bitcoin. As I said before, it adds such a huge amount to the inflation hedge narrative, something that big institutions could be excited about helping this technology grow into. Even the way in which it discusses some of the obstacles that remain show a maturation of this analysis. Another line that I found in the report was, quote, security issues with cryptocurrency do occur, but when compared to traditional payments, it performs better. This was after kind of beating down the fud about crime showing the chain analysis report that showed

Starting point is 00:14:11 that only 0.34% of transactions were used for illicit purposes. 12 years into the asset and a few months into this bull cycle, we are still just starting to understand what the sea change of this cycle might be, and it's pretty exciting to watch. For now, I appreciate you listening. I hope you're off to a great beginning of March. Until tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - Why Citi Thinks Bitcoin Is at a Tipping Point

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