The Breakdown - Why Is Bitcoin Going Up?

Episode Date: March 30, 2022

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

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, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, March 29th, and today we are asking that all-important question. Why is the price of Bitcoin going up? Before that, however, if you are enjoying the breakdown, please go subscribe, give it a rating, give it a review, or if you want to get deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also a disclosure, as always, in addition to them being a sponsor of

the show, I also work with FTX. Okay, so I think it's fairly likely at this point that you've noticed that over the last couple days, Bitcoin has gone up and drag the rest of the crypto markets up with it. Today we're going to explore some of the reasons why, and really this is just kind of an excuse to look at recent news and try to understand how all these pieces come together. It's important to note that crypto markets are always some combination of narrative plus market structure. And in a lot of ways, that means that any time you try to figure out what's driving a price, you're really trying not to figure out what's the one thing behind any movement up or down, but instead how these different forces are pulling and pushing on the asset. and the asset class as a whole at any given time. Obviously, we're mostly focused on the last couple of days where we've seen this big pop across crypto assets, but let's zoom out a bit. Jason Williams tweeted yesterday, Bitcoin is up 23.55% over the past 30 days, and a total of 8,906.

How is gold doing again? Now, you may be thinking to yourself, hmm, what does that timeline roughly correspond to? Well, here's a tweet from Will Clemente. Bitcoin is up 35% since Russia entered Ukraine. So here we have our first thesis that this price movement has something to do with Russia's war in Ukraine. We're definitely going to have to unpack that a bit because that could be due to a lot of different reasons, even if you think that has some impact on the price. So what might those reasons be? Well, first, there could be buying pressure from Ukrainians and Russians. In this case, you'd expect to see big increases in Bitcoin purchases denominated in rubles or Hervinia,

which did in fact happen a little bit in the first days after the invasion. However, they quickly started to peter out, and it certainly seems unlikely that the volume that we were talking about, which, while bigger than it had previously been, was nowhere near big enough to move markets even in the short term, is the thing that's still driving the price now 30 days later. Another possible explanation is Bitcoin and the crypto industry's potential role in the humanitarian and economic dimensions of the conflict. If you've been paying attention at all to this podcast, among other sources, you'll know that Bitcoin and Crypto have loomed unexpectedly large in the discourse in both a negative and a positive way.

On the negative side has been the accusations that cryptocurrency in general, Bitcoin and specific, would be used to evade sanctions. The West had chosen this united path where sanctions were its tool of economic warfare, its preferred approach, in fact, to both stop Vladimir Putin while also avoiding World War III, and the concern among some is that cryptocurrencies were ready-made to help him get out of the worst excesses of those pressures. Now, of course, this sort of sentiment has come largely from the folks who are already crypto's largest critics, skeptics in the U.S., such as Elizabeth Warren, as well as skeptics in Europe.

What have we seen? Well, there has been very little evidence of any sort of wide-scale use of Bitcoin or Crypto to help Russia or the oligarchs get around sanctions. In fact, bringing up this question of Bitcoin and Crypto's role in sanctions evasion has had a weird inverse effect where people who are neutral on crypto or Bitcoin professionally, but who are in the business of examining sanctions and sanctions evasions, have ended up coming out as defenders of Bitcoin simply because they are reporting the facts. You've seen this a lot as one of the chief voices saying that Bitcoin and cryptocurrencies are not being used for wide-scale sanctions evasion is the Treasury Department itself in the U.S. Given how much we've discussed the Treasury's

sometimes combativeness or at least questions with the crypto industry as a whole, the fact that they are in a position to now be the defenders of this space by saying that they are not really observing anything, nor are they currently worried about the potential of crypto's use to evade sanctions is a pretty fascinating development. Another unexpected consequence is that we've seen hearings in the U.S. around crypto and sanctions evasion, and even the people who were trying to make bully political points around sanctions were just kind of rebuffed. The witnesses that were called laid out a clear explanation of why it was so difficult for crypto to be used for large-scale sanctions evasion. Even more interesting is the positive fact that while it seems that rogue's

States and oligarchs have not been able to use crypto to evade sanctions, individuals in Ukraine specifically are having success using crypto as a lifeline. Indeed, that's the word that CNBC used, for example, in a recent piece that told the story of how one young Ukrainian and his girlfriend were able to flee the country, in part because they were able to, A, avoid lines at the ATMs by having a big chunk of their life savings in Bitcoin that was stored on a thumb drive, and B, through peer-to-peer transactions were able to get the Polish currency they needed by trading some of their Bitcoin with a friend in order to find transportation and lodging in that new place. Even a handful of these stories can't but have a meaningful impact on people's perceptions of

what crypto's true power is in these sort of terrible circumstances. And then, of course, on top of all that, crypto has been an unbelievable mechanism for direct citizen support. At this stage, $100 million or more has been donated directly. to Ukraine or to Ukrainian organizations through cryptocurrency. Now, there are some really important ethical quandaries around citizens directly crowdfunding war, but there's still no denying the efficacy of using crypto as a donation mechanism in humanitarian crises. The Ukrainian government has certainly amplified this new standing that Bitcoin and Crypto find

themselves in through their full-throated embrace. So all of that is to say that could it be that Bitcoin has gotten some new spark of life because people are observing all of this happening in Ukraine. A third possibility for how this conflict could be driving more price appreciation and interest in Bitcoin and crypto in general is the argument that the U.S. and the West's weaponization of the economic system is causing a reevaluation among states around the world in terms of how much of their foreign exchange reserves they want to keep in U.S. dollars or U.S. treasuries. You've seen some of this go into the Bretton Woods three thesis from Zoltan Posar.

You've seen it in comments from Russian state officials who offhandedly mentioned that they would trade in Bitcoin if Bitcoin was the right currency as long as it was with friendly states. Now, on this front, I feel like this is a much, much longer term trend. In other words, do I think that this whole situation has made sovereigns more likely to buy Bitcoin? Yes, absolutely. Do I think that shift is going to happen inside of a month? No, I do not. Instead, what I find most compelling is the idea that this conflict has served to make Bitcoin more. or Lindy in some ways, its value proposition more clear. In other words, it's not direct market

pressure in the form of Russians or Ukrainians buying crypto. It's not market pressure in the form of sovereigns shifting from dollars to Bitcoin either. And it's not over-ascribing the market impact of this discourse around crypto-humanitarian aid. Instead, the idea here is that the conflict as a whole might be helping people who are already either in the crypto space or dabbling at the edges have more conviction because it's ultimately demonstrating the potential significance of Bitcoin and crypto in a geopolitical sense and creating new conditions that suggest the future need for those types of non-sovereign, non-political assets. So in this way, sure, this geopolitical dimension may be having some influence on the price, but it's likely an indirect one that has to do with people's long-term

thesis. So that's the whole geopolitical kind of narrative dimension to this, but let's talk about the other simply glaring thing, which is much more in the realm of market structure. Nexo is the go-to platform for all things crypto. Invest in the hottest coins out there and start earning risk-free interest of up to 20% APR, paid out daily. Need cash, ASAP, but don't want to sell? Use your crypto as collateral and receive a credit line at premium rates. Open your Nexo account by March 31st and receive up to a $100 welcome bonus. Get started today.

at nexo.io. That's nexo.io. Meet Arculus, the next generation cold storage wallet. Arculus secures your crypto using three-factor authentication, providing a simpler, safer, and smarter way to store, buy, swap, send, and receive crypto. Arculus is offline cold storage. Your private keys are encrypted on the Arculus keycard and are never online. Stay safe from hackers with no cords, no charging, no Bluetooth.

Just crypto security made simple. Buy Arculus on Amazon today. The breakdown is sponsored by FTXUS. FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FTXUS is also the only leading exchange that supports both Ethereum and Solana NFTs.

When you trade NFTs on FTX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. So we were just discussing the idea of Bitcoin as a reserve asset for sovereigns, and this is an idea with deep roots. CoinDesks George Kulutis resurfaced a great quote from Hal Finney in a recent news analysis piece, and that quote came from Bitcoin Talk in 2010, where Hal Finney wrote, The Ultimate Fate of Bitcoin is to be the high-powered money

that serves as a reserve currency for banks that issue their own digital cash. Indeed, that this seems to be playing out not just in terms of reserve assets for sovereigns, but in terms of crypto assets. On March 14, Doquan, the founder of Terraform Labs, announced that UST, their stable coin, was to be backed by a $10 billion Bitcoin reserve. Now, the Terra Protocol issues TerraUSD, which is UST for short and is an algorithmic stablecoin, and the coin Luna. Luna algorithmically backs Terra, so unlike something like USDC, where there is a specific real-world asset like USD

that backs the stable coin, algorithmic stable coins like UST balance the supplies of reserves to keep the price pegged to target. Again from Georgia coin desk, Luna backs UST. When UST's price is too high above $1, the protocol incentivizes users to burn Luna and mint UST. When UST's price is too low below $1, the protocol incentivizes users to burn UST and mint Luna. So that's the basic gist of it. However, Terra has this idea to combine algorithmic stables and asset backstables, and in January, they set up the Luna Foundation Guard, or LFG, which definitely doesn't stand for anything else, and the idea is to create a reserve backstop in the circumstance that this UST Luna system ever stops working. LFG's plan is to

start by buying $3 billion of Bitcoin. So again, this was announced on March 14th, and the market had a couple of weeks, but it was really March 27th when things started really heating up. Big D. Senpai writes, it's so funny that everybody was like, okay, it's extremely obvious for various reasons that Bitcoin is about to pump exclusively, and then it actually happened for once. Zero Exsophis writes, Doquan is very publicly bidding and trying to reverse course the entire market. Remember that if price goes up, more people who are in cash will FOMO bid. CMS Holdings makes fun of the clarity of the message saying, crypto is the hardest market in the world. Last week, some guys,

with a couple billion dollars, said he was going to buy a bunch of Bitcoin, and then the lunatic went and did it. How can you trade that? Moon Overlord says, listen, guys, sometimes trading is just as easy as getting on Twitter and seeing billionaires say they are buying and you copy them. Will Clemente writes, No, it's priced in. Why would he tell us that he's buying beforehand? You literally had a billionaire tell you he was about to twap and people still chose to fade him. As you can see, a lot of people kind of just making fun of the skepticism that was inherent, but at least part of that skepticism came from Bitcoiners who simply wouldn't listen just because there was a quote-unquote shitcoin project involved. This has been a non-stop and consistent theme of the last couple weeks. Is Bitcoiners being

annoyed or frustrated or actually hostile that Terra is choosing to use Bitcoin as a reserve asset in this way? So much for permissionlessness. And frankly, whatever their priors are, I think they're going to have a rough go of it because guess what? This is going to happen a lot more. Nick Batia writes, Terra buying $1 billion of Bitcoin is no different than Tesla, micro-strategy, and El Salvador buying it, bolstering their reserve profiles with the digital asset class's new reserve currency. Many will follow. Dan Held says Bitcoin is becoming the new world reserve currency for both fiat and crypto. Now seeming to confirm that they were in fact buying, right after that big green candle Sunday, Doe tweeted long-live Bitcoin with an orange heart. The next morning,

Mayo Shen at Bloomberg wrote, a lot of rumors around Bitcoin. purchased by LFG, and we finally got Doe Kwan to confirm three addresses associated with their Bitcoin purchases. It looks like they had $2.2 billion in Tether in USC, and then $420 million in Luna. So far, they've purchased more than $1 billion of Bitcoin. Bitcoin today went above $47,000, so is LFG the Michael Saylor the market has hoped for? Or what slash who else is moving the market up? As a quick aside, also this morning, Sailor announced a new subsidiary of micro-strategy called, yes, the meme come-to-life macro strategy that closed a $205 million loan from Silvergate Bank that was collateralized with Bitcoin in order to buy more Bitcoin.

I think, though, really the clear analogy here is not Michael Saylor, but is the relentless bid of Grayscale when the premium was driving Grayscale to become one of the fastest growing asset managers in history in the early part of 2021. Either way, some here are seeing historical significance. Suu from Three Arrow's Capital says we're seeing some of the earliest and most ambitious ideas in crypto starting to unfold. Crosschain decentralized stablecoin backed entirely by digitally native assets was the holy grail in 2016. Frank Chaparro from the block suggests that there is evidence as well that this is having a market impact. Quote, no one wants to sell Bitcoin knowing there is a gigawail bidder. This is what OTC desks are telling me. They're literally not selling because

Doe Kwan says he's buying. Desk executives said, in the last week, we had several family offices and crypto-native hedge funds buy $50 million plus notational in Bitcoin-USD call options across the curve from April to December maturities, largely positioning into the anticipated spot buying. Last week also saw the biggest crypto fund inflows since mid-December, and that was even before the pump we've seen the last couple of days. So it seems fairly clear that there is a here here, but it's still a reasonable question to ask how long it lasts, as well as to recognize other fundamental forces that could

be shaping this as well and could help shape where it goes next. Dylan LeClair, for example, writes, Bitcoin is trading at $48,000 and throughout its entire history. There's only been one other time that the percentage of supply that hadn't moved in over a year was at this level. September 2020. Absolutely incredible. There is this weird fracture right now in terms of market sentiment where some people are just unwilling to believe this and other people think that we are just waiting for momentum to be off to the races. I have no idea. I do know that there are a whole set of market forces that have nothing to do with anything that we've been talking about today that could be lurking just around the corner to spoil the party. That doesn't mean you can't enjoy the green candles while you

can. I want to say thanks again to my sponsors, nexo.i.o. Arculus and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web 3, and the Metaverse, and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators.

Don't miss speakers like Kathy Wood, SBF, CZ, Punk 6529, and Joe Lubin to name just a few. Use Code Breakdown to get 15, off your pass at coin desk.com slash consensus 2020.