The Breakdown - Why So Gloomy? Mt. Gox Unlocks Latest Bummer in Downward Sentiment Spiral

Episode Date: June 25, 2024

NLW covers the dip over the weekend and what's driving such gloomy attitudes in the crypto space. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ 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. What's going on, guys? It is Monday, June 24th, and today we are talking about the slump. 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 in the show notes or go to bit.ly slash breakdown pod. All right, friends, happy Monday. Hopefully you had a good weekend because it wasn't all that fun

in the world of Bitcoin and crypto, at least not from a sentiment perspective. In fact, it was another rough weekend for Bitcoin with the price plunging below 61,000. We're now entering the third week of the correction with the total drawdown hitting 13%. And that is all before today's price action, which continue to send Bitcoin lower. This correction is not as deep as the one in April, but it has been far more persistent. Liquidity is extremely poor and price continues to bleed out day after day. And while sentiment on the timeline has been deteriorating rapidly, Bitcoin-specific indicators aren't quite as dire as you might think. Santiment, a service that scraped social media posts for Bitcoin commentary, has been showing negative sentiment since May 23rd.

They tweeted earlier in the weekend, The crowd is mainly fearful or disinterested toward Bitcoin as prices range between 65K to 66K. This extended level of fud is rare, as traders continue to capitulate. BTC trader fatigue, combined with whale accumulation, generally leads to bounces that reward the patient." End quote. The Bitcoin Fear and Greed Index only fell into neutral territory on Sunday after maintaining greed throughout the drawdown. There's also a growing cohort of traders who think that sentiment might have hit its bottom. Nikolaus wrote, I didn't follow Bitcoin in 2017, but I wonder if the sentiment on CT was similar.

Bitcoin dominance is repeating its past patterns, and the all coins I track are reacting the same way. Varish accounts are gaining traction as Bitcoin consolidates below all-time highs. I understand the risks, but I don't see many focusing on the potential. Now as far as market-driven price action goes, the past few weeks have seen relatively few liquidation cascades. Rapid price moves on Sunday seem to have triggered around 10 million in long liquidations, which is very low as these types of moves go. Future's open interest has declined by 5% since local highs early last week. Bitfinex analyst noted that liquidity has dried up on centralized exchanges. They wrote, Overall, it looks as though traders have decided to get out of the way of the stable and

slowed down trend and wait for better conditions. Analyst Ted Talks macro pointed out that the Bitcoin decline has happened right in line with three weeks of liquidity tightening from the Fed. This has occurred throughout a combination of Treasury account management, Fed balance sheet operations, and a drawdown of the reverse repo facility. Ted wrote, liquidity bottoms in the coming 10 days, then rips higher again. Get ready. Taking a longer view, Bitcoin has been ranging since March. We've seen multiple trips above 70,000 and repeated drawdowns to 60,000, but generally price seems to be consolidating within this range. June price action has been less volatile and trending down, a definite change

from the past few months. However, the lack of a violent drawdown suggests this could simply be the summer doldrum setting in, rather than an early end to the bull market. In terms of understanding what's been going on for real, the most obvious sell pressure has been continuous outflows from the Bitcoin ETFs. The last two weeks have seen net outflows of 580 million and 544 million, respectively. This is the first time the Bitcoin ETFs have recorded two consecutive weeks of outflows above $500 million. Cumulative outflows are comparable to the largest single week of outflows which occurred in April. Checking on individual funds, Fidelity is the outlier this time around, seeing 417 million in redemptions across the two-week span. This comes after a period of strong inflows for

the Fidelity product, suggesting that a large trade was put on and then taken off, rather than being related to buy and hold investors cashing out early. We've also seen major outflows for Ark and Greyscale during this period, with BlackRock managing to hold strong with zero outflows. Regarding a large trade on winding, the most likely candidate is the basis trade put on by hedge funds over the past few months. This trade involves buying the spot Bitcoin ETFs and selling the futures contract, capturing the spread and price. We know that Bitcoin futures shorts among hedge funds funds reached record highs earlier this month. At times, this trade has been yielding more than 9% on an annualized basis, which can be levered up even further. With recent bearish price action,

that spread between Futures and Spot has collapsed, making the basis trade much less attractive. The June Futures Contract is actually trading slightly below Spot at this point, while the July contract is at less than a 1% premium. Futures contracts naturally decay to meet the spot price as they reach expiry. However, this is the first time this year that the expiry of a quarterly contracts hasn't featured a massive pop in the spread. On-chain analyst, Checkmatey thinks the trade is over, tweeting, Bitcoin futures cash and carry trade is very likely reaching the end of the juice left to squeeze. A few weeks ago, traders could lock in an almost risk-free 10% annualized premium by being

long-spot-short futures. Technically, this is around 5% as you need capital on both sides. That is now down to 6% or 3% technically, which is below the risk-free rate of cash equivalence. Mike Cagney, the CEO of figure markets, explained what he's been seeing, commenting, we've had 15.5 billion of net inflows into Bitcoin ETFs, but a 7.5 billion increase in futures open interest over the same time period. The basis trade, not some coin-based conspiracy, is why the ETF inflows haven't driven prices higher after that initial push up. It's important to look at both sides of a market. The quote, there was X Bitcoin minted today and Y inflows into ETFs, ignore the short going on the futures at

the same time. Note that now the basis is not as attractive, the unwind shouldn't impact prices either, end quote. Hello, friends, before we get back to the rest of the show, I want you to join me at Permissionless. Permissionless is a conference for crypto-natives by crypto-natives. And the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S., the U.S. remains the beating heart of crypto. Today, the tide is turning.

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If you go to the Blockworks website, blockworks.com, there will be lots of information about how to register, and again, use code Breakdown 10 to get 10% off. While the basis trade is theoretically market neutral, it can still have. of a big impact on sentiment. As the trade was being put on, we saw massive inflows with a relatively muted impact on price. As it unwinds into the end of the month, we'll likely see large ETF outflows, also without having a massive impact on price, because spot selling should be equally matched by buying back the short futures position. Sentiment, though, is a whole different question, with few looking to step into the market in the face of strong ETF outflows.

Pratikala of DigitalX tweeted, The Unwind will impact morale as headlines say that spot Bitcoin outflows make new records. Most of the public don't get basis trades or its unwinding having net zero effect, they will just believe the headlines. There was also big public selling last week from the German government, at least if the headlines once again are to be believed. In February of this year, German authorities seized around 50,000 Bitcoin from a 2013-era movie piracy website. At the time, it was the largest Bitcoin seizure in European history, a little more than half the size of the stolen Bitfinex coins. The holdings are currently worth around $3 billion. On Thursday, German authorities began shuffling the Bitcoin around. Several thousand Bitcoin were transferred to fresh wallets,

while some were returned to the original wallet. The purpose of those movements were very unclear. Easier to discern were flows in decentralized exchanges, presumably to be sold or to settle previous OTC deals. Since Thursday, around $19.95 million worth of Bitcoin has been sent to Coinbase Cracken and BitStam. 19.5 million was returned by Crackett a few days later, which is a little difficult to come up with a good explanation for. We can only go on what we know, and for now, that's not much. The government hasn't made any announcements regarding the Bitcoin, which is a little lot. Some traders are assuming the worst that they're about to dump the entire stack into low liquidity. Robert Quartley-Genero, chief strategy officer at BitTru, said, quote,

having seen a slippage in the price of Bitcoin, the German government is releasing significant tranches of BTC and has taken a view that the price of Bitcoin is to soften for a while to come. Frankly, that seems pretty presumptuous. However, some noticed large positions being unloaded on BitStamp with pretty gnarly execution on Friday. So ultimately, this selling pressure could already be over, or the German government could load up another tranche to begin this week. we'll just have to wait and see. Crypto Twitter, following their pattern right now, is convinced that the selling will continue for the foreseeable future. On the flip side, Don Crypto-Trades, wrote, can't remember a time where sell-offs, big or small, due to government coins moving or

selling, haven't marked some kind of local bottom. Another big seller over the past month has been struggling Bitcoin miners. We know for sure that Marathon Digital has offloaded $100 million with the Bitcoin since the beginning of June. What's less certain is what smaller miners are doing to keep the lights on and the hash rate churning. According to Onchain Analyst Checkmaty, around of current hash rate is struggling to make a profit on their operations. He said that miners are likely to be distributing some of their Bitcoin holdings, but it doesn't appear to be a complete and total fire sale. Jake Media added, miners might be treading water up here. They may not be full-scale bare market level capitulating, probably just treading water. They mine 10 Bitcoin, they sell 10 Bitcoin.

That seems to be the consensus view across industry analysts. Matthew Sigel of Van Eck looked at publicly listed miners, writing, nearly all Bitcoin miners are selling 100% of their coins, while CleanSpark is managing to hoddle their Bitcoin and use their relatively USD balance sheet to acquire new capacity. This is the longest period of minor capitulation in Bitcoin's history, thanks in part to a boost in revenue from fees surrounding the halving and the launch of ruins. We're over 60 days into the process currently, while the previous two cycles took eight days and 24 days for weak miners to give it up. Analyst Willie Wu wrote, I'll break it down in simple terms. When does Bitcoin recover? It's when weak miners die and hash rate recovers. This

one is for the record books as it's taking a lot of time for minor capitulation post-having, still waiting for the miners to properly die. Guys, come on, just die. And looking at the overall market, checkmady thinks we're just about there, tweeting, the Bitcoin sell-side risk ratio has reached levels signaling it is time for the market to move. All the profits that were going to be taken have been, same for losses. The market needs to find a new price range to stoke the fear of fire, greed, panic, or euphoria. And of course, we haven't even gotten into the alts yet. While Bitcoin price action is uncomfortable, all coins are a downright bloodbath. Beyond Bitcoin and Ethereum, the drawdowns have been excruciating.

Other significant layer 1 tokens are down between 40 and 70% from their year-to-date highs, which were put in during March. We're also seeing a lack of risk appetite among the ecosystems that have been doing well. And some indeed are starting to think that this round is over. Andrew Kang, a mechanism capital, did extremely well with meme coins and long-tail alts during the past year. Last week, he wrote, I believe the cycle is over for 99% of alts. Hold what makes sense to hold for multi-year and decade investments. A big part of the problem for Alt is a massive supply overhang. There's billions of dollars worth of token unlock set to take place over the rest of the year,

and markets are already straining to absorb the additional supply. Some are also noting that venture firms could be under pressure to realize profits, with crypto falling out of favor as the hottest tech trend. Markisthelian of 10x research wrote, VC funds invested 13 billion in Q1, 2022, while the market turned into a steep bare market. Those funds are now under pressure from their investors to return capital as AI has become a hotter theme. Investor Santiago Santos had a similar take. Writing up his thesis for the rest of the year, Santi suggested, tokens with big unlocks will continue to underperform, mostly because funds that are unlocking try to get back above high watermark from the previous cycle, so are less price sensitive,

i.e. will take a 3 to 4x at all costs and indiscriminately dump. All of this makes for frosty sentiment on crypto Twitter. Zach Vol commented, Bitcoin is down 13% from all-time high. So why is everyone so upset because most of the alt coins and meme coins they've been buying have collapsed so hard they need a 200 to 300% markup to reach the prices they traded at only three months ago. Lastly today, breaking this morning, news that the Mount Gawks trustee is ready to finally distribute Bitcoin from the bankrupt exchange, really just put an nail on the coffin. This distribution process has been constantly delayed for years, but this time we have a solid starting date. The trustee informed creditors that distributions of Bitcoin and Bitcoin

cash will begin in July. Mount Gox has around $9 billion in tokens to distribute roughly 142,000 of each. We don't have any indication yet of how long distribution will take, but the deadline to finish up is in October. While this is a major relief for creditors who have been waiting more than a decade to see their Bitcoin again, traders are less enthusiastic about the supply coming back online during an already soft period. TXMC trades wrote, if the Mount Cox payees hold even the slightest feelings for the community, they would take zero profit here and instead open fresh longs at 62K. Indeed, there were plenty who thought that the news flow couldn't get much worse. Crypto gel wrote, Mount Cox news coming in after a 13.5% bleed over multiple weeks,

this market really hasn't changed one bit over the years. Would be funny if bad news marks the local bottom again. At the time of recording, we have dipped down to 59,000, so clearly we are starting this week off blue. However, that's not all that's going on. There are some much more positive indicators coming online as well, but for those, we will have to come back tomorrow. Appreciate you guys listening as always, and until next time, be safe and take care of each other. Peace.