The Breakdown - Why the Bitcoin Led Bull Market Will Be Different

Episode Date: February 18, 2024

A reading and discussion of: https://www.coindesk.com/consensus-magazine/2024/02/15/bitcoin-is-back-back-back-baby/ and https://www.coindesk.com/business/2024/02/14/how-bitcoin-benefits-from-global-stresses/ 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 Sunday February 10th, and that means it's time for Long Read Sunday. 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, friends, back with another long reads. And this week, it is all me, no AI for you. We are going to do two quick essays, of course, both about Bitcoin, starting with a perfectly well-suited declaratory piece, Bitcoin is back, back, back, baby. This is by Ben Schiller over at

Coin Desk, and I think sets a perfect tone for what everyone is experiencing right now. Ben writes, take a look at the front page of CoinDesk today, and you could be forgiven for thinking our site is all about Bitcoin. Just look at the headlines. BTC is above 50K. Options traders are betting on 75,000. Bitcoin's market cap is back above a trillion. Bitcoin ETFs have accumulated 11 billion since being approved in the U.S. in January. The Fear and Greed Index, a measure of market sentiment, is in extreme greed territory. Its frothiest moment since BTC's all-time high in September 2021. Bitcoin is even a campaign meme. Bitcoin is dominating narratives dominating media coverage and dominating mindshare among investors,

particularly the institutional kind. To be sure, important projects like Solana, and Chainlink are also rising in value. But this is very much a Bitcoin-led market. Bitcoin dominance, a measure of BTC cap versus the rest of crypto, remains about 50%. Making claims that Bitcoin would reduce in relevance as crypto expanded seem ridiculous now. In November 2022, Bitcoin's share dropped below 35%. Of course, the flows of Wall Street money into exchange traded funds are the driving factor here. The prospect of ETSS was a tantalizing catalyst throughout 2023, as SEC Chair Gary Gensler inadvertently fluffed the market by delaying approval. Bitcoin has been a benefited from being one of the few digital assets classified clearly as a non-security for regulatory

purposes. Nearly every other asset suffers from some regulatory uncertainty. And then there's the upcoming halving in April, when rewards for mining Bitcoin blocks are set to be halved. Havings have historically boosted Bitcoin's price, though the last one in 2020 was less positive in that regard than previous ones in 2016 and 2012. This year's having could be more boosterish, given the sense that the Bitcoin network is becoming more useful and broader based. Cryptoasset manager, Grayscale said in a research note last week, despite minor revenue challenges in the short term, fundamental on-chain activity and positive market structure updates make this having different on a fundamental level. While it has long been heralded as digital gold, recent developments

suggest that Bitcoin is evolving into something even more significant. By fundamental on-chain activity, Grayscale researcher Michael Zhao means ordinal's inscriptions in BRC20 tokens, which allow users to embed data and art on the Bitcoin blockchain, offering a use case beyond its traditional role as digital gold. Such activity has generated more than 200 million in cumulative fees for miners, reducing the pain that they will suffer when the rewards are halved in April. Projects like BRC20 have divided the Bitcoin community between those who want to maintain Bitcoin as a digital gold network for relatively cheap monetary transactions, these people hate higher transaction fees, and those who want to build new functionality on top of Bitcoin's blockchain. We'll see how these

divisions play out in the next few months. The role of the new Wall Street power players in this debate will be fascinating to watch. But for now, Bitcoin is doing just fine. an open-source blockchain with hundreds of millions of users, from the smallest hoddlers to the biggest financial institutions trading Bitcoin-based derivatives. Not bad for a project that started as a hobby 15 years ago. All right, so let's talk about this for a minute. Every new bull cycle is always Bitcoin-led. This is just the pattern, even when ultimately the story of that cycle becomes something different. This happened in 2020, when Paul Tudor Jones' great monetary inflation thesis came out just after Powell started cranking the money printer, and other hedge fundies and Michael Saylor all

got interested. That whole first part of the rally was Bitcoin driven. Now, of course, there were other things going on that summer as well. That was Defy Summer, for example, and it wouldn't be long before NFTs started to capture Normie attention. In that light, what's happening now seems pretty similar. You have a Bitcoin-led rally, a Bitcoin beginning to a new bull market, but for those who are more enfranchised in the crypto community, you also have this massive resurgence of Solana, you have interest in real-world assets and all these other things, and so it's certainly not like crypto people don't have other things they're playing with. The price increases for Solana bear that out.

What I think might be different this time is that I'm not convinced that the same pattern of the Bitcoin leadership in the rally dissipating into altcoins and other things will quite play out the same way. I think that this totally new class of investor with a different type of interest, who frankly might be more aligned with Bitcoin's digital gold-style use case, is going to create narrative continuity for, Bitcoin throughout this cycle, even as other things become more featured and more focused. When it comes to what will get retail back and interested again, I also wouldn't be

surprised if some of the people who decide that they're willing to actually come back or willing to give the crypto industry a chance, do so along those similar Bitcoinsir lines. I think that the trust gap that we have to climb this time to get retail interested again is vastly larger than we have in the past, and a really good answer to that is just plain old, simple Bitcoin. Of course, we will have to wait and see, but it is interesting to speculate upon. Now, next up, we're reading a piecebyte, Jennifer Murphy, the CEO of Runa Digital Assets, called How Bitcoin Benefits from Global Stress.

Jennifer writes, deficits, inflation, war, bank failure, cyber attacks, de-dollarization. These risks loom large as they threaten stock and bond returns for investors. Historically, U.S. Treasuries have been a safe haven, providing some protection from crises. But from 2021 to 2023, Treasury has delivered negative 10 percent, their worst. three-year performance since at least the 1980s. Similarly, the 60-40 diversified portfolio suffered its worst performance period in 14 years, with a return of negative 16% in 2022. In an increasingly uncertain world, what's an investor to do? In his book, Antifragile Nassim Taleb explores the unique characteristics of things that gain from disorder.

The immune system, for example, is more effective after exposure to a cold. Laws are clarified by suits and appeals. Software is battle-hardened by hackers who exploit flaws. What if you could add a portfolio asset that may benefit from global stress, that is improved by uncertainty and volatility. Consider Bitcoin. The Bitcoin network appears to thrive on stress. When the Chinese government banned Bitcoin mining in 2021, around 50% of Bitcoin mining capacity was forced to shut down or move. Within seven months, capacity had completely recovered, and it is now over 2x what it was prior to the Chinese shutdown. In the past 15 months, the world's second largest crypto exchange declared bankruptcy, and the largest exchange was sanctioned by the U.S. Department

of justice. Bitcoin network transactions were unaffected, and trading volumes are near all-time highs. As an asset, Bitcoin may be increasingly anti-fragile as well. When Silicon Valley Bank collapsed on March 10, 2023, fears of contagion sent stocks down by over 1% the next trading day. But Bitcoin rose by 20%. This safe haven price response was a new phenomenon for Bitcoin, and time will tell if it persists. But Bitcoin is outperforming all other asset classes over the last one, three, five, and 10 years, periods that include many stresses. Research from Galaxy shows that a 1% allocation to Bitcoin in a 55% S&P 500, 35% Bloomberg U.S. Ag, 10% Bloomberg commodity portfolio over five years from August 2018 to August 2023, would have resulted in higher returns and better risk-adjusted returns with virtually

no impact on volatility or max drawdown. Last week, Fidelity added Bitcoin to its diversified ETF portfolios in Canada, with a 1% allocation for the conservative ETF and a 3% allocation for the growth ETF. With many Bitcoin ETFs now available in the U.S. such as the low-cost Franklin Templeton, EasyBC, or iShare's ibit, it is easy for U.S. investors to follow suit. Little by little, your portfolio may gain a lot. So here's the reason that I wanted to add this one in as well. Basically what I was arguing just a minute ago is that I think that the Bitcoin narrative that is coming around the introduction of new institutional investors in the ETF is likely to be more sustained, have more duration, in other words, than previous moments where Bitcoin became just part of the general

crypto narrative. I think because this is the only asset available and seems like it will be for some amount of time in this sort of spot ETF form, at least in the U.S., that it's going to create a context for more investors to simply focus on what makes Bitcoin itself interesting, not because they are dyed in the world maxis, or because they wouldn't theoretically be interested in some of the other assets, but just because it's the one that's available to them. You are going to see more and more and more and more commentary like this one and from sources that are increasingly farther away from the core crypto industry. That I think all in its own is going to have a dramatic impact on the shape of these crypto markets in a way that I think keeps Bitcoin at the very center

of focus for a very long time to come. Anyways, friends, that is going to do it for this week's Long Read Sunday. I appreciate you listening as always. Until next time, be safe and take care of each other. Thank you.