The Breakdown - Why This Autumn Could Be Bitcoin Season

Starting point is 00:00:00 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 Nidig and produced and distributed by CoinDest. What's going on, guys? It is Thursday, September 30th, and today we are talking about why this fall, aka this autumn, could be Bitcoin season. So one quick correction before I get into this. Yesterday, most of the times that I was referring to Cracken Settlement with the CFTC, I said the correct number of $1.25 million. But at one point in the show, I said that their settlement was $125 million,

Starting point is 00:00:50 which obviously would have been a much bigger deal. Just wanted to make it clear that it was a $1.25 million settlement. All right, let's talk about why this fall could be Bitcoin season. And to get into the conversation, let's talk about how the crypto industry uses the word season in general. This refers to a sort of cyclicality that has been present historically in the crypto industry. Basically, the idea is that as part of the market cycle, a Bitcoin rally tends to then move into what people have called alt season. The idea here is that people who have made a bunch of money and Bitcoin, then recycle their profits into alts, which they view at that part of the cycle, is having a bigger opportunity to grow more over some period of time. Those alt cycles always

Starting point is 00:01:39 encourage a sort of mania, and then eventually they pop, and people who are wanting to stay in the crypto industry retreat to some safer assets, specifically Bitcoin. We languish in obscurity for a while, and then eventually the cycle starts again. Now, of course, there are lots and lots of debates about the super cycle and whether a super cycle or at least just a breaking of the traditional four-year cycle based around Bitcoin halvings has remade how we should think about cycles going forward. I've done a bunch of shows, just go look up Supercycle and you will find them. I tend to be more in the we've broken the cycle camp than not, but even if you don't want to go so far as to call what we're in now a super cycle, I think that it's very apparent from the last

Starting point is 00:02:23 year and a half, that cycle theory is a lot blurrier. I think you can make a pretty compelling argument that 2020 actually saw two separate bull cycles start. Now, these cycles were co-mingling, and there were many shared participants, but they were ultimately two circles in a Venn diagram rather than the same circle. On the one hand was the Bitcoin bull market, and this is more of the traditional cycle type of argument. In the wake of the market crash after COVID-19 shutdowns, Bitcoin was extremely resilient. That plus the crazy experimental monetary policies of central banks around the world got the attention of hedge funders like Paul Tudor Jones and his great monetary inflation thesis,

Starting point is 00:03:03 Stanley Druckenmiller, Bill Miller, etc., etc. Obviously, that also led to Michael Saylor and his micro-strategy purchase and the entire idea of Bitcoin as a treasury asset that started to make it into the institutional world as well. That whole cycle crescendoed coming into March, April, and May of last year, and since then we've been fighting a never-ending title wave, it seems, of FUD, right? We've had China Fud, regulatory fud, tether-fud, Tether-Fud, somehow, et cetera, et cetera, et cetera. But that's been kind of the Bitcoin side of the story. However, even as those hedge funds were starting to get really excited about Bitcoin

Starting point is 00:03:40 and how Bitcoin might be a hedge against rampant government printing and whatever was to come next, we were also in the midst of DFI summer, where at the beginning of the summer 2020, there was less than a billion dollars in value locked in defy. That grew and grew and grew and grew until here a year later we have more than $80 billion locked in defy on Ethereum alone. The big explosive months were really those summer months, and I think you can make an argument that it was in fact the proceeds from defy summer that helped fuel the first phase of the NFT boom that happened towards the end of the year and then had its own crescendo in around

Starting point is 00:04:14 March of this year 2021. Now, like I said, these things are blurry. There's commingling. There were plenty of defy investors who were also loading up on Bitcoin. There was probably plenty of Bitcoin profit that went into NFTs, at least from the traders. And I think in general, it's worth asking about zero-sum thinking as it relates to crypto markets. There are some for whom the questions of Bitcoin versus everything else are highly philosophical. And I think those have always been super coherent to me. If what you're interested in is the hardest money, the soundest money, the most decentralized money, the most untamparable with money, of course you're going to prioritize Bitcoin. Like I said,

Starting point is 00:04:49 this is a value judgment. It's a goal prioritization that makes sense. But there is also some part of the frustration, at least, that you see on Twitter from Bitcoiners that has to do with a presumption that there is a limited pool of attention and time and that all the other things in crypto take away from that. I'm kind of of two minds about this. I think in the context of any shorter period, there is perhaps a bit of that. There is, at any given time, X amount of participants and X amount of attention they have, an X amount of resources they have, and that can flow more or less to Bitcoin based on where in the cycle we are and what else people are interested in or making money from. In the long run, I think that we are in a much more of a rising tides lift all

Starting point is 00:05:27 boat situation, which again can be frustrating if you're a Bitcoiner who's really only interested in that super sound hard money goal. But either way, I think net net over the course of 10 years, everything that even sort of resembles crypto is going to be massively, massively huger than it is now, capturing a massively bigger share of global attention, having a massively bigger percentage of populations invested, et cetera, et cetera, et cetera. Anyways, that's all set up to this idea of this fall being Bitcoin season. And so we're back to that first category where in the context of any given moment, call it any given quarter, any given six-month period, there's going to be within this larger

Starting point is 00:06:03 crypto-milu, things that have more or less attention on them. Although Bitcoin's institutional fall was brewing last summer, for example, the attention in this industry was squarely focused on DFI. You get what I'm saying. So, why then might Bitcoin be uniquely positioned to claim more narrative share this fall? There's a bunch of reasons. The first is what seems like is going to be increasing regulatory pressure on stable coins and DFI. Anyone who's been reading the tea leaves of coming regulatory animosity has got to have seen that almost all of the attention is focused not on Bitcoin but in these other categories. There is a ton on stable coins, and that has been the case since last year when Brian Brooks,

Starting point is 00:06:43 the former Coinbase lawyer and then acting comptroller at the Office of the Comptroller of the Currency, made it so much easier for banks to interact with stable coins. That raised the ire of Democrats who countered with the Stable Act, and these concerns and questions around Stable Coins have been ever present throughout the national discourse this year. This podcast is sponsored by Nidig, and they put out a research newsletter that's one of the best ways to track market insights and track the turning points of Bitcoin adoption. Sign up at nighting.com slash NLW. That's NYDIG forward slash NLW.

Starting point is 00:07:26 Defi has also started to find its way more and more into the conversation. You saw Dan Berkowitz the soon-to-be former CFTC commissioner's speech about defy, and you've got to think as he becomes General Counsel of the SEC that that interest is going to extend. Gary Gensler has also talked about defy and has frequently claimed things as decentralized in name-only. So if there is some big focus or regulatory pressure on stablecoins in defy this fall, how might that impact Bitcoin? Well, one, depending on how severe the pressure on stablecoins is, if you actually saw something

Starting point is 00:08:00 like the Treasury being able to approve or deny certain stable coins, it could theoretically elevate Bitcoin and ETH, to be fair, as a transactional and reference currency, a role that in particular Bitcoin used to have, but which was supplanted by stablecoins. Remember, in the 2017 run-up, part of the reason that Bitcoin got so high is that people were buying Bitcoin to enter into ICOs. That hasn't been the case for a few years as people use things like Tether and USDC. This, to be fair, is a pretty outside possibility. I don't think we're going straight to the Treasury getting to control stablecoins entirely, at least not without a hell of a fight, but it's worth at least noting. I think more realistic possibilities are that pressure on

Starting point is 00:08:40 defy could stem the tide of emergent institutional interest in this space, or at least put a pause on it. From all accounts, institutions that have now gotten into Bitcoin are also looking at whether they should be in on Ethereum because of defy, or even looking at assets like Solana, or even looking at defy assets specifically. It's not hard to imagine a lot of compliance and risk management sides of the house saying, while there is this sort of regulatory pressure, let's not delve any deeper for now. Overall, it just seems pretty clear to me that defy is going to go through a gut check period. An example of this today is that 1 inch, the popular decentralized exchange or Dex aggregator, has started to geofense users from the U.S. users in the U.S. get a pop-up now that says

Starting point is 00:09:19 it looks like you are trying to use the 1-inched app from a restricted territory, or are using a VPN that shows your location as a restricted territory. We respect your privacy, but please change your VPN settings to correspond with your real location. One Inch has said that their terms of use have actually restricted U.S. users since April, but that these sort of notifications are just coming online on a technical level. to match the terms. The organization said the One-inch network is in the process of collecting the Series B funding round that has now grown to $175 million instead of $70 million, as was planned before. A significant part of those funds will be used for the development and launch of

Starting point is 00:09:52 the 1-inch Pro product which is specifically designed for the U.S. market and for global institutional investors in accordance with all the regulatory requirements. So basically, this Dex aggregator, this decentralized exchange aggregator, is now being forced to balkanize their product into the version for U.S. investors and presumably U.S. accredited investors and the version for the rest of the world. One inch is certainly not the only decentralized exchange that has gone through this. In July, Uniswap Labs also started to restrict access to certain tokens through the interface for the Uniswap protocol that it maintains, and it did so citing the, quote, evolving regulatory landscape. This gets into an important technical distinction that may become relevant legally, which is the line

Starting point is 00:10:31 between interfaces and protocols. You can see this in the note that Uniswap. put up when they made this change. To continue to innovate and provide this tool for the Uniswap community, we monitor the evolving regulatory landscape. Today, consistent with actions taken by other defy interfaces, we've taken the decision to restrict access to certain tokens through app.uniswop.org. These tokens have always represented a very small portion of overall volume on the Uniswap Protocol, and importantly, the Uniswap Protocol, unlike the interface, is a set of autonomous decentralized and immutable smart contracts. It provides unrestricted access to anyone with an internet connection. Similarly, this action has no impact on the Uniswap interface code, which remains open source,

Starting point is 00:11:10 or the many other portals are locally run instances used to access the Uniswap protocol. Now, of course, how much this separation will actually carry water legally is the big question. And this isn't really defy-itif I, just to say that it's going to go through this hard period where it has to actually fight these battles, and it'll come out in some way, shape, or form on the other side. However, I think that it feels pretty clear that as this happens, it will highlight the trade-off that Bitcoin made in terms of decentralization. Which brings me to my second point about why this fall could be Bitcoin's season.

Starting point is 00:11:44 It's not just that regulatory pressure won't come at Bitcoin the same way. It's that Bitcoin will in many cases, or at least from a narrative perspective from regulators, be held up as the type of thing that is okay. We only need to look at how Gary Gensler, the chair of the SEC, has been talking about Bitcoin and Bitcoin futures as an example of this. So let's pop back to August when Gensler spoke at the Aspen Secure. security conference. There were a couple notable parts of this appearance. First, he agreed with former SEC Chairman Jay Clayton that basically all digital assets or at least very many of them were

Starting point is 00:12:15 securities because, quote, you see, generally, folks buying these tokens are anticipating profits and there's a small group of entrepreneurs and technologists standing up and nurturing the products. I believe we have a crypto market where many tokens may be unregistered securities without required disclosures or market oversight. It was a big slap in the face to everyone who hoped for something different when he agreed with Clayton's previous dismissive statement about the whole of the crypto industry outside of Bitcoin. He also said, make no mistake, it doesn't matter whether it's a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These products are subject to the securities

Starting point is 00:12:50 laws and must work within our securities regime. That statement was notable because stable value token was a new term that he invented seemingly to give the SEC the ability to regulate stable coins, as was pointed out by numerous members of Congress, including Tom Emmer. But the point is, the point that I'm trying to make, at least for this show, is we have to also look at how he spoke about Bitcoin. He said, next, I want to turn to investment vehicles providing exposure to crypto assets. Such investment vehicles already exist, with the largest among them having been around for eight years and worth more than $20 billion. Also, there are a number of mutual funds that invest in Bitcoin Futures on the Chicago Mercantile Exchange, CME. I anticipate that there will be

Starting point is 00:13:28 filings with regard to exchange traded funds, ETFs, under the Investment Company Act. The Investment Company Act provides significant investor protections. Given these important protections, I look forward to the staff's review of such filings, particularly if those are limited to these CME traded Bitcoin futures. In other words, he's basically saying that Bitcoin futures were likely going to clear the SEC's muster. Now, this wasn't all sunshine and rainbows, even for Bitcoiners at the time. A lot of people said after that speech that it probably meant that a spot Bitcoin ETF, was not getting approved this year. Stephen McClurg, the chief investment officer for Valkyrie, which has an active application with the SEC for a Bitcoin ETF currently said,

Starting point is 00:14:07 I think his comments are pretty clear that a pure-spot Bitcoin ETF isn't coming soon, and that futures products would potentially be considered. I think it's certainly going to direct our conversations and our product roadmap. He continued, though, it's a really bizarre world where you can launch a Bitcoin ETF in Canada, US people can buy it through their brokerages, and you can create a USETF that includes Canadian ETFs, but a Bitcoin ETF isn't available in the U.S. Either way, Gensler reaffirmed this position in prepared statements for a Financial Times conference yesterday.

Starting point is 00:14:36 Here's what CoinDesk wrote about it. U.S. SEC Chairman Gary Gensler reiterated his support Wednesday for a narrow class of Bitcoin exchange traded funds that would invest in futures contracts instead of the crypto itself. Gensler signaled out Bitcoin ETFs, which invest in futures contracts that trade on the Chicago Mercantile Exchange and register under the Investments Company Act of 1940. The so-called 40 Act, quote, provides significant investor protections. He said in prepared remarks for a Financial Times conference, I look forward to staff's review of such filings.

Starting point is 00:15:04 From what we've seen before, there is far, far less appetite for this sort of Bitcoin futures ETF than there is for spot Bitcoin ETFs. And you need to only look at the example of Canada to see that clearly. But still, I think in narrative terms, I think in terms of stories, I think in terms of media. Imagine if we have a situation in the fall where stable, are under threat of basically nationalization via the Treasury Department, where leaders of defy protocols are being dragged in front of Congress in the Senate. But the SEC is cleared a Bitcoin futures ETF. It's hard not to see how that makes for a dramatic narrative shift, especially

Starting point is 00:15:40 among those who aren't paying that much attention, people for whom this is an interesting new asset class that potentially represents a small allocation in their portfolio. Next, let's talk about fundamentals in terms of how this fall could be Bitcoin season. And I'm thinking's specifically here of the great hash rate migration. A story that I noticed this morning is that Argo, which is a London-based mining firm, is buying 20,000 more miners for its West Texas data center. This is land that they bought in March. Now, at the same time, we are seeing the Chinese government make it very clear that their Bitcoin mining ban is for real. They've hired consultants in provinces like Inner Mongolia to go after firms that may be trying to still

Starting point is 00:16:20 operate, but in a hidden way. And also that they are serious about their cryptocurrency trading bands. This is hard not to see as an incredible net positive for U.S. institutional investors. All of the Kevin O'Leary's out there of the world who are super concerned and super focused on the provenance of their Bitcoin and how it was mined and who it was mined by are going to be delighted that more and more of this activity is moving not only away from China but to the U.S. specifically. It creates incredible fodder for pro-Bitcoin policies to be adopted by the government led by traditional institutional investors. Speaking of adoption,

Starting point is 00:16:58 we have never had a more fertile environment for showing how Bitcoin, enabled by Lightning, can perform in real-world circumstances outside of just buying and holding. Twitter tips seem small, but they are normalizing the potential of Lightning in a huge way. And frankly, one thing that I think is under-discust

Starting point is 00:17:16 is how Lightning doesn't just solve a technical problem of Bitcoin, but it also solves a psychological problem of Bitcoin, People who have enough Bitcoin who are enfranchised enough to use Lightning are also the type who don't really necessarily want to spend their Bitcoin. However, when you're using Lightning for these micro-transactions for small amounts, it makes it feel not absolutely terrible to quote-unquote spend your Bitcoin. You're not using it for big purchases that you'd rather trade your Fiat for, but it makes it

Starting point is 00:17:45 viable for all of these small day-to-day things that you otherwise would have no interest in taking your Bitcoin out and using it for. So I think that we've barely scratched the surface on the relevance for lightning being integrated to a social network like Twitter in terms of proving out technical feasibility, as well as making it feel kind of psychologically okay to quote-unquote spend your Bitcoin. Then there is El Salvador. It's going to be bumpy. There are tons of politics involved, as I've discussed.

Starting point is 00:18:10 But the stress test on the Bitcoin network is undeniable. This Monday morning on September 27th, through his Twitter account, President Naipu Kelle, shared some statistics from the Chivo wallet, which currently has 2,2004. 55,936 total users. That's around 34.7% of the population, and Buckele clarified that that's 2.1 million people actively using the network. He wrote, it's not a bank, but in less than three weeks, it now has more users than any bank in El Salvador. As of that sharing, 14,576 transactions were being made per day. Whatever you think about that experiment, if the Bitcoin network continues to perform in that context, it gets harder and harder to say that it's just for speculation.

Starting point is 00:18:51 Finally, a last factor in why this fall could be Bitcoin season is that there's always a return to Bitcoin during cycle tops. And I'm not saying I'm not predicting that we've hit a cycle top with either defy or with NFTs. NFTs seem to be on their own totally unique schedule and cycle that is not clear yet to anyone who's watching them, I don't think. They also involve actors who pay literal no attention to the rest of the crypto industry. So I think that in some ways you're going to see more and more bifurcation anyway there. But it's still the case that a lot of people have bought a lot of NFTs that are ridiculously overpriced and are going to watch them get cheaper and cheaper and cheaper and less and less liquid, and they're going to return to their

Starting point is 00:19:33 roots in crypto, whether that's Bitcoin or maybe Ethereum. And the point two is that when prices of non-Bitcoin crypto assets recede, it's not just that Bitcoin looks better in terms of its price or market profile. It's that all the arguments that Bitcoiners have made seem to get more credibility. Its cycle changes where you see Bitcoin pick up a lot of converts who maybe were super excited about some other asset before, but who had their hopes or dreams dashed. Like I said, I'm not saying that that's the profile this fall. We could still be in double bubble mode. It could still go crazy. I mean, the fact that this much regulatory intrigue and ChinaFud hasn't affected prices any more than it has makes that scenario seem at least pretty plausible to me. What I know is that,

Starting point is 00:20:12 as you've seen, there are so many factors that seem for a return to narrative focus on Bitcoin this fall. And I think that's really healthy. It's a great reminder of why this is the fundamental underlying asset of this space and why the tradeoffs that it is made that are different than any other asset, even if you like those other assets, are so powerful in the global macro context. Whatever happens, I am looking forward to this fall and I appreciate you hanging out and listening. Until tomorrow, guys, be safe and take care of each other. Peace. Hello listeners. If you're a financial advisor, manager, or CFA looking to learn more about Bitcoin, investment strategies, and tools to share with your clients, then you're invited to

Starting point is 00:20:54 attend CoinDesk's Bitcoin for Advisors event on October 6th. It's a fully virtual event experience designed for advisors by advisors who have found ways to get compliance ready in order to add Bitcoin advising to their practices. You can head over to coindesk.com slash events to secure your complementary registration today. That's coindesk.com slash events where you can register for free. We'll see you on October 6th and thanks for listening.

The Breakdown - Why This Autumn Could Be Bitcoin Season

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