The Breakdown - Why Today’s News Tells You Everything You Need to Know About the 2022 Crypto Bear Market

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 nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, September 20th, and today is weirdly an archetypically typical standard day in bare market crypto. Before we explore why that is, 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. Also, a disclosure, as always, in addition to them being a

Starting point is 00:00:49 sponsor of the show, I also work with FTX. All right, folks, happy Tuesday. Listen, I had a housing show planned, and there's a ton in that market that is super interesting to me right now. For one, we've just had the ninth consecutive decline in home builder sentiment, which represents the longest stretch of declines heading back to 1985, and part of that is likely driven by the fact that the average 30-year mortgage is now around 6.3%, which is more than double the average rate a year ago. That's the largest change on record with data going back to 1975. We've also got high-flying companies in the housing space falling prey to the sort of high-growth, no-profitability tech models that characterize the last decade of venture-backed companies. We've also,

Starting point is 00:01:33 also got inventory issues, supply issues, and all of the things that make housing such a fascinating microcosm of the moment of transition we're living through more broadly. So I will definitely be doing that show later this week. But as I was reviewing the crypto news this morning, I found it to actually be such a perfect microcosm of this particular 2022 bear market that I wanted to explore it through the lens of the themes that are really shaping everything going on. As I think you'll see, it's far less clear-line-barish than market prices might make you think. So we're going to discuss a recent market move, a defy hack, some CBDC stuff, regulatory enforcement, positivity and weirdness, pre-narrative institutionalization,

Starting point is 00:02:16 and post-narrative institutionalization, a slew of random fundraising, and an innovation that may get us out of this? Let's start with market moves. There is something that we've discussed in passing but not necessarily honed in on, which is why Ethereum has been hammered since the merge. To me, it's always been fairly clear that the merge, like the halving, wasn't the type of event that was going to be correlated with the specific short-term reason for a price increase, at least not after it happened. The impact of these things on their respective ecosystems

Starting point is 00:02:45 is about long-term properties in the system. And so, to the extent they have a positive impact and price, it takes time to show up. We know this well when it comes to the halving, and I think the merge is no different. But I also think, like the having, the excitement and anticipation of the upcoming event do create a narrative reason before it happens to pile in, which drives the price up. That's what we saw with ETH over the summer. When the merge happened, however, and there was no immediate reason to buy more ETH after, nor some new pool of capital coming in thanks to being unlocked by the event, the price of Ethereum has naturally stabilized back to a bare market base. This is sort of a variation of the buy the rumor sell the news phenomenon. It's more like,

Starting point is 00:03:25 in this case, though, buy the anticipation, sell the event. Even before the week of the merge, this felt like the most likely short-term scenario, and the fact that the merge happened just days after the macro environment slammed into a wall, thanks to a hotter than expected inflation print in the US, which caused the worst day in stocks in two years, well, it was almost assured that this is the type of thing we'd see. Thanks to coin shares, which tracks institutional investor flow into crypto products, we know that the merge week actually saw a fourth straight week of outflows across the board. Interestingly, during merge week, the one positive asset was Bitcoin, which after five weeks of outflows saw inflows of 17.4 million. The conventional wisdom seems to be that

Starting point is 00:04:04 a lot of investors who had ridden the pre-merge hype took profits, which caused, as Kiko put it, quote, large liquidations of leveraged long positions across derivative markets exacerbated by the drop in spot prices. Now, I think overall this is hugely reflective of what's happening out there in crypto markets in general. We're trading in a band of pain, and even the biggest narrative in the market only had the power to drive gains for so long. Once those gains were captured, the base scenario of a crypto market dominated by macro factors ripped back into clear view. Next, a defy hack.

Starting point is 00:04:38 This one is a sad inclusion on the list, but an important reminder of how challenging security remains in decentralized finance. Crypto market maker Wintermute has lost $160 million in a hack relating to its defy operations, according to a tweet from the company's CEO of Genni Gaeoff. He wrote, We've been hacked for about 160 million in our defy operations. C-Fi and OTC operations are not affected. We're solvent with twice over that amount in equity left, and if you have an M-M-M agreement with Wintermute, your funds are safe. There will be a disruption in our

Starting point is 00:05:07 services today and potentially for next few days and we'll get back to normal after. Out of 90 assets that have been hacked, only two have been for notional over $1 million, and none more than $2.5 million, so there shouldn't be a major sell-off of any sort. We will communicate with both affected teams ASAP. If you are a lender to Wintermute, again, we are solvent, but if you feel safer to recall the loan, we can absolutely do that. We are still open to treat this as a white hat, so if you are the attacker, get in touch. Wintermute is a large institutional market maker. They were just named official defy market maker for Tron and trade billions of dollars a day across multiple venues. On Twitter, there is a lot of discussion about the specifics of the

Starting point is 00:05:43 exploit and how it happened, and it seems so far to be connected to a vulnerability exposed last week around vanity addresses generated with online tools like profanity. However, most of the discourse is about the fact that when even extremely sophisticated market participants are vulnerable, it tells you something about just how big the risks remain. Tony Shang from Coney Finance wrote, terrifying when victims are among the most sophisticated actors in the entire space. Jason Yanowitz from Blockwork said the same. Wintermute is a top crypto market maker, one of the most active defy participants, has a huge OTC desk, is registered with the FCA and is run by CryptoNatives. Don't want a fud, but if they can get hacked for 160 million, anyone can.

Starting point is 00:06:22 Haseeb Qureshi from Dragonfly said, if it can happen to winter mute, dot, dot, dot, stay safe, stay paranoid. Next up, let's talk about CBDCs. CBDCs have been less a part of the discourse this year and last year than it seemed they might have been headed towards, but perhaps that lag is catching up. Certainly, the response to Biden's executive order has included quite a bit about the potential for a U.S. CBDC. In fact, we discussed last week that one of the frustrating parts about the reports is that

Starting point is 00:06:49 they keep shirking the question of who has authority to determine if a U.S. CBDC is in the national interest. Today, however, we got a few CBDC updates from other players around the world. The big one is that China's central bank is set to expand trials of its digital yuan to four major provinces, including China's most populous. The last two years of trials have been primarily city-based and driven by lotteries, where citizens win small denominations of the currency and merchants are pushed to accept it. As of January, around 261 million people had opened ECNY wallets and had made transactions worth around 87.5 billion yuan or 13.8 billion dollars. The South China Morning Post also reported that the Hong Kong Monetary Authority plans to start

Starting point is 00:07:27 trials of its CBDC in Q4 this year. Even with all this, I think that the biggest question in CBDCs remains whether or not the U.S. gets in. Certainly, China pushing forward could put more of an emphasis on that question. Next up, in this archetypal bare market day, we have regulatory stuff, enforcement, positivity, and weirdness. If you are a regular listener of this show, you will know that one of the absolute hallmarks of this bear market has been an increase in regulatory action. The Lasbow market made it clear to regulators in the U.S. in particular that they couldn't really keep kicking this can down the field. And so now they're trying to actually figure things out. We have multiple bills in Congress, the entire Biden and men working on reviews, and it's clear we're headed

Starting point is 00:08:09 towards some sort of determination in the U.S. on multiple avenues. Today had a set of stories, that exemplify all sides of that. On the enforcement side, while we discussed yesterday that the SEC is going after Ian Bellina for ICO promotion, the company that he was accused of promoting, Sparkster, has settled with the SEC. They'll pay 30 million in disgorgement, plus 4.6 million in prejudgment interest and a 500,000 civil penalty. They've also agreed to destroy their remaining tokens, remove those tokens from any trading platforms, and publish the SEC's order on its website. If cleaning up ICO stuff four years later is not emblematic of this SEC, I don't know what is. Nexo is a security first platform built for the long run with everything you need for your crypto.

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Starting point is 00:10:23 Download the FTX app today and use referral code breakdown to support the show. On the regulatory positivity side, residents of Colorado can now pay their state taxes with crypto. To do so, they have to use PayPal crypto tools and they have an additional fee, but at least it's a sign of legitimacy. Colorado is led by Governor Jared Paulus, who is one of the most forward-looking U.S. politicians when it comes to crypto and tech in general. Finally, on the weirdness front, the Treasury Department has published a request for comment asking the public to weigh in on how crypto might be used in illegal activities and how it should respond. The weirdness for me doesn't stem from whether Treasury should be dealing with these issues, 100% they should. It's more about the strangeness of this being

Starting point is 00:11:06 what they ask the public to comment on. Take this question. How can the U.S. Department of the Treasury in concert with other government agencies improve guidance and public-private communication on anti-money laundering and combating the financing of terrorism and sanctions obligations with regard to digital assets? The question is, how much does the public have to say? about that. Now, of course, public comment, quote-unquote, still could mean that it's really for a very small number of enfranchised organizations to comment. And what's more, in general, I'm for the government asking for more, not less of people's opinions. It's just strange that this particular issue is one where there is a request for comment when there's so many other issues that the public

Starting point is 00:11:41 might have an even stronger opinion on. Now, let's look at some pre- and post-narrative institutionalization. And first, I'll define my terms. Institutionalization during the last run was very much narrative. And what I mean by that is that the bull run really got started with the idea of institutions finally actually coming to the space, specifically with the idea of Bitcoin as an inflation hedge. There was Paul Tudor Jones' great monetary inflation thesis, and of course Michael Saylor's Bitcoin buy, which led to Tesla's Bitcoin buy, et cetera, et cetera. What I mean by post-narrative institutionalization is the slow, deliberate, but clear process that has been happening this entire bare market of institutions positioning themselves from an

Starting point is 00:12:23 infrastructure and client services perspective to actually engage with crypto the next time it becomes super relevant. So, the archetype of the pre-narrative institutionalization is obviously any Michael Saylor slash Micro Strategy buy. This morning, news broke that Micro Strategy had purchased an additional 301 Bitcoin at a price of 19,851 per BTC, and now holds almost 130 coins total. This feels to me like pretty clearly a signal, maybe a small one, but a signal nonetheless, from the micro-strategy leadership that just because Saylor is no longer CEO, that does not mean they're going to change their strategy. However, even more interesting to me was the amount of activity on the post-narrative institutionalization side. Nasdaq is making a major move into crypto.

Starting point is 00:13:09 They've hired a Gemini alum to run a new division, the NASDAQ digital assets unit. Pending approval from the New York Department of Financial Services, the group will initially offer custodial services for Bitcoin and Ethereum to institutional investors. What's more, custody sounds like it might just be the beginning. Tau Cohen, the company's executive vice president and head of North American markets, said, custody is foundational. Off the back of custody, we can start to develop other solutions, offer execution services, liquidity services, and think about how we support new markets. Now, as I'm now, NASDAQ is saying that they don't have plans to launch in exchange, but who knows what they'll do when things get up and running. The theme I see in this story is sort of two things.

Starting point is 00:13:47 First is slow walking to get regulatory clarity, and the second is institutions positioning for when it's here, and in my opinion, this is the standard institutional playbook for this bear market. Last bear, it was all about just people taking meetings and being introduced to the idea of Bitcoin. This time, it's around building the infrastructure to actually play in this space. For sure, the big unlocking force is going to be true regulatory clarity. Cohen said in the same interview. We know how to operate under regulatory regimes, and we continue to innovate under the rules of the road. Embracing regulation as it comes is something we do.

Starting point is 00:14:20 and institutions want us to operate under that framework. A couple more on this post-narrative institutionalization side. Robin Hood has listed USDC as the first stablecoin on the app, which is perhaps less institutionalization and more mainstreaming, but still relevant nonetheless. Also, hedge fund 2 Sigma is partnering with coin metrics to help provide better data and information for institutional investors in the space. Coin metrics reference data and indices will be combined with 2 Sigma's proprietary

Starting point is 00:14:46 trading system Venn. Venn also partnered with Coinbase institutional last month, to help on education, and the CEO of N Marco Delo Torre says, crypto is mainstream, and more and more folks are realizing they need to get smart, but also that they need to have tools to perform, so the institutional-grade workflows that they use allocate their capital with crypto in mind. Next, and we're coming to an end of this archetypal day, I'll quickly make note of the category a slew of random fundraising.

Starting point is 00:15:11 Just as a for example, a fund from DTCP that has a Web3 component has raised 300 million from investors including SoftBank and Deutsche Telecom, African Crypto Exchange Yellow Card announced a $40 million Series B led by Polychain Capital, and A16Z led a $51.5 million round for Sardine, which is a Web 3 fraud protection startup. Sardine combines traditional finance data like bank account history with other behavioral and device-level intelligence to better identify risks. It also provides KYC AML tools, sanctions tools, and transaction monitoring, and more. I've made this point a thousand times, so I will not belabor it. Perhaps the biggest difference between LastBare Market and this one is that

Starting point is 00:15:47 last bare market at the end of the ICO boom, there was no capital left. No one had dry powder. No companies had financing. Even the companies that were good who had raised money had usually done so in tokens that were now 90 or 95% off their highs. This time, there is tons and tons and tons of dry powder, denominated in things like USD stable coins that can be deployed into projects that could build the next thing that gets a new portion of people to be excited about crypto. Or, as the case might be for the next bull run, using crypto-powered tools and applications where the crypto is obviated from the end consumer. Which leads us to our final story in this archetypal day in the 2022 bear market, an example of the type of project that might bring new people in.

Starting point is 00:16:33 Helium is a decentralized IoT network. Basically, people run nodes that power hotspots for p-to-p wireless. There are currently around a million hotspots in 73,000 cities, and in August, helium-added support for 5G. Today, the company announced Helium Mobile, calling it a radically reimagined carrier and, in fact, the world's first crypto carrier. They're basically taking a completely different people-powered approach to building out a nationwide 5G network. Their announcement writes, Building a nationwide 5G network is expensive and requires very high density in order for subscribers to experience the dependable high speeds to which they're accustomed. The old way of building new infrastructure requires a network operator that can afford to pay billions of dollars

Starting point is 00:17:11 deploying enough equipment to cover a vast continent. But even with these resources, it could take decades to achieve due to local city and county red tape. With the helium network economic model, individuals are incentivized to help build a ubiquitous network in days and weeks, not years and decades. People eliminate the capital costs and associated red tape, establishing part ownership of the network, along with earning crypto tokens called mobile. By empowering people in this new model, 5G wireless connectivity is possible in every neighborhood city and state, including the most rural areas of the U.S., end quote. So in this model, mobile subscribers earn incentives for using the network. This is kind of the core function. You're not just a user, you're also a node. But what is to

Starting point is 00:17:51 make this viable? Well, as I mentioned, 5G was just added to the helium network in August, and people have already added more than 4,500 5G hotspots. But this is a smart group of people, and they realize that even with that exciting start, there are inevitably going to be huge holes in coverage. That's why Helium have today announced a five-year deal with T-Mobile. When subscribers are out of the range of a helium hotspot, they'll be able to tap into the T-Mobile network for coverage. With plans starting at just $5, some are already claiming that this will perhaps be the cheapest cellular plan with nationwide coverage. Now, obviously, we could spend an entire show talking about that, and if you want to get into some of those issues,

Starting point is 00:18:27 go listen to my show about the Solanophone. What matters, I think, is that there are a couple things that go into the shift from a bear market to a bull. In our case, this time around, I certainly believe that one of those, the fundamental prerequisite, is a shift in the macro environment. I've been clear that I don't think that any narrative or even innovation can fully drag the crypto market up in the absence of the rest of the risk space being depressed. However, I don't think it's a sufficient condition for the market to just turn around. I think that we do need new reasons for people to be excited and bring their energy to the space. That doesn't mean that we have to abandon all narratives. There are plenty of chances for people to rediscover why Bitcoin is so

Starting point is 00:19:06 valuable in a world of fragmentation with unstable monetary regimes everywhere. The existing networks and applications have a lot more potential than they've fully realized. But what we've seen is that each cycle, there's something new and dynamic that helps bring people in as well. Now, often that gives rise to the particular hype profile of that cycle as well and the excess that stems from it, but inevitably subnumber of those people stick around and they keep building. They discover conviction that comes after just their excitement about numbers going up. We're seeing that right now happen with the NFT space, we certainly saw it in 2018 and 2019. I have no idea of helium mobile or anything like it is one of those catalysts. What I do know is that my

Starting point is 00:19:47 outlook on the duration and intensity of this bear market is significantly more optimistic because of the capital available to these types of projects and the continued push from the developers in those communities. So anyways, that is my take on why today was such an archetypal day in the 2022 crypto bear market. For now, I want to say thanks again to my sponsors, Nexta.com, chain aliasis and FTX, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. I want to tell you about CoinDesk's new event, the investing in digital enterprises and asset summit or ideas. The event facilitates capital flow and market growth by connecting the digital economy with traditional finance. Join CoinDesk October 18th

Starting point is 00:20:32 and 19th in New York City for a 360-degree investment experience, where you can source, invest, and secure the next big deal in digital assets. Use code Breakdown 20 for 20% off a general pass. You can register today at coin desk.com slash ideas.

The Breakdown - Why Today’s News Tells You Everything You Need to Know About the 2022 Crypto Bear Market

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