The Breakdown - Why Yesterday Was One of the Most Illuminating Days in Bitcoin’s History

Starting point is 00:00:00 It seems insane that these two different huge things, the inflation print on the one hand and Evergrand rumors on the other, could happen just so close together and have such totally opposite effects on Bitcoin, but that's exactly what happened. Bitcoin ripped to a new all-time high on the inflation news, the news of a real concern plus a rumor around Evergrand sent markets all types of risk off. 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 CoinDesk.

Starting point is 00:00:42 What's going on, guys? It is Thursday, November 11th, and I'm not sure I've ever seen a single day that so totally encapsulates Bitcoin's relationship to macro and market structure as yesterday. So let's begin where we're going to. left off on yesterday's show. If you'll remember, inflation numbers had just come out. We printed the highest numbers in more than 30 years, seeing 0.9% month-over-month inflation and 6.2% higher overall. What's more, as we discussed, there are many who were pointing out that if we used the

Starting point is 00:01:22 inflation formulas and how they calculated this in the 70s, that we were already in the 14-plus percent inflation range that we associate with the incredibly high inflation period of the late 70s. This was totally cross-cutting, right? This conversation was not at all limited to Bitcoin Twitter. It was the thing that macroeconomic Twitter and traditional finance Twitter were talking about as well. Now, of course, an inflation print this high has some pretty big implications for, well, a lot of different people. For the Fed, it puts them in a real rock and hard place, situation. On the one hand, they have this growing inflation, which would suggest for a more hawkish policy, a faster withdrawal of the bond buying support that they've had in place since the

Starting point is 00:02:09 beginning of COVID-19. That taper is something that's already started, but right now it's slated to finish in the middle of next year. Maybe that's going to have to speed up. Of course, even more on the minds of traditional market participants is whether this is going to put more pressure on Powell at all to raise interest rates. This is something they've been vociferous about not wanting to do, even as they've prepped the market for the taper of asset purchases. The logic that they've given is wanting to see more improvement in the employment situation before even considering an interest rate hike, but again, this sort of inflation makes it such that they have to really consider that. At the same time, they will

Starting point is 00:02:48 also be concerned that if they raise rates too aggressively or too quickly, it will sink the market into recession. And here we get some political. implications as well. It is very clear that growing inflation and specifically increasing prices that are being experienced by real consumers day and day out are having a negative impact on Biden's policies. One of the big questions for the Biden administration is how will this impact the $2 trillion tax and spend package that they're trying to get through the Senate. One of the key Democrat, Senator Joe Manchin, tweeted about how destructive inflation was yesterday, and it's not impossible that these high print numbers make it even harder for the Biden administration to get its agenda

Starting point is 00:03:32 pushed through. Still, obviously to me, the most interesting implications, at least in the short term, are definitely on markets. And when it comes to Bitcoin, in a couple hours after this report came out, Bitcoin surged to a new all-time high, hitting nearly $69,000. It seemed as if the Bitcoin-as-inflation hedge trade was actually coming to the fruition, at least in terms of a short-term market movement. Indeed, Alex Kruger tweeted that was the first time ever BTC traded as an inflation hedge. Cryptonatives have big pockets now and thus the ability to change narratives. Perception becomes reality.

Starting point is 00:04:15 What Alex is pointing out is that there are now enough people who are high conviction around the idea of Bitcoin as an inflation hedge as a safe haven, that we actually can influence the way that most of money. markets interpret Bitcoin's ability to play that role. What he's saying in terms of the first time it ever traded as an inflation hedge is that we had an example of a clear exogenous catalyst influencing the short-term price of Bitcoin in a way that isn't always easily decipherable. So that's where we left off the show yesterday. Bitcoin was trading as an inflation hedge. We had hit a new all-time high. I had a little triumphal spark to my last note on the show.

Starting point is 00:04:53 and then, before the episode even aired, we had a sudden and severe 10% drop down. Now, we've recovered slightly making the overall drop more like 5%, but still, WTF happened. Well, let's look at the technical side first. Dylan LeClec tweets why the BTC pullback from 68K. There was a massive increase in BTC margin futures open interest this afternoon. Traders going long Bitcoin with Bitcoin as collateral. No free lunch, these traders are in the process of being shaken out. Yet, of course, that still begs the question,

Starting point is 00:05:29 the question that Dylan didn't answer in that tweet, is what was the catalyst for this shakeout? NIDIG sponsors this podcast, and they are the go-to Bitcoin Company for banks and credit unions as well as corporate treasuries, fintechs, and hedge funds. Learn more at nidig.com slash NLW. That's nydig.com slash NLW. The crazy thing about yesterday is that we effectively had

Starting point is 00:06:01 two very significant things happened within hours of each other that sent the market in completely opposite directions. First was the inflation print, which to Kruger's point showed just how much the narrative of Bitcoin as an inflation hedge has taken hold. But second, were the wide rumors all over Twitter that massive Chinese real estate developer Evergrand was going to default on about $150 million of debt that was coming due that day. Around the middle of the day yesterday, East Coast time, you started seeing tweets like these from Blake Allen. Breaking, China Evergrand has officially fallen into default. Bankruptcy procedures are going ahead. This is the largest real estate default in years, and a company with over $300 billion in assets

Starting point is 00:06:46 has just gone under. The wild ride and a Chinese real estate market has begun. So you may be asking yourself, what in the hell is Evergrand? Well, first of all, I suggest you go check out my full episode on them from 917. At that time, there were protests raging throughout China around the once-largest second Chinese real estate developer Evergrand. The company, in short, just has too much debt. It has liabilities worth more than $300 billion, and many of their projects and acquisitions were financed by pre-sales, so there are currently something like 1.5 million people who have put down deposits on homes that haven't yet been built. The trouble started in August of last year when Beijing announced new measures to control real estate debt levels. In the subsequent months,

Starting point is 00:07:33 Evergrand saw something like an 85% drop in its share price. Its corporate bonds had fallen at the time of that episode in September 30%, so much that trading was halted a number of times. Evergrand was downgraded by two credit agencies. And of course, the concern internationally is around the fact that Evergrand's debt is held all over the world. 19 billion of the $300 billion in liabilities are in international bond markets. That means that any insolvency could have a contagion effect that would ripple throughout the financial system. Remember, Lehman Brothers caused a crisis with a lot less debt than that. Is there a crypto connection? The short answer is not really. Except insofar as crypto is in fact a part of this larger macro ecosystem. There was a fun

Starting point is 00:08:17 little tether narrative there, which was an entirely speculative argument that maybe, just maybe some of Tether's commercial paper was Evergrand paper, a fact that Tether denied, but there was never any smoke, much less any flames, in that accusation. I think the uptake of that narrative shows just how toxic the discourse around Tether is, but that's not really the subject of the show. What happened yesterday is that $148 million of bond coupons came due. From Reuters yesterday morning. Evergrand teeters on edge of default as 108 million payment falls through. The company has not defaulted on any of its offshore debt obligations, but a 30-day-grade period on coupon payments of more than $148 million on its April 22, 2022, 2023, and

Starting point is 00:08:56 2024 bonds ends on Wednesday. A failure to pay would result in a formal default by the company and trigger cross-default positions for other Evergrand dollar bonds, exacerbating a debt crisis looming over the world's second largest economy. Not surprisingly then, when news started to trickle out that Evergrand had defaulted, markets went completely risk off. And that spilled over into crypto markets as well. And hell, you got to think, with Bitcoin at a new all-time high, it wasn't a bad time to sell and flee to safety a bit, right? Now, the denou ma of the Evergrand story, they apparently did make the payments.

Starting point is 00:09:32 The New York Times wrote, the company has managed to leap from one deadline to the next, meeting its obligations at the last minute, but often without explaining how or even publicly disclosing that it had done so, end quote. Still, of course, this is an ongoing problem, again from the New York Times. At least six Chinese property developers have defaulted on foreign bonds in recent weeks, rattling domestic financial markets and raising the cost of borrowing for all Chinese companies. Property prices are slowing and fewer people are buying apartments, worsening the outlook for real estate. End quote. Indeed, in many ways it feels to me like we've forgotten how large this looms as a market risk.

Starting point is 00:10:07 The Fed said earlier this year, given the size of China's economy and financial system, as well as its extensive trade linkages with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States. So anyways, it seems insane that these two different huge things, the inflation print on the one hand and Evergrand rumors on the other, could happen just so close together and have such totally opposite effects on Bitcoin, but that's exactly what happened. Bitcoin ripped to a new all-time high on the inflation news, the news of a real concern, plus a rumor around Evergrand sent markets all types of risk off. I think this hits two realities

Starting point is 00:10:51 of market structure. The first is that we now overlap with traditional markets, and to many of those participants, Bitcoin remains risk on in the short term. Second, volatility is exacerbated by leverage, and a slew of people happen to open levered longs right into the Evergrand news. And perhaps even quite sensibly given the inflation print. Going back to that original quote from Alex Kruger that we started with. This was the first time ever Bitcoin traded as an inflation hedge. Graham Codes responded to him later after the Evergrand thing, different market participants. Inflation trade happened first to the upside and then risk off in equities today cascaded to risk off in crypto too. Lots of people look at Bitcoin in different ways and have different investment

Starting point is 00:11:32 mandates. That's part of the fun, though. Kruger responded to him, bingo. Markets are complex systems. So let's TLDR what we learned today about Bitcoin macro and market structure. First, Bitcoin is trading as an inflation hedge. That may be self-fulfilling prophecy, that may be traders trading the narrative. But when that narrative shows up in numbers, enough times it starts to become real. Second, Bitcoin does have increasing correlation with traditional markets. And of course that's going to be the case. As soon as people from traditional finance started buying into Bitcoin, their portfolios that weren't 100% Bitcoin were going to impact how much they versus long-term hoddlers from the Bitcoin world natively were impacting what happens in these markets.

Starting point is 00:12:16 Remember, there's a lot of reasons why Bitcoin might be risk on. There are, of course, some people that don't buy the safe haven argument, but think others will so they speculate on it. There are some people that buy the haven argument, but think there are so many more people out there that they are also speculating on a thing that they even think will be a long-term safe haven. Ultimately, Bitcoin has a huge number of different forms. forces pushing and pulling it in different directions. So trying to correlate it one way or another

Starting point is 00:12:40 is going to be best as a short-term illustrative versus something that gives you a longer-term picture. Third and finally, though, leverage has a hugely deterministic impact in Bitcoin markets on the way up and on the way down. And market structure often explains things as much as narrative. People might have wanted to get out of Bitcoin a little bit. The market might have wanted to see a bit of a price decrease, but they probably didn't want a 10% candle down. That was forced selling that came from liquidations of levered long traders. Finally, I wanted to close with one other thing. It's been fascinated for me to see how fast the mood shifted from bullish to not so bullish. I think there are a couple reasons for this. First,

Starting point is 00:13:19 inflation going up isn't the reason you want to root for Bitcoin going up. If that thesis is right, it involves a lot of pain. Second, we are just suspicious of good times, and there are a couple reasons for that. Most recently, we got hammered earlier this year by a barrage of environmental and China fud right when we were at the top. But moreover, a lot of people are still here from 2017, and no, not to get too excited and too euphoric. Third, there is a weird combination going on right now where we're at all-time highs or near them, but there doesn't seem to be the same sort of market madness and euphoria, but there are pockets of mania, i.e. Shiba, but it's not fully fledged, right? To use Google search trends as a very ineligent reference point, the highest point of interest

Starting point is 00:14:01 in the term Bitcoin was in December 2017. That's what Google considers 100. The highest we've had since then was February of this year, which was a 50, and right now we're just at a 25. So nowhere near those peaks from even four years ago. All in all, this adds up to a very strange combination of things that makes it a little bit hard to get a handle on what exactly people are feeling or where we're going. But again, I want to go back to my first point that I just don't think I've ever seen a single day that so totally encapsulates, demonstrates, and helps explain Bitcoin's relationship to macro and market structure as yesterday. So I hope this was interesting for you, and you got something out of it. And if you have a different take on what went down,

Starting point is 00:14:42 please let me know. Hit me up on Twitter, join the Discord. Its link is in my Twitter bio. And as always, I appreciate you listening. Until tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - Why Yesterday Was One of the Most Illuminating Days in Bitcoin’s History

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