The Pomp Podcast - #1015 Dylan LeClair On The Liquidation Of The Crypto Market

Episode Date: June 22, 2022

Dylan LeClair is the Senior Market Analyst at UTXO Management, a digital asset fund investing in the analog to digital transformation of money and the emergent financial system.    In this conversation, we discuss Bitcoin, on-chain metrics, the bond market, inflation, all of the leverage that has been liquidated in the Crypto market, and when we might see a bottom in this bear market. Dylan joins us every Tuesday on "The Best Business Show." To see the video with the corresponding charts that Dylan references throughout the interview, go to "The Best Business Show: LIVE" YouTube Channel ======================= BCB Group is the leading payment services partner for the digital assets industry. BCB Group provides payment services in 30+ currencies, FX, cryptocurrency liquidity, digital asset custody and BLINC, which is BCB’s free, instant settlements network for the BCB client ecosystem. Find out more by visiting bcbgroup.com/pomp ======================= Brave Wallet is the first secure crypto wallet built natively in a web3 crypto browser. No extension required. Store, manage, and grow your portfolio, get NFT & multi-chain support, and more.    Download the Brave privacy browser at brave.com/Pomp, and click the wallet icon to get started. =======================

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Dylan LeClaire is the Senior Market Analyst at UTXO Management. He also writes a newsletter with Bitcoin Magazine. In this conversation, we talk about Bitcoin, on-chain metrics. We talk about Bitcoin's price, the market structure, and what to expect in the coming weeks. I really enjoyed this conversation with Dylan, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. This episode is brought to you by FTX US. FTX.US is the safe, regulated way to buy and sell Bitcoin and other digital assets. You can

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Anthony Pompliano runs POMP Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of POMP Investments. You should not treat any opinion expressed by POMP or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. We've got Dylan LeClaire joining us. Dylan, my friend, how are you? What's up, Pomp?

I forgot to suit this week, but maybe next week. Don't worry, man. I'll get it on. I got the bear market armor on. We're ready to rock and roll. We'll defeat this at some point. Give me a quick sentiment check on how you're thinking about the market right now. Obviously, over the weekend, we saw Bitcoin crash down to $17,000.

it's come back now trading at over $21,000. Uh, what are your general thoughts? Is that the bottom? Is it something to continue to pay attention to? Like walk me through just from a sentiment standpoint, how you're feeling? Yeah. Crazy weekend. Uh, it was actually, um, the craziest part about all this is that a lot of the, the kind of the liquidations, uh, and you know, you see these, these live players with collateralized Bitcoin, collateralized Ethereum, A lot of it's on these transparent DeFi networks with liquidation levels that anyone can see. And so there was actually Ethereum actually ticked 10 cents away from a huge liquidation bomb during the peak of all the craziness.

So I mean, that was certainly kind of a market frenzy. Good place to buy. Obviously, I got a buy-in at 17.8. So I feel good about that. But I think we're still in a kind of a macro environment where there's a lot of uncertainty. There's a lot of volatility. We can talk about it a little later in the show. But just in terms of the crypto contagion, that's obviously been the driving force in

the Bitcoin market. And I don't know if we're at the end of it all. We saw an announcement today with FTX extending a line of credit to BlockFi. They just did the same with Voyager, another similar yield platform. So it certainly seems like there's some assistance kind of in the crypto industry to kind of stabilize things. But I don't know if we're out of the weeds yet. So when you start to see some of the contagion that's actually happening across the market, is a lot of this just based on leverage? Or how would you, if you were a doctor, trying to diagnose the problem?

We see what the side effects are in terms of a lot of the contagion, but where can you pinpoint exactly what has driven this or caused a lot of the issues? Yeah. So a lot of the leverage in previous market cycles was in these derivative markets that were built out. You can think of the BitMEXs of the world, the Binances of the world. That's pretty transparent. We saw that.

This cycle, with the rise of DeFi, added another layer of leverage. So you had all these funds, all these kind of market participants that were stacking leverage on top of leverage on top of leverage. And while the cycle was going, the bull market was in full force, everything worked fine. But on the other side of this, we're seeing a lot of that get wiped out and purged. And so I still think there is some leverage out there. There is some bad debt that probably ends up liquidated. I think that's kind of the slow grind we're in. It's just purging the market of all that debt. Yeah, it's fascinating to kind of think through this. You got some charts here. Maybe let's go through those and then we'll come back to

Bitcoin and crypto. You've got the U.S. equity plus all U.S. bonds market value not going so hot. Big, big drawdown here. What is this showing us? Yeah. Total bond market, equity market value basically lost from all time highs as a percent of GDP. So historic drawdown in record time, even surpassing the COVID lows. Right. So you could just see we had this everything bubble that's deflating faster than I think most market participants could have expected. This is a result of soaring yields. Obviously, we know the energy and commodity situation. And so not just crypto specific, obviously, I think if you add crypto in here,

it would be another trillion, $2 trillion of kind of wealth destruction. But really, bond and equity markets have lost almost $16 trillion. And that's just US markets. So include global markets, and it's a lot uglier. So I think it's important to just have some kind of context. Obviously, Bitcoin's taken a beating, but it's not isolated. And really, it's about the liquidity tide falling out. Yeah, I mean, this is just wild when you see it.

It's more than the 2008 financial crisis. It's more than the COVID crisis, just absolute off a cliff drawdown there. When we look at treasury bond futures, what are you seeing here? Yeah, just kind of another way to visualize this, right? The Treasury bond, the U.S. Treasury bond is the driving force in all global markets. It's still is king. The dollar still is king at the moment, still is a world reserve currency. And so these are long dated Treasury bond futures and they're getting killed. Right. So so the bond bubble. Right. People like to talk about the equity market bubble.

If you want to think think of like the everything bubble. But really what it was, was it was a global bond bubble. And with this record inflation, and there was high inflation for a while, but as it continued to accelerate, the bond market realized these bondholders, they were the patsies at the table. And so this sell-off in bonds is really what's causing this pullback everywhere else. As yields soar higher and people realize that the net present value of their assets as duration gets killed. And you can think of the duration aspect as yields rising. So the value of a growth stock, why does it come down when yields rise? Well, when you're doing cash flow models and you have to account for rising costs of capital, even if in real terms it's still negative with current inflation,

this is why really this is like kind of another way to view that liquidity tide is when bonds are getting killed. This is treasury bond futures. When the long-dated treasury is getting killed, it's going to be a tough environment for risk. We've got the dollar currency index here, and it's just up only. Looks like what Bitcoin and crypto used to look like, but now it's the dollar strengthening against other fiat currencies. How do you look at this in the macro environment? Yeah, so we can talk about consumer price inflation. That's obviously top of everyone's mind. It's important to understand that we're

kind of in this max pain scenario where inflation is soaring, risk assets are selling off at the same time that the dollar, which is the world reserve currency, is strengthening against almost all global fiat. So the euro, the yen in particular, especially the yen, where the Japanese, the Bank of Japan are conducting yield curve control. This is kind of that Max Payne scenario for not US citizens, but global citizens, especially emerging markets with dollar denominated debt. The dollar soars higher. This essentially plunges the world into recession. So So the Fed actually has kind of a lot of power right now and are making up for their policy error with this rapid tightening policy.

So the higher the Dixie goes, the dollar currency index, even if there's a relative decay in the dollar's purchasing power and real goods and services, this can cause a lot of pain for global risk. And that's what's playing out. I mean, it's just crazy to watch all this and the interconnectedness, I think, of these various assets as the macro environment unfolds. We've got bond market volatility up and equity market volatility up as well. How do you think about these two? Yeah, I think we're headed for kind of a point of singularity or a reckoning point. We've obviously

had a lot of pain in equities, a lot of pain in bonds, a lot of pain in Bitcoin and crypto. But I think this all kind of ends or not ends, but it's coming to a head with a blowout in spreads volatility in the equity and bond market, and maybe even further volatility in Bitcoin, even though that's quite volatile. So especially bond market volatility, when you have the most liquid asset in the world, the asset class, the bond market, trading with this level of volatility, not seen since really, oh, wait, we're surpassing those COVID highs as we speak. The world's in trouble, or really, global risk assets are in trouble, asset financial markets. And so probably equity market volatility, bond market volatility explode higher.

I certainly don't think that the high for the VIX has been put in. And so, you know, spell some trouble for risk assets. I think we're in a little bit of a bear market rally here. But most of this stuff is the charts are saying that the worst isn't over. And how would you measure how bad it could get? Like the worst isn't over, but is there anything on these charts specifically around market volatility that would signal, okay, this is where my expectation would be? Is it just, hey, where was the COVID high? Or where was the global financial crisis high?

Yeah, it's tough to conduct, you know, technical analysis on volatility charts with the VIX. I mean, certain people try to do it. Maybe, maybe it works. But I really think what it comes down to, and it's somewhat, I'm not unfortunate, but it's somewhat comical that we're at this point where we're all just waiting for a Fed pivot. But essentially, there's so much debt out there. There's so much dollar-denominated debt. And yields continue to rise where the entire world's just essentially waiting

for the Fed to cause enough pain for them to pivot. So every time you see these blowouts in volatility, what brings it back in is easing a central bank stimulus. It's not a free market force. And that's important to understand. So I think ultimately what we're headed towards is an absolute explosion of volatility and a reaction by central bank and a fiscal and monetary response is what we're headed towards, in my opinion. So obviously, volatility works in

both directions, up and down. When you say an explosion of volatility, does that necessarily mean that it's only down in kind of a continuation of the trend over the last six to eight months? Or could volatility be some sort of reflexive type response and actually the volatility could continue, but it could be a recovery of prices for various assets, depending on what the Fed does. Yeah, that's a great point. I think it's worth noting that some of the most explosive rallies come during bear markets when volatility is this elevated, right? So usually you can think of the Fed putt as kind of a, they're selling volatility and they're dampening that volatility down, Right. So that Fed put is not in the room with us today. And what essentially I think I think you can think of a lot of these like bear market rallies like we have the S&P, the Nasdaq up three percent today.

Bitcoin is doing well. So we're obviously going to see some some rips to the upside. But ultimately, I think what really the market is headed towards is an explosion upwards. Risk assets could go down. and we need that Fed putt to come in and we might be a long ways away from that with the inflationary environment. Yeah, when you look at something like the five-year breakeven inflation rate here, what is this telling us

and how should people think about a five-year breakeven inflation rate just like in the context of what this data point actually means? Yeah, so it's pretty interesting. I don't put all of my kind of weight on this, but I think it's worth noting because this is what the bond traders are looking at

And it's this kind of inflation expectation gauge. And you saw post-COVID, post all the stimulus, the wreckage in supply chains, these inflation break-even expectations for the next five years on average just exploded upwards. And 3.5% doesn't seem too high. Inflation currently is around 8% or 9% in the US. But this is that kind of blended average for the next five years. And the bond market was saying, hey, you know, inflation, there's really this thing is skyrocketing. And since around a couple months back, it's somewhat topped, and it's actually coming back in. And so I think the real key here is that we're in this huge inflationary impulse as the economy is slowing, as growth is slowing down. You have the Atlanta Fed saying, hey, we're revising our GDP forecast from growth to no growth to now negative growth. And I think that trend continues.

And so what the bond market, I think, will soon start to price in is this inflationary impulse in CPI and commodities and a sell-off in risk is going to quickly turn into a deflationary collapse or deflationary impulse, if you will. And so we can see this with inflation break-evens. As these start to collapse and as bond yields start to fall as well, that's when this kind of inflationary or maybe stagflationary environment turns into a deep recession and just an absolute kind of all growth is gone from the economy. And so I think that's what we're kind of headed towards. And I think that's what ultimately merits the pivot in central bank policy. Yeah, it's crazy to to kind of see this in in visual form. We've got the Bitcoin 200 week moving average here hasn't hit the price and 200 week moving average many times. But obviously, when it has, that's usually signaled some sort of bottoming of a bear market or liquidity crisis moment. Is that how you kind of internalize this now? is folks should put weight on the 200-week moving average, or is there some things that make you kind of wait to see if this will continue as a trend? Yeah, I mean, price can certainly go lower.

It can certainly go higher. I just think of Bitcoin is historically running a four-year cycle. That may or may not be over with, but really you're kind of at this four-year average that Bitcoin has only hit four times ever. It didn't even hit it during the 2018-19 bear market. Briefly touched below it during the COVID lows. So can price go lower? Certainly.

Can there be more pain in the macro environment and more market volatility? Certainly. And you should always, whenever you buy Bitcoin, understand that there's a probability that that price can get cut in half from that point. But in terms of this risk reward over a one year, two years, five year, 10 year time horizon, it doesn't get much better than this. And so starting to allocate, starting to average in with more size than you have been is certainly, in my opinion, a fantastic idea. And I think that looking back at these levels, at these prices, say, you know, again, one year out, two years out, five years out, it's going to, in hindsight, be looked at as, you know, one of those can't miss buying opportunities. Talk to me about GBTC. Obviously, we've got the discount now, 30%, 35% to NAV. There's tons of talk of ETF conversion. You've got the GBTC Bitcoin cost equivalent right now. What is this showing us? Yeah, it's just that discount baked into the market price. So right now, you could buy GBDC, you can buy essentially Bitcoin for $14,000. The market's trading at around $21,000. Obviously, it doesn't have the properties of Bitcoin, the self-sovereignty, it doesn't have the ability to zip it around the world, use it as collateral. you're trading it in a somewhat less liquid OTC market. But for anyone in a retirement account, anyone that has money locked in a brokerage or any funds in particular, it's a fantastic way

to gain Bitcoin exposure and win that ETF converts. The interesting thing here is, say with a 35% discount, you buy that and eventually an ETF comes. What happens is you you get about a 54%, 53% upside if that goes to one-to-one equivalent, right? So that's how math works. If there's a 10%, you get an 11% upside. If there's a 20% discount, I think back of napkin math, you get a 33% upside. And so this is pretty damn attractive. And it's honestly quite, I don't know what the right word is. It's laughable really that we don't have a spot ETF and the market's still stuck with this huge gptc discount at the same time that they're approving futures etfs and short futures etfs yeah when you start to think about uh the short futures etf getting approved

is that just like hey they're okay with futures and so they've got the long and short and people shouldn't read too much into it or do you think that there is some sort of uh other way to view a short future etf getting approved yeah i mean i don't think there's certainly you can kind of it's conspiratorial with it uh i don't put too much weight into it there's other similar products there's 3x short you know equity markets there's short bond market futures there's all this stuff so a bitcoin futures on cme uh long and short makes sense um i i mean i don't understand why they don't have a spot index at this point um but yeah i i think that it doesn't it's not going to affect the market too much in my opinion for every long there's a short so you know let them pile in

if they want. Um, but I, I don't think it's going to suppress the price, uh, you know, like some of the gold bugs do. Yeah. And help people think through, I've seen a couple of people asking, uh, right now Bitcoin's at, you know, 21,500, obviously over the weekend was down at 17,000. Uh, it's been hanging around 20,000. How do you look at maybe like intraday price movements and whether it's importance or weight that you would place on the difference between 17, 20 and 21, is that all just like, Hey, it's down, you know, 70 ish percent from the all time high. And so it's, you know, relatively the same, or do you put more weight on trying to understand, you know, the difference between 21, 20 and 19? I mean, yeah, like, you know, in the future,

I don't think it'll matter too much whether you bought 18, 17 or 21. But certainly if you buy at 17, rather than 21, you can get around 20, 25% more Bitcoin. So that's, that's obviously advantageous. For anyone that's worried about timing the market, DCA works, so does limit orders. If you're worried that we revisit 20K or 15K, set a limit order. And if it fills, it fills. I think that's certainly a way to keep some peace of mind in a volatile market and get rewarded if it goes lower. Obviously, if it goes higher, you might miss out, but patience might be rewarded. So I think people shouldn't worry too much about a 5% move in a notoriously volatile asset. But at the same time, you could use it in your favor and set limit orders lower or attempt to trade it.

I mean, I don't recommend that for the average Joe or the everyday person, but certainly some people do it with success. When you start to think about a lot of the contagion that's happening in the market right now, how do you think through where the market will end up coming out of this? So it seems like a lot of users like, hey, maybe this isn't nearly as beneficial as I thought for various products. But do you think that we will get to what I would consider like the holy grail for Bitcoiners, which is no fractional reserve banking, no rehypothecation, like all of those things that are rampant in the legacy financial system? Is that where you expect us to end up? Or do you think that Bitcoin will continue to be more and more financialized and have

a lot of those same features of the legacy system in a steady state? Yeah, it's very tough, especially some of the yield products, right? Because Bitcoin is a bearer asset. There is no yield. So with the U.S. Treasury bond, like it's a dead instrument. Right. And it's an IOU. It's a future obligation. It's a liability of the U.S. government and it's an asset to yourself. With Bitcoin, it's just a bearer asset. There is no liability side. And so those yield products are essentially, you know, you are giving it to someone else that's going to do something to generate that yield. So I certainly think that the no rehypothecation aspect will come. And there's already that kind of product with, say, collateralized loans with, say, an unchained capital where they deposit in an address and you can watch it and you can watch that Bitcoin not move. But in terms of getting native yield, that's a different story. And I think that there will always be risks inherent to those type of products.

Yeah, it's kind of wild to really think through just how much the industry is changing right now, you know, kind of live, right? When you also start to think to yourself, the types of businesses that are being built, we obviously had maybe in this last bull market into the current bear market that we're in, a huge influx of venture investing

into some of these financialization, you know, type platforms or products. Is your expectation that maybe the next bull market uh we'll see capital flow in on other themes like is it lightning uh enabled businesses is it bitcoin only is it a continuation of what we've already seen like talk through to me in terms of where you see value being created and ultimately that's kind of where venture dollars will follow yeah i certainly think lightning is a is a big uh is a big theme um that that we have coming um it's i mean it may not be as as profitable as some of these other

ventures potentially, but it's something that has huge use cases that are just being built out. We're just starting to understand some of the cool things that can be built with Lightning and just how much better it is than the legacy system in terms of being able to send a bearer instrument across time, across space, rather. I think Bitcoin mining is still something that's very, very under-invested in. Obviously, we have a bunch of publicly traded companies, but I still think there's massive growth there. And obviously the centralized exchanges, I think the FTXs of the world were built out of the last bear market. And so I think that we'll see another couple of those. Who knows what companies or what products are being built out, but I certainly wouldn't

bet against innovation despite being 70% down in the market currently. Yeah. When you start to think to yourself about regulation in the space, we've seen the Terra Luna UST. We've seen the Celsius situation. We've seen other places where FTX or Alameda have stepped in with lines of credit. How do you think about regulation changing, you know, in the years to come? And is the expectation that these market downturns essentially elicit both regulators saying, hey, we have to regulate it, but also market participants saying, look, maybe we actually do want more disclosures or more things that would mimic what's going on in the legacy system? Yeah, I think certainly the crypto industry is going to face some regulation. Whether that's

a good or bad thing is up for interpretation. I think Bitcoin is kind of in a class of its own and that's a good thing in the sense that it is a commodity, a digital commodity. It is property in the US. It is not a security. So it's kind of isolated from some of the regulation, although not all of it. I think due to, say, the collapse of UST, some of the rehypothecation that's going on, the Celsius debacle, regulation will come out of this. But also at the same time, there is a growing kind of lobby effort in Washington from Bitcoin-only firms, as well as, you know, say that the FTXs of the world have a pretty big presence there as well. So I'm not too worried. And I think, you know, over the long term, more regulatory clarity is a good

thing. But hopefully, it doesn't stifle some of the innovation that that that could come out of out of this industry. Yeah, I think a lot about regulatory clarity doesn't necessarily mean that you get the regulations you want. It just means that there's clarity, right? And that clarity could be something that maybe you didn't want. But but I think that that's an important difference. One other thing is that we're starting to see a lot of blurring of the lines between Bitcoin crypto industry and the regular financial market. So obviously, we see the investors from the legacy market coming in, buying Bitcoin and cryptocurrencies. We also see the reverse happening a little bit. We obviously saw Sam Bankman-Fried take a position in Robinhood.

We've seen FTX this morning announce that they are buying a registered and regulated clearinghouse for their stock trading. uh we've seen other um you know players that were in fintech add crypto as an option like is this all end up in one place do we just see a consolidation and like finance now is just going to be both the legacy and the new system put together and that's how people that are maybe under the age of 40 years old or something will end up uh treating it yeah i think that's natural progression um ultimately bitcoin is a monetary asset it is a financial asset um you know how is treated by different market participants is obviously different. Some people treat it as a unit of account. Some people trade it as just a speculative trading vehicle. And so that's fine.

But I think it was always kind of the end game that we were going to get this merger of the legacy system and this new system that we're building. And so that's a net benefit, I think. And I think the more that it's incorporated into the legacy world and the easier the on and off ramps are from this asset class, the better in the long run. So I think it's a very natural progression and it is a net benefit. Yeah. Before I let you go, any predictions or things that you're paying attention to going into the July 4th weekend? Obviously, we saw Arthur Hayes say buckle up, four or five days of no banking access might not be so hot and could provide for a lot of volatility. But what are you thinking going into that long weekend? No crazy outlandish

predictions on my end. I'm just a happy stacker. I have some cash ready to scoop up some some Bitcoin ready to scoop up some minors. I think we'll get, we'll get a pretty good discount here. It just not, not even in Bitcoin, just across the board. I think some more volatility is coming in legacy world.

So, you know, I'm a, I'm a happy buyer here and, and, you know, ready to, ready to scoop up some discounts on zip.

All right, my friend, where can we send people to find you on the internet? You can find me on Twitter at Dylan LeClaire underscore, uh, right at the newsletter. You can find that at Bitcoin Magazine Pro. We're putting together a lot of this stuff.

And apologies if my internet is somewhat laggy today. It seems like I've been getting some trouble. It's all right, buddy. Listen, you have such a clear message that even with internet troubles, it comes through perfectly. And everyone says, I know exactly what he's saying. I appreciate you joining us. And we'll do it again next Tuesday.

Sweet. Cheers, man. Later, buddy. Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you're subscribed on Apple, Spotify, or your favorite podcast player. And if you're looking to try to transition

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Go to palmscryptocourse.com to learn more. and I'll meet you guys for the next episode.