The Pomp Podcast - #1145 Will Clemente On Bitcoin 2023 Outlook & 2022 Review

Episode Date: January 11, 2023

Will Clemente is the co-founder of Reflexivity Research. In this conversation, we talk about bitcoin, bitcoin miners, 2022 crypto contagion, and the bitcoin outlook for 2023. ======================= Announcing LYCEUM | Miami, a day-long event on March 4th, 2023 in Miami hosted by Pomp. We’re gathering an explosive group of experts to engage in a series of fascinating discussions. We'll cover topics from investing, emerging tech, scientific research, sports, music and more.We have some massive names being announced via Twitter throughout January so stay tuned for details.This will not be your typical event and it certainly won’t be one you want to miss. We’re going to learn a lot, make some smart friends, and as always, we’re going to have fun.Spots are limited so head to lyceummiami.com to buy your ticket today. ======================= Pomp writes a daily letter to over 200,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/ ======================= With a Messari Pro subscription, you gain access to exclusive industry-leading long-form daily research reports, daily crypto news & insights in your inbox, advanced asset screeners, curated sets of charts and metrics and so much more. Try Messari Pro today! Get up to 25% off their Messari Pro membership by visiting www.messari.io/pomp and entering promo code "POMP" at checkout. ======================= LMAX Digital - the market-leading solution for institutional crypto trading & custodial services - offers clients a regulated, transparent and secure trading environment, together with the deepest pool of crypto liquidity. LMAX Digital is also a primary price discovery venue, streaming real-time market data to the industry’s leading analytics platforms. LMAX Digital - secure, liquid, trusted. Learn more at LMAXdigital.com/pomp =======================

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. Will Clemente is the co-founder of Reflexivity Research. In this conversation, we talk about Bitcoin, Bitcoin miners, the crypto contagion of 2022, and his outlook for 2023. I really enjoyed this conversation with Will, and I hope you guys enjoy it as well. Once you get done listening, let me know what you think. Jump on Twitter, tell us what you agree with and what you don't agree with. I always appreciate the feedback.

It helps us get better. And the guests also enjoy hearing from you. Okay, here's my conversation with Will Clemente. This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales

using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. expression of his personal opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. I've got Will here, the young wizard. You and the team at Reflexivity Research put out a brand new report summarizing all of 2022 and doing a little bit

of a look forward for 2023 for Bitcoin and crypto assets and also the macro environment. So I thought it'd be great just to kind of dive right into, maybe we'll start with macro. Obviously, inflation was a major story over the last two and a half, three years. How do you break down where we are in that inflation story and where we've been? Yeah, absolutely. It's a great question. You know, if we just backtrack to early 2020, you know, we had the largest liquidity insertion into, you know, the broader economy than I think we've ever seen in history, at least on like a rate of change basis. And, you know, with that, we had kind of a lagging effect where, you know, some people were speculating, would we see inflation? Bitcoiners, of course, said that, you know, we

would. But it took about six months until we finally started to see that be reflected in CPI. You know, a large portion of that also had to do with the China lockdowns and a lot of the COVID related, you know, policies that had kind of gone into place. Obviously, towards the back half of the year, we saw that to begin to be a big issue. And in retrospect, you know, once Jerome Powell came out and said, hey, you know, inflation is no longer transitory, that should have been kind of the signal to sell everything in hindsight, which of course is 2020. But since then, we've seen the most aggressive monetary tightening period in history. If we go back and look at a year-over-year change in M2 money supply, I think it's the first year that we've seen a net negative change. And

this is a chart that we put in the report. Going back and looking at this over the last 40 years or 50 years, I don't think we've ever seen such a sharp decline in the rate of growth in M2 money supply. Also, you know, at the same time, we're seeing, you know, quantitative tightening from the Fed as well. And so the combination of that has made, you know, absolute brutal conditions for, you know, growth assets. And unfortunately, you know, Bitcoin's got basketed in with that. You know, I think one thing to keep in mind, and I think we definitely both agree on this, is that you kind of have to compartmentalize CPI and M2 money supply, right? And so, or I should just say, you know, broader liquidity conditions.

Explain that. Sure. So when money comes into the system, it doesn't have an immediate effect. Money comes in through QE, which is basically the Fed buying bonds. And that doesn't immediately translate to the prices of something at the grocery store. And at the same time, also, we had a bunch of stimulus checks that came out in 2020, which added another piece on top of the QE that had been taking place for the last 10 years. But there tends to be a big lag between when the money comes into the system and when it begins to get reflected in something like a CPI, which is a lagging indicator by definition. And so I think that's kind of why, you know, while Bitcoiners

were harping on, hey, look, they printed 40% of all the money in existence in early 2020. It took, you know, five, six months for that really to start, you know, getting reflected in the actual CPI numbers. And Bitcoin, you know, performed accordingly. You know, there's a lot of people that said Bitcoin failed as an inflation hedge. You know, I would actually argue the complete opposite you know i think what you need to be looking at is bitcoin's performance on relative to like the six six month change or one year change um in in the m2 money supply rather than looking at the cpi because it's a direct what i would say hedge against monetary debasement instead of necessarily inflation and so when we look at its performance since the end of last

year it's done exactly what bitcoiners have said it would you know would do as basically a check on central bank um you know monetary policy and so of course you know as the liquidity tide is pulled back, we've seen Bitcoin perform exactly how you would think it would do so in, you know, those environment, that environment. And so, you know, I think you've had a lot of kind of misguided criticism over the last year of people saying, well, you know, inflation is at, you know, a multi-year high. How come Bitcoin is down? What happened to the, you know, what happened to the inflation hedge argument? And, you know, I think for a lot of Bitcoiners, including the two of us, I would say it's performed exactly how you would like it to. So that's interesting because I think

that uh there was this maybe not confusion but almost uh used as a common term where people would say inflation and some people were actually talking about true cpi you know year over year rate of change and some people were talking about monetary debasement and there's obviously a lot of connectivity there but they are two separate things and so is your belief today that given all of the benefit of hindsight that actually bitcoin is a monetary debasement hedge but not necessarily an inflation hedge or do you think it's both like how do you kind of come to a conclusion and say like, this is how I think about Bitcoin today. Yeah, I think it's the former, right? And, you know, you have certain periods where, you know, like what we saw at the end of 2020 into the

beginning of 2021, where you kind of have an overlap of, you know, M2 money supply and the broader, you know, liquidity, however you want to look at like net liquidity is something like Darius Dale likes to talk about looking at like TGA accounts as well as M2 money supply. You know, you kind of can get this period where if it's continuing to trend up for like a year or so, you could have a several month period where CPI is ticking up in, you know, confluence with M2 at the same time. And, you know, Bitcoin appears to be performing at a high correlation with CPI itself going up. But yeah, I think I think when you look at the kind of historical data and the way that Bitcoin's performed, looking at different correlations to things like the Dixie or like the

net liquidity index or M2 specifically, I think that those are the best mental frameworks, I would say, to think about Bitcoin. So when we actually look at the quantitative tightening that's been happening, or I'm sorry, monetary tightening has been happening. It's very obvious that interest rates continue to go up. And without speculating on like where interest rates are going to go from here, is it as simple as just like when interest rates go up, people realize the cost of capital is going up and therefore they stop buying things, they stop investing in things, and therefore that is what is going to pull down inflation? Is it really like just how the theorist would describe it? Sure. Yeah, I think on a general basis, yes. You have basically

the Fed tightens monetary conditions, raises interest rates, which goes down to your large traditional banks and then affects all businesses below that. And then as you have businesses that decide that they need to cut back, they're no longer able to borrow money as easily, right? I mean, you could borrow basically any amount of money over the last two to three years at a 0% interest rate i mean look at what michael saylor did right he was able to borrow a billion dollars for his leveraged bitcoin bet at a zero percent interest rate which is absolutely insane uh we also had you know negative real yields which is you're basically paying people to give you less money in the future it's absolute madness when you know you're in that zero interest rate environment

um but now it's taking place as you know as you have all these companies uh that are starting to pull back on spending they're cutting back on hiring um you know that trickles down into all the smaller guys below them and so you basically get this effect where you know as certain large businesses pull back um then all the small businesses that you know perhaps they have lending exposure to or you know they're they're you know they they impact in terms of like their uh part of their supply chain or whatever it may be their b2b businesses things like that uh it all trickles down and so and then kind of the the final trickle down effect of that is that as businesses cut back and people lose their jobs then the consumers stop spending

And so I think, you know, over the next few months, we're finally starting to see that take place. We have started to see CPI kind of roll over over the last few months. And what you know, this is something that Stanley Druckenmiller has talked about before. Historically, like large raises in CPI inflation don't end until the federal funds rate actually crosses the CPI number. We are getting very close to that within 50 bps of that taking place. And so, you know, if we have another two months of, you know, continued downtrend in CPI and, you know, the Fed raises another 25 bps at their next meeting, then you I think, you know, you could see that kind of crossover of the federal funds rate finally getting above the CPI number, perhaps, you know, sometime in Q1 of this year. And when you're talking about CPI, you're talking about the CPI number or the core CPI number in terms of that cross. Correct. Just the regular CPI.

And so as that occurs, the thought process would be, okay, CPI comes down, the interest rate continues to go up, they cross. Is there any analysis that you're aware of in terms of how long the interest rate needs to be above to kind of kill off the inflation? Or is it just a simple cross of those two numbers should signal that, hey, we're going to head in the right direction? It's a good question. I don't know the time aspect of it either. It's fascinating to think about that, right? It's like, because really, it says like, once they cross, then should the Fed keep interest rates high for a long period of time? Or is it just good enough to cross, leave it there for a quarter or so, and then you can actually start to pivot? Right. I think, you know, that's been kind of the big debate is, you know, the velocity of, you know, rate hikes, I think, is kind of in the past. But, you know, the bigger question on everyone's mind is how long is the Fed going to hold rates where they are? According to the dot plot, it's going to be towards, you know, the back half of the year into 2024. But that was the same case at the end of 2018. So, you know, I will say on one hand, you know, the Fed has done exactly what they said they were going to do. And I will say, you know, I think we were both kind of surprised with given where debt to GDP is at, you know, how the economy hasn't at least, you know, things like looking at the Treasury market just hasn't completely melted down, although we have seen a big sell off.

Markets have been relatively, you know, orderly, I would say. And the sell off in equities has been relatively controlled. We haven't had any like limit down days or anything of the sort. Right. So, you know, I think it's something where I've been surprised personally, but I would also still be surprised if, you know, we get to the end of the year and the Fed's holding interest rates at, you know, five and a quarter percent. And, you know, we haven't seen any type of significant, you know, decline in the economy. I mean, I think also, you know, maybe part of it is, you know, all the stimulus checks that went out in 2020 and, you know, all just the massive amount of liquidity that got pumped into the system kind of gives a buffer where, you know, maybe the historical numbers of, you know, how quickly it took for CPI to really start rolling over and, you know, how long it took for things to really start breaking after the Fed, you know, raises rates at, you know, such an unprecedented rate like we've seen over the last few years. You know, potentially that's why we've seen a couple of month delay and some of those effects that I think both of us are kind of surprised that we haven't seen already.

One of the things that you don't expect in the bond market is lots of volatility. Right. And in the report, you guys talk about the move index, which is kind of the VIX for bonds. And it actually was more volatile last year than it was during the March 2020 crash. So there was more volatility in 2022 than there was in the bond market than in March of 2020 during the liquidity crisis of the start of the pandemic era. Now, the only time that the move index had been more volatile than it was in 2022 was during the 2008 global financial crisis. And so how do you think about, you know, if there's so much volatility in bonds and yeah, we know the volatility in the stocks and in crypto and all these other things. Like, was it just generally a year of volatility across 2022 and there was nowhere for people to hide as investors? Hey, guys, I hope that you're enjoying this interview.

Before we continue, I want to quickly remind you, I'm hosting a conference March 4th at the Miami Beach Convention Center. That's right. It's a big venue for a big event. On March 4th, I'm bringing together some of the absolute fan favorite guests from the podcast and this show. And we're going to debate ideas. The event is called Lyceum Miami. The Lyceum was the public gymnasium in Athens, Greece. That ancient gymnasium was important because it's a place where people from all walks of life came together to have a war of ideas. You were able to not only participate in the debates, but also people could sit and watch some of the smartest people in the world talk about important issues.

That's what we're going to be doing on March 4th at the Miami Beach Convention Center. If you want to join us, go to LyceumMiami.com or click on the link in the description, and I'd love to see you there. Okay, let's get back to this conversation. Yeah, I think that's pretty well said. You know, I think, you know, one mental framework is just looking at markets in general. It's really just comes down to liquidity and volatility. And so when you pull back liquidity, then volatility increases. And so that's been reflected heavily in the bond market.

You know, it's been the worst year for bonds, I think, since like the late 1700s or something like that. You know, it's funny, too, when you look at Bitcoin. At one point this year, Bitcoin is actually less volatile than bonds, just looking at the move index. Bitcoin's volatility is at an all-time low right now, while the bond volatility represented through the move index, as you mentioned, is near 10-plus-year highs, right? So I do think it's kind of funny, just as kind of like a separate fun fact, is that this year, Bitcoin's volatility actually reached a lower state than bonds

and also several currencies. So if you remember, when everything went on in the gilt market, the pound sold off aggressively, right? And so during that time period, Bitcoin actually became less volatile than one of the largest currencies in the world. And so I think for a lot of the critics of Bitcoin just on a volatility basis, I think a lot of those things have just been kind of completely wiped off the map in terms of Bitcoin is too volatile to be an asset. We've seen every single major asset class this year show an incredible amount of volatility. What do you think about dollars and the dollar index, so the dollar against other foreign currencies? It seems like the dollar has continued to strengthen pretty aggressively all throughout 2022.

And what is your expectation in 2023? Yeah, I think it's interesting now you're finally starting to see like the ECB start to raise rates. And so I think with that, you know, the Dixie itself, which, you know, to just remind people, you know, it's just a relative gauge of currency strength against each other. So you're just looking at a basket of different currencies relative to the dollar. And so I think you could have the DXY decline as these other foreign currencies are continuing to, on a relative basis, get stronger because the monetary conditions in those countries are getting tighter and the U.S. has kind of surpassed the rate of change in terms of rate hikes, whether we'll hold them there as kind of a TBD for the rest of the year. But in terms of kind of a relative basis to the other countries, you've seen the Fed tighten really aggressively throughout the year. Other central banks haven't tightened as aggressively and kind of caught up. And now I think you're starting to kind of see them catch up with Christine Lagarde stating that they finally need to start to raise rates to try to catch up to the Fed.

And I think part of that is just currency strength. So I think you could see this period where perhaps the Dixie could decline, but that doesn't necessarily mean that it's bullish for risk assets. Right. And that's solely because, you know, the Fed, you know, you could have the Dixie decline because the Fed is easing, you know, monetary conditions relative to other countries. Or you could have it decline because, you know, the Fed has already raised rates and tightened monetary conditions. But then you have the other countries, you know, stepping in to catch up. And so I think with that, you could you could kind of get this weird period where the Dixie actually declines. But perhaps it's not like super bullish for risk assets like it historically has been. So I want to read a part from the report specifically talking about U.S. yield curve.

It says, as it stands, the U.S. yield curve is now nearly entirely inverted, and other countries such as Canada are entirely inverted. Going into 2023, all indicators in the bond markets are pointing towards a significant recession occurring in the next 12 to 18 months. And so when you see that, the yield curves inverting has historically been a warning sign. But to say that there's a significant recession in the next 12 to 18 months, that is something that is becoming much more of a popular view. There's more people kind of sounding the alarm. There's more people who are pointing to all these different data points. How do you view the inversion of the U.S. yield curve and then also the inversion of yield curves around the world? And is that a signal for the severity of how bad the recession will be?

Or do you just look at those as two separate data points, but they tend to kind of follow sequentially? Yeah, I mean, it is pretty weird when you think about it just from like a first principle standpoint, you know, because banks traditionally borrow on the short end and lend on the long end. And so when, you know, you have an inversion, it completely throws off that dynamic. And like you mentioned, historically, when you look at kind of like the 10-2s or some people like to look at, you know, different, you know, comparisons of, you know, different yields. You know, yeah, like you said, historically, they have been kind of a leading indicator. And like you said earlier, you know, I think we could kind of have this lagging effect where the tightening that's, you know, taking place over the last year hasn't fully, you know, gotten reflected in consumer spending to the extent that maybe it perhaps will over the next few months. But, yeah, I mean, I guess it's kind of TBD. I wish we had Felix, who's our macro analyst, who could give you a much better response than I can on the macro stuff.

I love it. You wrote a whole section on crypto contagion. And that was one of the big stories of 2022. too. Walk me through kind of in hindsight, what is your evaluation? How would you describe to a friend like, okay, here's what happened with Contagion in the Bitcoin and crypto industry throughout the year? Yeah, it's a great question. I think like the first thing to state is that everything we just described, you know, historic rate of, you know, monetary tightening, you know, that's caused everything in crypto, at least, you know, indirectly. I think it's important to just

state that, you know, all of the kind of crypto Contagion and credit blow up that we've seen throughout the year should all be taken into context with the liquidity tide pulls back. As Warren Buffett likes to say, when the tide comes back, you see who's swimming naked. And that's absolutely what we've seen in crypto this year. Going back to the beginning of the year, the initial domino that set everything off was Luna. Luna was at its peak when you combined UST and Luna was worth over $60 billion on paper. Not that there was that amount of value that went into the actual asset but that was that was the peak market cap um when you looked at kind of luna and ust uh ust was this algorithmic stablecoin that was very closely tied with luna

at any time you could redeem one asset for the other uh and so the whole kind of system was whereas you had like solana was kind of you know bootstrapped and spearheaded by you know sbf and the ftx group you had avalanche which was essentially you know spearheaded by three arrows um luna was really brought to prominence through this uh d5 application that was built on terra called anchor uh and with anchor you could basically get 20 risk-free yield um by you know piling you know your ust purchasing the ust putting it into the protocol um and some people would say it's very ponzi-like and that you need new market participants to step in to kind of you know you to cause that you know yield to continue to be sustainable um and what happened was is

basically you know this this works great when you know there's high confidence in the system um but when you do lose confidence in the system with an algorithmic stablecoin you could have something called a death spiral and this is something that you know doquan was very vocal about when he came on your podcast he walked through and said you know this is something that's possible is you could have this death spiral but i think you know he was just a little too confident in in hindsight about you know the the validity of the protocol and its resiliency um you know i think one thing that i think it taught people is just you know when people lose confidence and people you know are are in a state of fear that overrides any rational thinking that

maybe they had about uh you know the protocol they could be you know have a positive outlook on it for like six to eight months but as soon as they you know start to feel feel fearful that overrides all of that right and so um you know you had all these die hard luna people that i think as soon as the peg started to break you know they started to get a little nervous um and so you had initially this move down in the peg from like a dollar to like 99 cents or 98 cents um it bounced back quickly i don't know if someone was like defending the peg like jumper one of those type of entities uh it's hard to say but um after that you know it kind of had this dead cat bounce up back up to like 99 cents on the dollar and then completely nosedive um and so you know what happened was

basically uh once once the ust supply um was significantly lower than the luna supply um it it was basically locked in that it was going to be a death spiral because the redemption mechanism no longer worked. And so that completely crashed in a matter of two days. I think it went down like 99% or something crazy. So it's crazy looking at the chart now in hindsight. And so with that, you know, I tweeted out at the time, this is the, this is crypto's Lehman Brothers moment, right?

In terms of you had this, you know, huge kind of too big to fail entity that failed. And now we're going to see the fallout of it. And it took some time, which, you know, I guess is because, you know, People don't immediately want to kind of poke their neck out and say that they're hurting. Everyone kind of wants to assess the damage and see who pokes their neck out first and then kind of reassess from there. But after a few months, we began to see all the effects of that. And the first kind of big domino to fall after Luna was Three Arrows Capital. Three Arrows Capital was initially started as a currency arbitrage fund.

They would do different types of arbitrage through foreign exchange started by Suzu and Kyle Davies. We both had like a traditional banking background. They ran up from my understanding, I think their initial base of capital was just a few million dollars, like two or $3 million. Ran it up to on paper peak 2021 to $18 billion through a lot of venture capital investments. And one of their most lucrative trades, at least that kind of helped to propel them to, you know, build up a large capital base

was the Grayscale trade. So at the time you could buy Grayscale, you could purchase the shares into the trust. And then after six months, you'd be able to the shares when I'm not going be able to sell them on the market at the end of 2020 grayscale was trading at a premium and part of this was just because i think there's a lot of entities out there that aren't able to get direct bitcoin exposure uh whether that's because they feel uncomfortable you know holding their own keys or some people just for compliance and regulatory reasons just like aren't able to actually hold

digital assets and so you know they they thought that grayscale was the best way to kind of get indirect exposure to that uh and so you you know had i think at the end of 2020 early 2021 uh grayscale was trading at like a 20 or 30 premium i think it was like 30 33 at its peak um so essentially you know you could purchase shares uh put them into the trust and then after six months uh sell them at a 30 premium this sounds awesome but what happened is it just got completely overcrowded uh and then you know eventually you had the uh you had the trust fall into a discount i think in march of of 2021 um but nonetheless during that kind of time period from the end of 2020 into early 2021 um three arrows was able to just borrow an immense amount of capital and make

a bunch of different you know venture capital investments that on paper uh you know showed that they were you know they had a massive p l right i mean they ran up billions of dollars through these venture capital investments that were liquid and they you know were probably locked in for several years but on paper they grew the fund to an enormous size um you know unlike anything you could do in traditional finance um and so what happened was is i think you know they had collateralized several of these loans some of them unsecured uh with their grayscale holdings um and it's my it's my understanding that they they were trying to basically uh arbitrage the 20 rate that you could get through through anchor um so essentially they had borrowed a bunch of

money from all these lenders piled it into anchor and the idea was okay you get you know 20 on you know return on that capital and then you give uh you know whatever the rate is that you're borrowing from from the lenders you give you know pay that back and then keep the difference sounds super straightforward sounds too good to be true right and it was uh and so what happened was when luna got wiped out i think three arrows was probably already under some pressure from you know the grayscale trade uh and i think that was kind of probably their their final death blow and uh in interview after kind of everything went down kyle davies stated also that you know like i kind of caught them offside so i think that was kind of the final arrow in their in their heart that that

put them down um and so after that then you had this just immense panic of all this credit contagion in the space and turned out that you know the the minimization of counter-party risk just completely didn't exist everyone thought you know in the crypto space that they were exposed to different people in reality everyone was exposed to the same largest counterparty which was three arrows and and also to a lesser extent alameda uh and so you know immediately after that you had voyager that went down i think voyager lent them i forget the figure off the top of my head over billion dollars um unsecured um three hours also lent uh also excuse me three hours also borrowed from block fi uh over a billion dollars but that was actually uh collateralized but the issue was

it was collateralized with the grayscale um with the gbtc shares and so whenever block fight took delivery of the collateral they tried to liquidate it uh they weren't able to get back the full mark to market value of that because you know uh gbt's gbtc was already at a discount and the market was already a liquid um so you know basically every major lender including genesis as well all took a hit on once three arrows went under um and then through that we started to see you know continued contagion throughout the space we also saw celsius go under at the time which was also a byproduct of them having a lot of money in risky you know d5 product uh you know products and you know they experienced the hack from badger dow uh you know a couple other d5 hacks uh and then i think luna

was probably the final death blow for them as well. And so, you know, throughout the rest of the year, you had, you know, FTX that was basically trying to act as this kind of white knight in the space and coming to save the day after, you know, Three Arrows had gone under and they're like, hey, look, we're the good guys. We're here to clean everything up.

And in retrospect, that was just a bunch of posturing from, you know, SBF and his team. You know, they had purchased the Voyager assets for I think it was $1.1 billion at the time. They also extended a credit line to BlockFi, which had basically saved BlockFi at the time. And so for several months, people had kind of thought that FTX was kind of the white knight of the space, and they were kind of the responsible ones, which is pretty funny. In retrospect, at the time, the tactics that SBF was using to puff his chest out and kind

of posture that they were kind of the adults in the room, it did fool everybody. But then November comes, and what happens in November? well you had this initial kind of leak from coindesk which was uh showing the balance sheet of alameda which is the kind of sister fund which we know is basically the same entity as ftx now um which by the way you know i think in in crypto a lot of the kind of crypto you know twitter people always knew that these two entities were co-mangled not that not that they were using customer funds but they they knew you know okay alameda probably has some extra trading edge that no one else has you know they're probably getting access to um you know customer like liquidation

data and and things like that but people just kind of accepted it and they said okay you know it kind of is what it is just play by the game right um but i don't think anyone knew the kind of extent to to what was going on behind the scenes i think that did you know catch almost everyone off guard i think there were a few people in in with you know uh the benefit of hindsight that you know were super skeptical but very few people were saying you know this is a this is a full-on you know scam uh and to you know sbf sbf's credit you know i think uh a lot of the posturing that they did, the political donations, all these types of things, the effective altruism, it really did fool everybody. But once the balance sheet got leaked, everyone realized,

holy cow, Alameda is not the entity that we thought they were because their entire balance sheet was just a liquid altcoins. And most of the altcoins were coins that Sam had literally created. So it was Serum, Oxy, FTT, and also some Loxalana as well, I think like $900 million in Loxalana. You know, the crazy thing, especially about Oxy, FTT, and Serum is that these were essentially what we like to call these high FDV, low float tokens. And what that essentially means is that you have, you know, the circulating supply, and then you have the total amount of supply that will ever be in existence. And there was a very small amount of supply that was actually circulating relative to the amount that would ever come into the market. And so you can have

these crazy price moves that cause a massive run-up in market cap because there's a very small amount of circulating supply that you can actually access if you want to get exposure to the asset. Meanwhile, Alameda was holding the majority of the assets, especially in the case of FTT. Even going back to the origins of FTT, a lot of people, it's hard to say for sure, but it seems like there's a good likelihood that FTT was originally created just to fill a hole in Alameda's balance sheet. I don't know that for a fact, but there's a lot of speculation around that. And some people have some compelling evidence of that being the case. But once the balance sheet was leaked, it's unclear, you know, I'm, I'm kind of in the camp of it was leaked for

a reason. I don't know if it was from someone in kind of the Binance camp or one of those things, it's kind of, you know, tinfoil hat type of type of question, but nonetheless, it got leaked and everyone kind of realized that, you know, they weren't in the position that, that everyone thought they were. And so what happened after that was CZ had his infamous tweet where he basically said, Hey, look, you know, this entity is weaker than we thought they were. And therefore, you know, kind of our FTT tokens are at risk. And also, we just don't want to have exposure to this entity that seems to be, you know, kind of not on the up and up. I don't I'm kind of in the camp that I don't think CZ realized, you know, how they were completely swimming naked. I think

he probably realized there was, you know, to some extent, some some weird behavior going on behind the scenes. But I doubt he probably knew full on that, you know, they were basically, you know, giving Alameda the majority of their customer deposits. But after he tweeted out that they're to sell their ft stake which they got um you know whenever they they cashed out of their their ftx equity uh it caused two things it caused first of all um a panic on the ft token itself everyone said oh my gosh like the only buyer of this thing is alameda and ftx uh and binance is about to dump you know multi nine figure bag on the on this you know already a liquid market uh and then the other thing it caused was a bank run on ftx itself because people began to wonder hold on does the

does CZ know something? Why is CZ getting rid of his FTT tokens? There must be something that maybe he knows that we don't. And so you saw a massive amount of withdrawals, billions of dollars of withdrawals within the first few days, which got processed originally in the first 24 to 36 hours. But then of course, after that time period, they no longer could process the withdrawals because they didn't have the capital. Because with the benefit of hindsight, we now know that they lent $8 to $9 billion of customer deposits to Alameda, which was collateralized with FTT tokens. And when we go back and look on-chain, and this is something that we put in the report, when we look at the balance of FTT on exchanges, we see this massive jump in September.

And at the time, SBF tweeted out, he said, oh, this is just a natural shift of wallets. We're just moving around some wallets, which we now know was definitely not the case. and what were they doing you you could see that they were lending out uh the customer assets to alameda and alameda had moved the ft tokens to ftx basically as collateral for taking on those customer deposits because there's no way that if alameda actually you know if they had a liquidity issue at the time um that they were going to be able to get that liquidity out of selling off their ft tokens because they were the only buyer of them um and so you know when you when you look at when you look at you know the end of september and you look at the balance of ftt on exchanges

you can see this huge jump which uh we now know to be as the day that they ended up transferring over the customer assets for for the ft tokens as collateral when we see in hindsight the ftx situation alameda um it didn't stop there like there was continued contagion we're still seeing it now yeah um there's obviously genesis there's dcg um there's kind of uh gemini is uh is brought into this talk a little bit as to uh how ftx and alameda which appears to be um at least based on uh prosecutors and law enforcement uh a nefarious or malicious thing uh where obviously people have been charged, arrested, the whole thing. Versus DCG and Genesis, at least from what I read online and on Twitter, seems more of like got caught in a bad trade, right? I don't see people kind of

being like, hey, this was a malicious, you know, intentional thing to like hurt customers. Is that your read on the two differences? Hey guys, I hope that you're enjoying this conversation. As you probably realize, we don't run any ads on this show. That's right. All the other podcasts, all the other YouTube shows that you watch, they have advertisers. We don't have any direct relationships with advertisers and we simply create this because we enjoy doing it. Now that we do that though, we have a team. And if you'd like to support us, one way you can do that is to go subscribe to the Pomp Letter. It's a daily letter that I write to about 235,000 people about my personal opinion on financial markets, business technology, and Bitcoin. Just go to

PompLetter.com and you can sign up there. I'd love to have you join us. And it's a great, easy way to support the work that the team and I are doing on a daily basis. All right, let's get back into this conversation. Yeah, I mean, you could question kind of Barry's ethics in handling the whole thing. And, you know, I think he's probably very carefully, you know, conveying all the potential options for them. But yeah, I think it's different than, you know, what took place with FTX and Alameda, which is flat out fraud. I think, you know, that's partially just reflected in the time that it's taken, right? If, you know, there was something to the scale of the FTX Alameda fraud that would have gotten sniffed out by now. I mean,

it's been over a month, you know, since Genesis has paused withdrawals. What basically happened was, is that, you know, Genesis had a large amount of exposure to three arrows, as I mentioned earlier. So they took a huge hit on that. And then also they had extended a loan to DCG. And so, So, you know, what happened was after the three arrows loan was defaulted on, DCG basically absorbed the hit to their balance sheet. So now it's kind of come back to bite DCG and they're now under some immense trouble. I do think, though, Barrie has several potential options. You know, they do have several assets, including, you know, their their venture investments in terms of like different like crypto protocols. I doubt that they'd be able to get anywhere near the mark-to-market value of those on paper right

now. They also have several portcos. And whether they're full outright owners, they're also investors in numerous different companies in the space, dozens and dozens of different companies in the space. And then on top of that, they also have Grayscale, which is their cash cow. And I think if it really came down to it, I think Grayscale is probably the crown jewel of the DCG empire and it's the last thing that they would want to get rid of uh but depending on the multiple that you want to put on on you know the gbtc trust you know i think you could argue that it's worth you know maybe somewhere between 750 to a billion dollars again depending on the multiple that you want to put on it this also depends on you know um what how are you determining what you know

you're saying that their yearly revenue is um i know they did almost i think it was like 750 mil last year and and uh i'm sorry in 2021 um but you know now obviously that's significantly lower it's like somewhere between like two or three hundred mil um because they're just collecting a two percent fee on the the bitcoin that are sitting in the trust and it's just absolute gold mine you just sit on bitcoin and hold it and get paid to do it um so i don't know exactly you know also knowing that dcg is in trouble they probably wouldn't get the terms that they'd be looking for if they tried to sell off grayscale but my point is they have several different potential assets they can tap into they're also the largest holder of gbtc and this is something that they've

kind of come under scrutiny for is that they borrowed capital from genesis to make venture investments um and then also buy back gbtc shares well i think once gbtc started going into a discount uh just kind of kind of backstop backstop the discount um and so you know there's no way that they could get the full mark to market value of those assets in the same way that they couldn't for their venture investments as well um i think this is why they recently came out in a letter uh to grayscale shareholders um that they're considering a tender offer for uh it's a 20 tender offer and so what that would essentially do is i don't know exactly how it's i don't know if they just go down the list of the largest holders and that's how it's determined who's able to to

participate in the tender offer um but if that is the case they're the largest holder they own over four percent of the gbtc supply so that would benefit them immensely right they you know they could get i don't know exactly what the gbtc shares that they're they're holding are worth today some are um you know multi multi-nine figures um so you know that would also help them shore up some liquidity so you know i think i think barry has some options and he's definitely assessing all those very carefully um you know people should also keep in mind that barry was an old uh he used to be involved in in bankruptcy uh restructuring so you know i don't think this is anything new to him and i tend to think that you know barry's one of the ogs in the space and

he'll probably figure it out but it's definitely under come under an immense amount of scrutiny mostly because of the gemini earned product which was a retail facing product where you know retail are going on gemini and seeing oh i can get you know seven eight percent yield um you know this sounds great you know they're not thinking about you know the risk going on behind the scenes of course you have terms of service but like no one's actually reading what's you know going on with the assets they just see you know the the you know percentage return that they could generate uh by simply just you know pushing a button and giving the assets to gemini which they perceive as risk free so i think that's kind of the biggest ethical question is you know should should barry just

expedite the whole thing to get customer funds back but at the end of the day i think you know the cynical reality is that everyone has their own personal incentives and barry's going to try to look out for himself yeah what about bitcoin miners i know you touched on this in the report and they seem to be kind of taking a backseat because of all the contagion and that, but they haven't exactly had a great year either. Yeah, I think this has probably been the toughest year for Bitcoin miners ever.

You know, when you look at kind of the variables that go into being a successful Bitcoin miner, you're essentially, you know, long Bitcoin spot price and then your short hash rate and your short energy costs, right? And so when we look at the three of those components, I mean, they're going in the complete opposite direction as what you would ideally want to see, right?

You have Bitcoin spot price down 75%, you have global energy prices at multi-year highs, and you have hash rate near all-time highs, which has actually been increasing. It's come down a bit over the last few weeks, but it's actually increasing as Bitcoin is trading down at 15, 16K, which is absolutely mind-boggling. And I'm unsure exactly who the entity is that was piling on hash rate. Maybe it was just because a lot of these miners were financed with debt, and previously that wasn't the case. But nonetheless, I mean, that's just been making the outlook for miners this year incredibly, incredibly difficult.

So, you know, there are margins. And one way to look at this is through hash prices. You can compare miner revenue divided by hash rate. And what essentially you get is the price per terahash. And so when you look at that, over time that perpetually declines because you have more and more people that want to mine Bitcoin, so it becomes increasingly difficult to do so. But we've just, over the last few months, made more all-time lows.

Every week I check it, it's on a new all-time low, basically showing you that margins continue to get more and more compressed. Another way to look at this is something called the Puel multiple, created by our buddy David Puel over at ARK Invest. test, what essentially this looks at is miner revenue divided by the 365-day moving average. So you're essentially gauging how much revenue are miners bringing in relative to how much they brought in over the last year. And so that also is at relatively historically low readings in addition to hash price.

And so when we look at something called hash ribbons, which looks at two different moving averages of hash rate, according to that indicator, which tries to identify capitulatory periods for miners. We've seen two capitulatory periods this year for miners. The first one took place in June. At the time, you had the 30-day moving average of hash rate crossed below the 60-day moving average of hash rate, which was an indication that we entered a capitulatory period for miners. During that time, you saw Core Scientific sell, I think it was 7,202 BTC for like 170 million in proceeds, which bought them some time. But now they weren't able to weather the storm and we've seen you know them they're undergoing some type of restructuring

at the moment um and then you also saw looking at on-chain data uh you could see that the kind of minor wallets which basically the way these these data providers track them is they can just look at the coinbase transactions um you know coming directly from the bitcoin protocol as mining rewards and then tag the wallets from there to see you know the heuristics around how the wallets are moving around and then get a gauge of okay this appears to be a minor wallet um and so And so when you look at these miner wallets, you could see back in June that a substantial portion of BTC was also sold off. We came out of that capitulatory period and then just entered another one roughly a month

and a half ago. And with that, we saw an immense amount of sell pressure come from miners. Tens and tens of thousands of BTC were sold onto the market. And then recently over the last week, we've finally seen that 30-day change in their holdings actually flip positive. So, you know, potentially kind of coming out of that period, at least at least temporarily. You know, I think I think historically it's been a good indicator of kind of macro bottoms for BTC. This is the same thing that took place at the end of 2018.

You know, I think that kind of leg down from 6K to 3K at the end of 2018 was mostly all miner selling. You can also see that, you know, reflected in the on-chain data. And I think I guess just to kind of like wrap up on Bitcoin miners, I think some of the like the key takeaways here are, you know, you are looking at you know purchasing you know bitcoin mining stocks i would say you know look for miners that have you know fixed energy contracts right so they're not susceptible to the you know crazy volatility and energy prices that we've seen this year and also look for miners that have very low debt you know with with any company you want to have some degree of debt to you know help your growth um but i think with bitcoin miners it's a little different because it's just

such a cyclical business uh the volatility of bitcoin and and also you know hash right the hash rate is just absolutely insane. So I think you kind of have to approach holding debt on your balance sheet differently than you would traditionally. And there's a few, I guess I won't name names on the pod, but there's a couple of names that have fixed energy contracts, have super low debt relative to assets or relative to equity. And so those are the guys that I would keep an eye on. And I think also it's a pretty fair conclusion to make that you'll probably see a lot of M&A and consolidation in the mining space. And then I think the last thing to kind of hit on with miners and hash rate is I think over time you probably see if there was a way

to basically look at the amount of passive hash rate versus outright mining operations that were set up to mine, I think you probably see the amount of quote unquote passive hash rate increase over time as a percentage of overall hash rate. You know, I think as you see guys like Shell and Exxon kind of, you know, dip their toes in the water with Bitcoin mining and, you know, some of these entities that are basically whether they're, you know, flaring off excess energy or whatever it be um you know take take what you and jason were doing for example with the tires early on with eth mining right um you know i think uh you'll probably see a larger portion of people who have what is essentially you know free energy or extremely low cost energy uh tap into bitcoin

mining that you know maybe maybe bitcoin mining just you know wasn't a large enough industry and bitcoin was too small for them to even you know think about getting involved in it but you know with bitcoin surpassing a trillion dollar you know asset class and of course isn't there right now but you know still multi-billion dollar multi-hundred billion dollar asset class i think it's large enough now that some of these bigger energy producers can step in and kind of use it as a way to monetize what otherwise would be um you know wasted energy i think one really cool example of this is uh the great american mining company um when you look at what they're doing in in the midwest i believe um you know they have uh what are essentially um like you know uh

traditional miners that are out there you know like digging in the earth actually physically pulling things out, like not computing with Bitcoin miners. And of course, they're flaring off their excess gas. And there's all kinds of environmental restrictions on how much they can burn off every day. And that also causes a restriction on their profit margin, right? Because if they could operate 24-7, they would, but there's restrictions on the energy that they're allowed to burn off into the air. And so you bring a Bitcoin miner out there, you say to these guys, hey, look, you give us this energy for dirt cheap, or, you know, even, you know, free in some cases, you know, we benefit because we have super cheap mine, we have super cheap power, which allows us

to be, you know, a profitable miner. At the same time, it benefits you guys, because you're able to operate for a longer period of time, because you don't have to burn off that excess energy. And so I think I think as a, as a percentage of hash rate, I think the kind of amount of passive miners will probably grow over time. And so when people talk about, you know, oh, it is such a bad time to be mining right now. I think at the same time, you know, as we continue to see these guys who have just extremely low, you know,

energy costs come into the space, I think that'll be what kind of drives hash rate, you know, into the future. This episode is brought to you by LMAX Digital, the number one institutional crypto exchange. They offer clients the deepest pool of liquidity and they have 100% uptime track record through all the volatility spikes.

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This episode is brought to you by Masari. Your days of spending hours scouring the internet for quality crypto insights are over. Masari is your one-stop shop for all your crypto data and research needs. With Masari Pro, you gain access to exclusive industry-leading, long-form daily research reports daily crypto news advanced asset screeners and curated sets

of charts and protocol metrics you can try masari pro today and listeners of this podcast will get 25 off the masari pro membership by visiting www.masari.io backslash pro and entering promo code pomp again that's masari.io backslash pro and use promo code pomp navigate the market with confidence with Masari Pro. Will the public miners stay public or will they be forced in the private market? Like there'll be like M&A and kind of these take privates just to get them out of those public markets or is it the capital market so important to them just to survive? I don't know. It's a really good question, right? Because like a large portion of the hash rate that came online was largely driven just by debt, right? In the end of 2020 and early 2021, we saw a lot of the

big public miners take on substantial amounts of debt. But I also do wonder, I guess it just depends on the type of entities that come in and step in by what are essentially distressed assets and you know maybe you have some of these larger kind of trad five firms or you know big energy firms that step in and take these guys public i i just don't exactly know who the entities will be that come in and step in and do the m&a when you look forward 2023 and into 2024 how do you feel are you bullish are you cautiously kind of optimistic and what you think we're gonna go sideways like give me a little forward-looking uh perspective yeah sure i think you know first of all, the outlook and case for digital assets is stronger than ever. I think the FTX situation

proved that. And I know there's a lot of Bitcoin maxi types that listen to this podcast, but I think you have to really appreciate if you look at a lot of these DeFi protocols, they continue to operate flawlessly throughout the entire debacle of FTX and all the other major lenders in the space. And the reason for that is no one's getting extended unsecure loans off of one phone call, as Kyle Davies said that Three Arrows was able to do. It doesn't matter who you are. You have to maintain the same LTV as everyone else in these DeFi protocols. No one gets any special treatment based on their connections or anything like that. And so a lot of these protocols just operated completely flawlessly. And so I would say with that, while at the same time you had

all these centralized players, the case for DeFi, I think it's stronger than ever. So that's one thing I would say. And then on Bitcoin specifically, you know, I think the kind of need for, you know, a non-political asset that is for enemies is stronger than ever. I mean, if you look at all the kind of geopolitical craziness that took place this year, you know, you now have countries that are trying to move off a dollar standard as, you know, the U.S. basically said that they're going to be using Swift as a weapon moving forward. You know, it's kind of their big bazooka that they could pull out and they immediately pulled it out once, you know, the Russia, you know, ukraine situation began to unfold and kind of showed their cards of you know the kind of um

biggest move that they could make from from like a you know non uh non-physical you know war standpoint i think that was probably the the biggest move that they could make against the country without you know physically going to war with them um and so i think with that a lot of countries and this is something china's known for a while as they've stopped buying u.s treasuries um you know you can essentially just get completely cut off from your you know reserves and that's happened to russia earlier this year and the entire you know financial system and so i think you have a lot of countries that are probably waking up to the value proposition of btc over the last year um you know wouldn't be surprised if you have sovereign wealth funds or central banks

and you know developing countries at least that are probably accumulating some btc down here when you think of reflexivity research you've put together an entire team of various analysts uh you guys are pumping out a ton of um research uh i read it every day obviously uh involved in helping start the business um talk a little bit it's like what's the goal right there's a lot of people who do research there's a lot of people who are looking at the space like why is another research firm needed why spend all the time i think this report is uh what 40 pages uh you know why spend so much time to put together a 48-page report yeah sure i think you know when i when i put together the team um you know i didn't look at anyone's credentials um i didn't

even know when i first hired uh each of our analysts uh what their background really even was you know i kind of knew vaguely a few things that they did um but it didn't matter to me i found these guys through twitter because they had great insight uh and i liked what they put out and you know is essentially proof of work right the crypto ethos is you know proof of work you know you you you put out the information and let people you know judge you based on that um and you know you could be an anonymous uh whatever you want to have as your profile you know a monkey picture and if you're putting out great stuff people will find you and that's how people found me that's how you found me is i put out an article and you dm'd me and said hey man i like this let's let's record

a pod right and then ever since we we've been good friends um and you know that's how i found these guys as well as i just thought they put out great content on the internet i said you know let's let's put a group together of young people who are completely passionate about the space and have proven uh that they have great insight into the space and you know have a unique perspective And so through that, we've compiled a team covering everything from global macro, fundamental Bitcoin analysis, derivatives, on-chain stuff that, you know, mainly I'm covering, and then also DeFi and even a little NFTs in there as well. We kind of cover a breadth of everything that you need to know in the crypto space. You know, I think when you think about, you know, why would you want to, you know, purchase a research subscription, you know, I think it comes down to the following. You know, if you're a hedge fund or a family office or, you know, someone in traditional finance, like an independent investor that's looking to get involved in crypto, but you just don't want to take the time to do it, you could bring on a crypto analyst, right?

How much is that going to cost you? Probably $90,000, $100,000, you know, probably less than it did a year or two ago. But, you know, it's probably going to cost you near six figures a year. And for us, you know, you can go on our website right now, purchase a subscription for $2,500 and get access to four to five quality reports about everything that you need to know about the digital asset space, you know, from a team of analysts that are constantly surveying the market 24-7 so you don't have to. And so when you kind of think of it that way, you get the value of four analysts, not only through reports, but also we do weekly analyst calls for a fraction of the cost, a 50th of the cost of what it would be to bring on your own full-time analyst. And so that's how I would say I think about it. And I'm really happy with when we launched. We launched what I think we both at least hope so is near the trough of the bear market.

And, you know, I think that just kind of reflects that, you know, we really do care about the space and, you know, we're here for the long term. We didn't launch this at the peak of the bull market to make a couple bucks. You know, I think there's room for especially, you know, as people have gotten shaken out over the last, you know, 12 to 16 months, there's room for several reputable, you know, trusted, transparent voices in the space to step in and really help guide people, particularly in traditional finance. You know, I think there's a lot of kind of word salad that gets thrown around. There's a lot of weird terms in crypto and things like that. And I think we kind of really make an effort to unpack that for our clients. And, you know, in our weekly analyst calls, you know, we answer any questions that they may have and, you know, help kind of simplify the, you know, approach of coming into this space that, you know, quite frankly, is pretty overwhelming when you first step in. And so, you know, our kind of goal of launching the business, of course, as you know, is that, you know, we wanted to help bridge traditional finance into the digital asset space.

And I think we could play a big role in doing that moving forward. Are you still having fun? Of course. Of course, man. When you first met me, I was sending out tweets and sending out charts in the bathroom at Target. You were. We're still doing the same thing. Yeah. Just not at Target. Just not at Target. All right. Where can we send people to find you on the internet? Or if they want to sign up for Reflexivity Research, where can we send them?

Sure. You can find me on Twitter. It's WClementi, I-I-I. Reflexivityresearch.com is where you can find our research product. We've got a bunch of example reports. And then as you mentioned, and we walked through today we just also released this 2022 year in review 2023 outlook report we cover everything in that from everything that took place in global macro and what to expect in 2023 moving forward with that uh from our macro analysts and we can word a lot of things more eloquently than i can uh covered all the crypto contagion of this year a lot of the positive statistics of you know kind of the silver lining of of bitcoin's resiliency despite the price draw down um a lot of the big kind of mainstream events that took place you know i think um you know not

to turn this into a whole nother tangent here but i think there were a lot of kind of things that got overlooked this year um you know fidelity offering bitcoin to clients uh blackrock offering bitcoin to clients uh starbucks integrating nfts in their rewards program which is the largest rewards program in the world um you know visa recently announcing that they're going to be integrating starkware into their payments and so i think there are a lot of positive developments that took place below the surface. We also cover everything that took place in DeFi this year, all the trends in terms of individual protocols,

the kind of rise of layer twos, how to think about layer twos versus layer ones and what the potential multi-chain landscape might look like. Basically everything you need to know. So if you have a little time and you're looking for a little extra reading, definitely check out that report on our website.

And we also have a couple other example ones as well for you to check out. I love it. We'll definitely do it again in the future. Thank you so much. Absolutely. It was fun doing this in person after the last three years.

We'll see you next time.