The Pomp Podcast - #690 The Bitcoin Bulls Are Running Through 60k! w/ Will Clemente

Starting point is 00:00:00 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 lead insights analyst at Blockware. He's quickly become one of my favorite writers on all things Bitcoin, including deep dives on various on-chain analytics. In this conversation, we discuss the Bitcoin fundamentals, the on-chain metrics, what happened this past week and what the on-chain data is telling us to be prepared for moving forward. I really hope that you enjoyed this conversation with Will, as I always do. Before we get into this episode though, I want to quickly talk about our sponsors. First up is AppSumo. AppSumo is the

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Starting point is 00:03:35 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. How good does it feel that all summer long you were telling people supply squeeze supply squeeze supply squeeze and whether they believed you or not the supply squeeze is underway feels pretty good you know i'm not right 100 of the time but uh i'm glad that the macro thesis is working out so far i am uh i'm glad as well let's uh let's jump into uh some of the metrics that you have this week

Starting point is 00:04:18 so the first thing that we've got is the utxo realized price distribution explain what this is and what you're seeing in the actual metrics. Yeah. So this is basically just like on-chain volume. So you're looking at the amount of supply that was last moved at each denominated price cohort, as you can see in the bottom. And what I'm just trying to show here is that only 0.68% of Bitcoin supply is last moved above where we currently are, which means that there's very little overhead supply, aka resistance, above where we are currently. So we're kind of, as I titled the newsletter this week, we're on the edge. You know, we, we have this very small amount of supply above us. But of course, once we break, you know, above all time highs, we'll

Starting point is 00:05:01 have no supply above us. Okay. And so the idea is once we break through that 64,000, then we go into this price discovery and it's likely to appreciate pretty quickly there. Sopra, you've got the seven day moving average. We've been talking about Sopra all summer. And now we saw that bounce, uh, like a week or two ago off of, uh, one. And so it looks like we just got a continuation of that trend right now. Yeah, exactly. Um, nothing's really changed from last week. Just, you know, you're watching to make sure we stay above that one threshold, um, and then possibly coming back down and retesting it on some kind of correction. So, uh, just keep an eye on it over, you know, over the next week or so before we meet again, um, we could just continue

Starting point is 00:05:41 to see more upside as we did towards the end of the last year, but you know, we'll take it day a day. Okay. And then the futures term structure, we haven't done this before. So explain what this is. Right. So what you're looking at here is the futures curve on all the major derivative platforms. So you have Binance, Bybit, Deribit, FTX, Huobi, and OKEx. And so aside from Huobi, what you see is that the futures curve is actually in contango right now, which means that, first of all, that it slopes positively, but each contract going out further on the curve is higher than the previous. And so this kind of leads us to our next chart in terms of why is this important? The reason is because you can capture the spread between spot and futures in this

Starting point is 00:06:25 non-directional way through something called what's traditionally called a cash and carry trade, where you're selling the futures contract and you're buying spot, and then you hold that position until expiry, and then you capture that yield. And so earlier this year, we saw a really large basis spread, uh, between, between spot and futures got all the way up to about 45%, uh, at the very peak, um, you know, earlier this year, but heading into the summer, we dropped down, I think we, we briefly flipped negative, um, on the basis, but we were hovering right about right above, um, you know, 0%. So, um, now, now we're back above to, I think right around, uh, 14%, yeah, 14.18%. Um, and so right now, you know, on an annualized basis, um, you can,

Starting point is 00:07:11 sell the three-month future, buy spot, hold that out till expiry, and then capture the 14.18% annualized yield. And so if you start to see this move higher, what that means is that you're inadvertently drawing more, you're incentivizing capital to flow into spot because as we mentioned, they have to sell the futures contract, but they're also buying the underlying spot Bitcoin, which of course is what dry is driving up market price. Um, and so if this starts to go higher, then you'll have that incentive for more capital to flow into spot. Another thing is the, um, you know, we're talking about like a futures ETF, right. And that's, that's primarily going to be based on, on the CME. And so where this kind of gets interesting is earlier this year, um, all of

Starting point is 00:07:57 the, uh, you know, the majority of, of the, the, the curve, you know, the, when we're talking about like 40, 45%. That was all on these overseas exchanges versus CME was really lagging behind. And so if you start to get that CME curve bit up, that kind of opens up the U.S. capital that was kind of locked out of this trade earlier this year, although they were participating in the grayscale arbitrage. But they were locked out of this particular trade because they can't use like Binance or Deribit due to regulatory reasons. So I think the futures ETF could be interesting in that sense. But yeah, nonetheless, looking at the overall basis over the next couple of weeks to see, does that start to move higher? Because that's going to incentivize more capital to come

Starting point is 00:08:42 into spot. Got it. And then when we look at the futures open interest margin, explain what the slight difference with the margin is. Right. So when you hold a futures position or a futures contract, you have to margin it somehow. So you have to either collateralize it with Bitcoin or other crypto. You can do that on FTX and I think Binance as well, although I've never used Binance, so I can't confirm that. And then you can also collateralize it with stable coins, right? And so the difference here is you're starting to see this big drawdown in the percentage of the futures open interest that's collateralized by crypto. And so what that means is more and more of these contracts are collateralized with stable coins, particularly

Starting point is 00:09:26 mostly Tether. And so what this means is that you have less convexity to the downside, which means that if everyone is long and price starts moving higher and you're collateralized with Bitcoin, well, your collateral is increasing in tandem with the actual P&L of your trade. But as soon as it starts to go against you, and by the way, as that's happening, you can increase your leverage as your collateral is increasing in value. But once the market starts to reverse as what we saw in may because there was a large percentage of um of the open interest that was collateralized with crypto well there's this huge convexity when it starts to go the other way because now not only is your p and l decreasing but also how collateralized you are is also decreasing so

Starting point is 00:10:10 your margin is decreasing and so seeing it goes it goes the opposite way with with the uh with the cash uh margin future so or stable coin margin futures uh because you know you're more apt to a short squeeze, because usually if you're margin with BTC, you have this inadvertent hedge if you're short and the trade starts going against you because your collateral itself is increasing in value via the BTC that you're collateralizing the contract with, even though the trade is going against you. So if you're collateralized with non-crypto margin, then you're more susceptible to getting short squeezed or getting squeezed out of your trade, I should just say. But once we get above all-time highs i would suspect that you probably start to see this this start to creep

Starting point is 00:10:56 back up as more people look to collateralize with btc because they're bullish on btc um but yeah for now for now we're in a good spot in the sense that um you know the lower we go the the you know less convexity that we're set up for to the downside got it and then we've got this relative transfer volume breakdown by size what is this so we're just looking at all the transfer volume on any given day. And then we're looking at in different subsets, the size of the transaction. So we have zero to $1,000, $1,000 to $10,000, 10 to 100K, all the way out to $10 million plus. And what you see is throughout 2020, you saw a larger portion of volume being taken up by these larger transactions. But really over the last month, we've seen this big spike and sustained, you know,

Starting point is 00:11:45 prolonged, like higher, higher portion of, of, uh, overall volume taken up by these large transactions. So when you look at like $10 million plus transactions, uh, they actually reached as high as 84% of volume at some point, uh, last month, I think it was like two or three weeks ago. Uh, but they're, they're sustaining a large portion of volume, which to me is suggesting either a exchanges are using batching more. Uh, but primarily, I think, I think the reason here is probably otc transactions so you know large capital that are whales that are active in the market um and and then that also is reflected by like the next chart where we're looking at all of our entities data so as we talked about since the end of july we've seen

Starting point is 00:12:26 really large buyers enter the market especially the whales so the buyers over a thousand or the entities above a thousand btc and then we filter out for exchanges and and known entities like Grayscale and Purpose ETF, QBTC. And so you've seen them consistently buying up until about a month ago. And then you've started to slowly see them trim their holdings. But what I didn't actually include this last week, and so I felt like it was right to kind of give an update on this. I actually wasn't looking at the 100 to 1,000 cohort in confluence with the above 1,000. And what you see is that the $100K to $1K guys have actually offset the selling or the profit taking that we've seen from these above $1,000 BTC entities. So, you know, your point is I'm just trying to make is that you're seeing large, in general, you're seeing really large buyers or activity from whales in the market.

Starting point is 00:13:22 Got it. And then when we see the transaction activity, I remember at one point the big thing that you said, hey, look, if I was a bear, my argument would basically hang on the fact that transaction volume is down. And that was like the one thing that you wanted to see pick back up. And it looks like it is picking up. Yeah. And a couple of different measures. The one I threw in here was the number of active entities. So we're clustering together addresses and then we're looking at, you know, which ones are active and which ones are dormant. And so you run a 14 day moving average over it to kind of smooth it out. You have this chart that we're looking at. And so in tandem with we talked about how volume is predominantly, you know, large transactions.

Starting point is 00:14:00 And then also you look at things like Google search trends, Coinbase app downloads. I think I think it's a fair assessment that retail hasn't really entered back into the market yet. Although we are starting to see, as you can see here on the bottom right, we are starting to see this transactional activity start to pick up a little bit, which resembles, you know, the early phase of a bull market. So we're just keeping an eye on this. I think, you know, this in confluence with some of the other things we mentioned, you know, is a good way to kind of get a get a sentiment check on is, you know, are the speculative market participants that come with a bull run starting to enter? All right. And then we've got the supply shock ratios. And I saw you tweet this last night and I literally just got a smirk on my face. And I said, Will has been all over this chart and this is like the money chart. So explain to everyone again, what is the supply shock ratios and what is the chart showing? Right. Yeah. I mean, this is probably like if I had to use one chart or I would also use the liquid supply shock ratio. But this one from a macro sense is just, you know, it really speaks for itself because you're taking a ratio of all the supply held by long term holders to short term holders.

Starting point is 00:15:09 And you're running, you know, you're taking a comparison of those. And so whenever the long term guys lock up a certain portion of supply, you start to get the supply shock or supply squeeze effect in the market. And then one thing, one thing that's important to note is, well, first of all, we're at an all time high in this, like by far, if you look in the top, right. But also in the, you know, over the next probably month or so, I mean, this isn't for sure, but I would suspect you'll start to see them trim their holdings and we'll keep an eye on this for sure. But, you know, into strength, you see the long term guys start to sell like they don't perfectly time the top, but they slowly sell into strength and then they accumulate into weakness. And so as we start to move higher, you know, with with, you know, major other major, you know, bull rallies that that Bitcoin's had, you just naturally are going to see those long term guys start to distribute their coins. So don't take that as an absolute red flag, because I think now at this point that they've locked up this large purchase supply. And this is what seems like what happens every time the ratio gets in the top part of the little green highlighted zone I put there. They lock up a certain amount of supply.

Starting point is 00:16:18 As the marginal demand keeps stepping in, the only way they're able to acquire new coins is to start bidding the price up because the float is so low. And then once that starts to build up the momentum, it's already kind of taken a leg of its own. And then the long term guys can start to sell into that into that rally. But I think we've now kind of initiated that demand. Obviously, you know, the confirmation will be like above all time highs to say that that's absolutely the case. But, yeah, I think like at this point, we're getting ready to have an exciting remainder of the quarter as we've been talking about, you know, since summer. So it's been really cool. I remember we first started following this.

Starting point is 00:16:55 The ratio was below the green box, and we've just been on this for weeks now. So, yeah, I mean, this is from a macro sense, this is probably the most bullish chart, I guess you could say. So what's really interesting about this is in prior bull markets, if we pull the chart up one more time, what you can see is that it kind of tops out in the green zone, right? So if you go all the way back to I think it's 2015 in eight or 17 and 18 and then in 2020, you can just see that it kind of ends up running up into the green zone and then coming back down. This is way higher than it's been previously. Do you think that that indicates as the price increases, it will be more volatile? It'll be kind of like an even more breathtaking move. Or should we not read into almost like the severity of how much further we've gone past that green zone than in prior bull markets?

Starting point is 00:17:47 Yeah, I think that stands out to me. And then also the base of which at the bottom of, well, at the bottom of the ratio, but at the net distribution zone from earlier this year, about 50, 60K, you'll see that the base that the long-term holders had to build off of was much higher than that at the end of 2017. So, yeah, I think it just kind of goes to show you this behavioral shift in the market. Also, like if you if you plot out the liquid supply shock ratio and over time, I think this one makes makes the point I'm going to make like really clear is it over time. It's in this descending channel in the first half of Bitcoin's existence. It spent that in the bottom half of the channel and kind of the latter half in the upper part. And then after covid of last year, which I don't think is a coincidence, you started to see it break out above that channel. And it's now kind of floating in no man's land where we've never really seen it before. And so, yeah, I think, you know, you're seeing this behavioral shift in the market of people are just holding their Bitcoin for the long term.

Starting point is 00:18:51 And I think this is, you know, pairing pairing the two of these charts together. I think I think you could reasonably make that argument. All right. And then talk to us about the miners. You've got one more chart here showing what's going on with them. Yeah. So you just have hash and then minor balances, and then we're looking at revenue per hash in USD terms. So as hash comes back online, of course, you have more competition for the same block reward, right? And so the revenue in BTC terms is going to go down, right? But in USD terms, because Bitcoin's price has been going up, we are actually at pretty high

Starting point is 00:19:27 levels in terms of revenue per hash in USD terms near where we were earlier this year and substantially higher than we were, you know, at the beginning of the Chinese kind of mining exodus, if you will. So, you know, that's the green and blue chart. And then I'm sorry that the orange and blue chart and then the green one is just minor balances. You see a little uptick this week and it's nothing like substantial that's going to move the market or anything. But just to keep an eye on what miners are doing, you're not seeing any big trend changes or anything, just slight accumulation this week. Got it. Joe, John, what questions you guys got? Well, what's going on legend? So my question would be around, there's, there's a lot of talk around the ETF, right?

Starting point is 00:20:07 Both futures and spot whenever that would happen. But we've seen some of the numbers on the goal on gold ETF. It had about gold had about a trillion dollar market cap before the ETF was approved. And now it's around 11 trillion. So is that kind of the impact that you think it could have on Bitcoin specifically, or are there other factors that you're looking at also? Well, first of all, a spot ETF would definitely be preferable to a futures ETF. I'm questionable how much liquidity that the futures ETF will take on initially, just because I think people naturally will be a bit skeptical about new products entering the market. And then if you have multiple ETFs getting approved, then I think people are going to kind of feel out the different products to see which one that they find most advantageous for them. So I think it'll it'll I mean, this is kind of a cop out answer, but I think you'll have to see the initial reaction from the market in terms of, you know, are are these products getting really large volume or not? A futures ETF is the bull case for Bitcoin is that, you know, it's bidding out, as we mentioned earlier, it's bidding out the CME curve.

Starting point is 00:21:10 you can now take part in that cash and carry trade. It draws capital into spot. But I would much, I would much rather have a spot ETF for sure. John. Yeah. Well, what's going on? Happy Friday. What metrics are you looking at going into this ETF and in this later stage in the bull market? What are you looking at? Obviously I feel like hash rate isn't as important as some of the other metrics or just what's your thinking process? Yeah. So a couple of things, like, first of all, we're going to look at, Well, in the short term, you're asking about like ETF. Um, I think one of the, one of the, the best, I guess, uh, sources would be the two guys on Twitter. Um, Eric, I don't know how to pronounce his last name and the other guy. Um, sorry, I don't remember your name. James Seifried. The two ETF, uh, experts are kind of, uh, uh, analysts at, uh, Bloomberg.

Starting point is 00:21:59 work. Yeah, there you go. Um, yeah, like I've been, I've been watching them pretty much. Cause I don't know too much about it and you know, how, how ETF approval works or any of that. Um, but also I've been watching like the, the CME, we talked about the basis, um, that's got bit up pretty aggressively over the last month. Uh, and so I suspect at least a good portion of that is probably people speculating or perhaps knowing that an ETF is going to get approved. So those have been, those have been like the two just main sources I've been looking at. Um, I don't think i know any more than like the average guy in that sense um yeah like as we as we get more you know further into the into the bull market i'll watch be watching several things so first of all you

Starting point is 00:22:38 know i have these top models um you know those will be a good gauge of you know how overheated maybe we are um also we have different on-chain ratios like market cap the thermo cap um mvrv which is the market value to realize value and the z scored version of that uh we've realized hodl, uh, ratio. Um, I mean, there's, there's several different, um, on-chain metrics that we can look at to kind of, um, you know, get a, get a kind of gauge of, of, you know, how historically overheated we are relative to the investor behavior going on chain. Um, and then lastly, of course, I'll be looking at things like my, my liquid supply shock ratio, and then also, um, you know, the exchange balances. Like, I think that was one big, one big red flag,

Starting point is 00:23:20 um right before that big may dump we had the largest day of exchange inflows ever and so of course you know if something like that happens um i'll be on it but you know some of the some of those different things uh just so everyone knows that it is now official the valkyrie bitcoin futures etf was just approved they actually got the uh notice from uh the uh regulators so when you think about this will what's your guess on what happens over the weekend as people are waiting for that thing to start trading on monday you think people are just spot buying uh kind of trying to front run it or something else i don't know how does the market react i haven't even looked at the it literally just happened like two seconds ago uh people are all tweeting it right

Starting point is 00:24:03 now bitcoin is sitting just uh basically at sixty thousand dollars so not really reacting yet i'm assuming it'll take a couple of minutes for uh for everyone to figure it out that's on the best business uh show you get breaking news like that but my guess is and part of this is we don't know the answer, but I do wonder how many people are going to try to front run this that don't already own Bitcoin, right? Like, are there really institutions that were waiting there saying, Hey, I'm going to wait for the ETF to get approved. And between getting approved and it start trading, then I'm going to go buy spot Bitcoin. Like if you wanted to buy Bitcoin, you probably were just going to already go and buy it. So I just don't know how much like real

Starting point is 00:24:37 size is going to be able to go do that now. I don't know. I've been wondering, is this kind of like a sell the news event just because the market has gotten so overhyped on an ETF. Um, I think in a lot of people's minds, it's almost been like a definite thing. So I think you could maybe make an argument that it's been priced in, but obviously we'll, we'll see over the weekend. Um, like my, my big thing is like, as, as we touched on like a couple of minutes ago, it's just, well, we'll see how the initial reaction to these products are, uh,

Starting point is 00:25:04 just because like, you know, if there's multiple that are getting approved potentially, right. I mean, if you're an active manager, you're going to want to kind of feel out and see how each different product is for you and see which one that you feel comfortable with. And then also, you know, which one has the most liquidity and all those kinds of things. So I, you know, I think, I think, you know, to an extent, you know, I think there is a potential bear case to be made that maybe we have like a sell the news event, but I don't know, man, I don't know any more than you will

Starting point is 00:25:33 see over the weekend. Yeah, no, definitely. And I guess part of this too, is as we watch uh kind of the access open i think your point in the beginning around the bitcoin futures etf versus a bitcoin spot etf uh is people are going to be getting the exposure via the future market it is not necessarily the spot market so there may be uh kind of an increase in uh demand for bitcoin and therefore that 85 of bitcoin circulating supply that's being held by strong hands over the last 90 days uh definitely plays into the supply squeeze but if this was a bitcoin spot etf we it would just go absolutely bananas because people would be coming in trying to actually buy the spot bitcoin there's just not enough there and so you would really expect to

Starting point is 00:26:14 see kind of rocket fuel to bitcoin right yeah i think that's a fair assessment yeah all right so as you kind of think through uh the end of the year what's your price prediction anything changed to uh to what you're looking at oh man same same as we've been talking about for for months now but uh, you know, the, the top model sits at like 111 K, um, Willie Wu has a top model that's like at 193 K, but mine's a bit more conservative. Um, but of course as price it's based on mean reversion and then also the, um, kind of the, uh, cost basis of investors based on realized cap. Um, and so you'll, you'll, you'll start to see that slope up if price does as well. Um, but for now that sits at like 112 K. Why is yours a more conservative?

Starting point is 00:26:58 It's just a different way of calculating it. So Willys takes the all-time moving average or all-time moving cap of Bitcoin and then multiplies it by, I think, 37 or 36 and a half. And then mine is looking at delta cap. So you're looking at the difference between realized cap and the average cap. And then you're multiplying that. This is an arbitrary number. This is the one we looked at like two weeks ago. And I just said it's a random number.

Starting point is 00:27:25 I picked seven and a half. Multiply it by that. You've been able to catch some tops just as you've been able to clip the macro bottoms. So yeah, I like Delta Cap as a conservative way to look at mean reversion. And then also, because you have average cap, which is where I'm saying the mean reversion is coming from, and realized cap is where the cost basis of investors is coming from. Got it. And then in terms of time series, so a lot of folks look back in 2017 and right in the

Starting point is 00:27:57 part of december was the top of that bull market it also happened to be i think like the day after futures were approved to actually start trading um but do you think that the bull market runs through the end of this year or do you think it will actually carry into q1 of next year i wouldn't be surprised if it if it carries out to q1 of next year because of some of the the supply dynamics and how long that those have taken historically to kind of play out um and also like anecdotally hearing about some people that may be sticking their neck out of the woods. I don't know how long that period of perhaps announcements will come, right? Like, I don't know if that's just like a chain thing of they all kind of come in, you know, sequentially

Starting point is 00:28:38 like week after week after week, and then we just blow off top or, you know, do we get one like every month or so? And I don't know. I think there's a couple of different factors that make it really difficult to look at the timing, but in terms of like some of the investor behaviors, we know kind of what to look for in terms of gauging how close we are to getting to these overheated zones. Got it. One of the things I'm really interested in, and frankly, nobody knows the answer, but I think is fascinating is that as the price continues to go up, you're going to see the success of MicroStrategy, Square, Tesla, all of the Bitcoin miners, their balance sheets are going to expand. People are going to say, hey, that's an interesting idea that I cannot have

Starting point is 00:29:16 cash sitting in my balance sheet that's actually losing its purchasing power, but I can protect and appreciate my purchasing power by putting a portion of that balance sheet in Bitcoin. And so I do wonder how many publicly traded companies are at least heavily considering, if not actually going to do it before the end of the year. And we have earning seasons coming up. Right. And so during earning season, we get two or three of these announcements. You could really see a number of different forces all working together to push Bitcoin significantly higher than some of the models. Right. You've won. You got five plus percent inflation. So people just naturally are looking for kind of a safe haven. You then got ETFs

Starting point is 00:29:50 getting approved. And then all of a sudden you get a couple of these additional shocks, whether you get a Brazil, you know, making Bitcoin legal tender, you get a couple more publicly traded companies putting it on their balance sheet that just considerably drives the demand. And again, you know, we will see those strong hands sell into the bull market. But right now, you know, I think the last time we saw 85 percent not moving in 90 days was in what, october of 2020 right before we went up five six hundred percent yeah um yeah i mean we'll have to see like as far as as far as like you know does does everything change because of macro i mean i think the only way that we'll know is to kind of see it unfold i do think at some point we

Starting point is 00:30:32 probably diverge from these historical four-year cycles and and whether that starts to happen now or not uh i don't know but you know i i wouldn't be surprised if we did just because where you know where people are calling for you know a bear market we've been seeing you know resemblances of early bull market behaviors over the last couple months and and you know if that's true then yeah perhaps we probably extend out until q1 and into the spring of next year all right sounds good thank you will all right guys take it easy later buddy

The Pomp Podcast - #690 The Bitcoin Bulls Are Running Through 60k! w/ Will Clemente

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