The Pomp Podcast - #735 Analyzing The Bitcoin Market Sell-Off

Episode Date: November 30, 2021

Today's episode is a little different than usual.. I break down the sell-off in the Bitcoin Market this past Friday and why it may not be as big of a deal as many people thought. I then continue the analysis by taking a took at the on-chain addresses and explaining why Bitcoin holders are becoming more decentralized. If you like this kind of breakdown of the news and on-chain analytics, you can watch The Best Business Show on my Youtube Channel every weekday from 11am-1pm. ======================= 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 ======================= Compass Mining is the world's first online marketplace for bitcoin mining hardware and hosting. Compass was founded with the goal of making it easy for everyone to mine bitcoin. Visit compassmining.io to start mining bitcoin today! ======================= Do you want a new job in the bitcoin and crypto industry? You should go apply for hundreds of open roles at http://www.pompcryptojobs.com or sign up for our training program at http://www.pompscryptocourse.com  =======================

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 today's podcast episode is a little bit different than most of the others i break down the sell-off on friday in the bitcoin market i also explain why maybe it's not nearly as big of a deal as many people thought i then continue the analysis and i look at the on-chain bitcoin addresses and Bitcoin balances, and I make a case for why Bitcoin holders on-chain are becoming more and more decentralized over time. I hope you enjoy this new type of episode, and I will do a couple of more of them in the future. Before we get into this episode, though, I want to quickly

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many others. So if you want an open job, go to pompcryptojobs.com. But if you want to go through the training program, go to pompscryptocourse.com and we'll see you there. All right, let's get in the episode with Jameson and Pete. I hope you guys enjoyed this one. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. On Friday, there was a massive market sell-off.

Everyone was worried. There was a new variant of COVID and literally the world got lit on fire. everyone running and selling all of their assets, trying to get cash because there was uncertainty and there was chaos. But maybe actually that was just an overreaction. What we saw was the stocks coming off of that session on Friday, which saw the Dow post its worst day since October of 2020. The Dow was down 905 points or about 2.5%. S&P 500 tumbled 2.3% and the NASDAQ composite slipped 2.2%. All three major index is negative for the week based on what happened on Friday. Now, not only were the stocks down, also we saw Bitcoin's price draw down as well. And Bitcoin's price actually dropped before we saw stocks drop. Bitcoin remains the most honest market,

the most free market in all of finance. But before everyone started to freak out, you have to remember two things. I saw a great tweet and I couldn't find it this morning, unfortunately but somebody had this great tweet where they said on friday the stock market sold off on saturday a hundred thousand people packed into a stadium to watch college football to watch michigan play so that tells you that people aren't scared of the actual variant itself instead what they're scared of is the government's response to the variant but what we see here is bitcoin's price drawdown if you zoom out and look at this year over six times now six different times Bitcoin's price has drawn down at least 20%.

And this is coming from Glassnode data that was posted on Cryptopius on Instagram. But what you see is back in January, 29% drawdown. In February, 24% drawdown. April, 26%. In May to June, 54% drawdown. September, 37% drawdown. And in November, only a 21% drawdown.

Now, why is this important? One, we expect in bull markets to have multiple 20 to 30% drawdowns happen throughout that time. If you go back to 2017, Bitcoin went from $1,000 to $20,000, but there was at least five, I think there were six different drawdowns of over 20%.

This is very natural. But what we did see is that the November drawdown from 69,000 all the way down to about 53,000, that was the shallowest, the least severe drawdown, just 21.8% compared to the other drawdowns we've seen earlier this year. So before everyone starts to freak out, you have to remember, this is part of what happens in a bull market. Now, that isn't necessarily going to help the people who are buying at $65,000, $67,000, $69,000.

You have to remember, dollar cost averaging is your friend. If you're willing to buy it at $69,000 of any asset, then if it drops, you should be willing to buy it lower. And if it goes up, you should be willing to buy it there as well. Dollar cost averaging is a timeless financial principle for a reason. But not only should we be looking at the drawdowns. Also, you can look at here, plan B, posting a risk-adjusted return chart that shows all of the various assets. Now, what's so fascinating about this chart to me is that when you go ahead and look at this, you can see everything from Facebook, Amazon, Apple, Netflix, Google, Tesla, also classic investment assets, and then obviously Bitcoin. Bitcoin remains the single best risk-adjusted return asset that you can buy and put into a portfolio.

When you add in things like the Sharpe ratio and you start to look at the impact that it can have on a portfolio, it becomes a really, really attractive thing. That doesn't mean you should go put 100% of your assets into Bitcoin, but what it does mean is if you have 0% exposure, you're probably wrong. Having some exposure, whether it's half a percent or something more, depending on what your financial goals are, is likely to be a good decision. Again, you've got to understand what your goals are. You've got to understand what risk you're willing to take. but looking at it from a risk adjusted return perspective bitcoin is very very attractive so when we see the drawdown first question is are we surprised that the second people start talking about a new uh virus variant that markets sell off like almost they have some sort of like

a memory of like oh there's a virus variant assets are going to go down let me beat everyone to the door and sell my assets first is that surprising to us not not necessarily i think i mean it's people just being scared right and fear in markets setting in i think it's a little surprising that maybe bitcoin and equity markets did it at a similar uh you know point in time and at a similar velocity but ultimately this is the same thing we talk about all the time which comes to uh how much bitcoin kind of the volatility of the asset right and when things are appreciating when things are going up when we're hitting all-time highs when we're up gaining 100 200 300 percent during uh kind of different time periods you look at no one's no one's saying very much on the bear case

right? They're all kind of everyone's bullish running around saying great things. But then on these slides, people are soon to forget, right? You said it earlier, we saw 20%, 25%, 30% drawdowns, three of them previously. Oh yeah. And then we had a 50% drawdown, right? So like these are very, very, very common, uh, for each having cycle and we've seen them historically, but I don't think that this should be looked at as a super negative thing, right? Because if you want to enjoy the upside of that, the volatility provides, you also have to be willing to withstand the downside. And what we've seen over time is that these happen a lot, that they happen frequently in kind of these four-year having cycles, but also over time that the appreciation has greatly kind of benefited from this drawdown, right? And what we're seeing now is people that are willing to hold on to these assets for a long period of time, Bitcoin specifically, are greatly rewarded on the other side of this.

So I think when you look at it kind of in the context of just zooming out and seeing what your long-term belief is, these 20 to 25% drawdowns shouldn't really be that surprising. And if you really believe in the asset long term, you should just hold on. John, what do you think? The correlation is a little surprising to me because Bitcoin, I don't think should be correlated with any shutdown or any lockdown or anything like that. Right. I can see how businesses and other equity companies are correlated that right. They can't make more revenue. People spend less money, all that. But traditionally, a lot of Bitcoin holders have been holding for a long time. Right. Greater than a year. So I don't think they're really necessarily moved by that.

So seeing an 8% drawdown one day or 20% in November, just based off kind of new things coming out in the world and the possibility of a shutdown, I don't really understand. But you made a good argument when I was talking to you last night about it was the fact that people just race to get liquidity, right? So it's, hey, I just need emergency money. I don't have it right now. All my money's tied up. So let me go ahead and take something off the top.

And that's what I could see happening. But like I said, traditionally, Bitcoin holders are very long term. So I don't think they're really phased by any news in the market. so what we john and i were talking about last night is basically this idea of a liquidity crisis and we did not see a liquidity crisis on friday right to be clear uh but there was the uh ability to get there or the early signs of it what happens in a liquidity crisis is every asset is denominated in dollars are you priced in dollars what's bitcoin worth you say a dollar amount what is real estate worth you say dollar amount what's that stock worth a dollar amount and so what

happens in a liquidity crisis is people get very very scared there's a lot of uncertainty so what they'll end up going and doing is they'll sell their assets because they want dollars they find security in dollars stability in the dollar for a short period of time it doesn't matter what inflation is because it no i know that the dollars one dollar is going to be worth one dollar i don't need to go and try to figure out what the price is going to be in the future of this asset so if you go all the way back to march of 2020 when there was the government mandated lockdowns and there was tons of uncertainty and fear people sold off their assets so you saw gold go down 15 percent. So equities go down 25 percent. So Bitcoin go down 50 percent. And that is because

people wanted to sell their assets and get dollars. They were running into dollars. That is called a liquidity crisis. The reason why it's called a liquidity crisis is because people are looking for liquidity, but everyone is at the door trying to sell. There's not that many buyers. So there's more sellers than buyers. Obviously, the prices go down very, very quickly. That's what we saw. What we saw on Friday was not necessarily a full on liquidity crisis, but there was a kind of a mini one, right? It's a lot of people want to sell very quickly because of some external factor. And so you get a price drop, not nearly as severe as in March of 2020, but definitely noticeable. And so when you start to see this, one other thing to remember is that Bitcoin's

historical volatility, about 12% move in Bitcoin is equivalent to about 1.7% move in the S&P 500. So every time Bitcoin moves 12%, it is about the same as the S&P moving 1.7. So if Bitcoin was to go up or down 24%, then that is the equivalent of the S&P going up or down about three and a half percent or so. And so they just have a different level of severity in terms of that volatility, but they still were acting the exact same. If you go back to March of 2020, all assets sold off. It didn't matter whether it was Bitcoin, gold, real estate, stocks, et cetera. Everything sold off because people wanted dollars. It was a liquidity crisis. Same thing on Fridays. People wanted security. They wanted some level of safety and stability. They didn't know what was going to

happen oh there's a new variant is it real is it bad how much should we be worried is there gonna be lockdowns travel bans what's gonna happen to consumer shopping etc i don't know just get dollars and i'll sit sit there safely now as over the next 72 hours we learned more about it and it seems to not be nearly as bad as people thought could have happened people start to go back into the market we see prices coming back both bitcoin stocks etc all coming back which is what you would want to see if you are a long-term bull right and that's really kind of what we're talking about in that same volatility when 20% versus 1% for the S&P, are you just talking based off of like a market cap basis? No, if you think about the historical amount of volatility, right? So let's

say that you can measure volatility a couple of different ways. I don't want to get super into the technical details around like an 80 vol asset, right? But basically what you're looking at is when Bitcoin moves up or down, what is the average percent it moves on a daily basis? Well, compared to, let's say, the S&P 500, Bitcoin moves much more aggressively on a day-to-day basis or on a weekly or a monthly basis, right? If you ever watch like mainstream financial news or business news, they'll literally talk about assets like gold went up, you know, 0.1% or the S&P is up 0.75% today. And those are, to some degree, material movements, right? 1%, 2%. Bitcoin, that happens in a minute, right?

Or five minutes. And so ultimately what you start to see is the equivalent of a 12% move in Bitcoin is a 1.7% move in the S&P. And so if they got excited or scared about a 1.7% move, you could imagine that people get just as excited or scared in the Bitcoin world when there's a 12% move, right? It is kind of the exact correlation. Yeah, it's also you have to remember that it's a newer technology still. We talk about it like it's been here forever and everyone knows about it. there's still the majority, if not a large percentage of the population that still has no idea what Bitcoin is, how it operates, what it's useful for, how the network works,

all of that kind of stuff. So I think in that context, like the volatility is normal, right? And this stuff has been proven time and time again to be beneficial to the people holding the asset, right? Not only from a price appreciation standpoint, but when you look at the Sharpe ratio compared to just about every other financial asset from stocks to real estate, to other currencies, commodities, et cetera, Bitcoin has outperformed them on a Sharpe ratio when you determine kind of the volatility overlaying the price appreciation. So I don't think this is anything

necessarily to be concerned about. Look, if you were gonna buy Bitcoin when it was at 68, $69,000, now you're getting it 20% cheaper, right? So if you still think that we have a lot of way to go, you should be purchasing it also. And look at guys like Michael Saylor, right? He's an easy person to point to

because of his conviction in the space and the amount of money that he has put into this asset. But he's buying 400 million more dollars of Bitcoin this morning, he announced, right? at 58, $59,000 was his average price. So even on the way up, someone who has been acquiring for a long period of time has a very low cost basis under 30,000, I believe, is still acquiring Bitcoin at these prices that people consider high or are saying are high, and might be the top of this cycle. He clearly doesn't believe that he's clearly someone that is very convicted on the

space. And I think it speaks volumes that he is buying $400 million worth of Bitcoin at 58, $59,000. Bitcoin's on chain distribution is becoming more and more decentralized. What exactly does this mean? Bitcoin has a very unique advantage. It is a transparent ledger. You can go on and using on-chain metrics, you can see all of the Bitcoin addresses and you can see what is in there in terms of a Bitcoin balance. I went last night and I did a deep dive looking at what is the centralization or the decentralization of the Bitcoin ownership on-chain. What I found was very, very interesting. First, let's start with the 10,000 Bitcoin balances. So these are wallets on-chain that have 10,000 or more Bitcoin in it. What you can see is that these peak,

the number of wallets that have at least 10,000 Bitcoin or more peaked in October of 2018. Bitcoin's price was approximately $6,500 at the time. And it was right before that big puke down that signaled the bottom of the 2018 bear market. So 10,000 Bitcoin or more, the balance or the number of wallets with 10 000 or more bitcoin and it peaked in october of 2018 if we go ahead and we look at a thousand bitcoin so kind of an order of magnitude smaller what we see here is that this peaked in february of 2021 earlier this year there are currently about 2 100 bitcoin addresses that hold a thousand bitcoin or more which is similar to where we were throughout all of 2020 so what you can see is all through 2020 we're hovering right around 2 000 bitcoin addresses with a

thousand Bitcoin or more in them. Then we had this big run up and then kind of a puke down. And now we are right back around 2100 Bitcoin addresses on chain with at least a thousand Bitcoin or more. If we go and we look at a hundred Bitcoin, all the Bitcoin addresses that have at least a hundred Bitcoin or more, what we can see is that the all time high was the peak in February of 2017 at the beginning of the real bull market in 2017. And at the time there was 18,500 Bitcoin addresses with at least 100 Bitcoin. But today there's only about 16,100 Bitcoin addresses with 100 Bitcoin or more. So what you can see is 10,000, 1,000 or 100 Bitcoin in the balance of on-chain wallets. Those have all peaked. They've all hit an all-time high and then been trending

downward. There's less and less whales on-chain with these Bitcoin wallet addresses. So what if we go and we look at the opposite end of the spectrum? If we look at 0.01 Bitcoin or 0.1 Bitcoin as the balance. Well, first here we have Bitcoin addresses with at least 0.01 Bitcoin in their balance. And what we can see here is that we continue to hit all time high after all time high. There are now 9.3 million Bitcoin addresses that hold at least 0.01 Bitcoin or more, just over $500 or so. If we look at Bitcoin addresses that hold 0.1 Bitcoin, about five to $6,000 worth of bitcoin in their balance we can see that continues to also hit all-time highs you can see here that there are 3.28 million bitcoin addresses that have at least 0.1 bitcoin or more in their wallet and

so ultimately what we are watching is the continued stacking of sats by those at the lower end of the ownership so the big whales people who owned a hundred a thousand ten thousand bitcoin on chain they continue to disperse their Bitcoin. They're selling into the market and people at the lower end continue to buy, they continue to stack sats. And so ultimately Bitcoin is becoming more and more decentralized. The distribution is getting into more and more people's hands of on-chain ownership. This is very, very important. I think of Bitcoin ownership or Bitcoin distribution on-chain as one of a three-legged stool. First, you want to have decentralized ownership of the actual asset two is you want to have decentralized mining and three

is you want to have decentralized node operation we know that mining has become more and more decentralized over time after china banned bitcoin mining in the country we saw tons of people flood out of inner mongolia and other regions inside of china and spread all throughout the world no longer is 60 of bitcoin mining hash rate in china instead it is now much more evenly distributed across the world. It got more decentralized over time. On top of that, we continue to see more and more Bitcoin nodes coming online. There are tens of thousands of Bitcoin nodes all around the world that continue to pop up and that becomes more and more decentralized as well. So if you go back and you look at that three-legged stool, there's more decentralized ownership, there's more decentralized

mining, and there's more decentralized node operations. That tells me that the network is not only healthy, but it continues to become more and more secure over time, which is exactly what you would want to see. What did you guys think when you saw some of these charts in terms of Bitcoin ownership, John? It's great to see that more people are acquiring Bitcoin and kind of having the addresses. It's really tough because it's so decentralized that you can't tell if one individual actually owns both addresses. But obviously, when you have multiple people coming in and owning 0.1 Bitcoin, it's a it's a big deal, right? The education has greatly widespread over the last few months and years about Bitcoin in general and cryptocurrencies. So it's great to

see. I've always kind of worried that one person owns, if one person owns 10% of the asset of an asset, it's supposed to be a store of value for everyone. It's really tough to have everyone else own it. So I like seeing stuff like this. Yeah. I think it's interesting too, because the charts that you were just showing, right? If you look at the accounts that the wallets had owned over 10,000 Bitcoin, over a thousand and downward, they're all declining from the previous highs, right? And they're continuing to stay at those depressed levels that we, previous to the response that we had seen in October of 2018 or so on. So I think that the accounts in general with 0.01 that continue to rise to all time highs is a good sign, because to your point,

it's becoming much more decentralized than it was previously. And I think that was one of the knocks that people pointed to earlier on in the kind of in the process of Bitcoin, whether it was two, three, four, five or six years ago, was that it wasn't nearly as decentralized from an ownership perspective, right? And if there was only 21 million, a lot of this would be transferred to wealthy people who could afford to kind of ape into the asset and buy as much as possible. and what we found is that has continued to trend downward over time and change the other piece that i think is important to call out in this analysis is that this is not total um uh kind of data set right what i mean by that is this is just on chain bitcoin ownership

so there are still people who own via and purchase via otc desks that buy through exchanges they have exchange wallets uh they have software wallets they have hardware wallets like there's a couple of different ways that people can own. Some of that is counted inside of this on-chain distribution. Some of it is not. And so obviously, if you come in and you buy, let's say, Bitcoin on Coinbase or Gemini, BlockFi, Kraken, a whole multitude of various platforms, what you can see is that you can see that there's inflows to the exchange in that wallet. But what you can't see is the breakdown of all of the various customers. So take the largest US-based exchange, which is coinbase they have you know about 60 million registered users or so you cannot see the

difference of who owns what there they know right because it's their platform but that is different and and so it makes this analysis a little bit hard because it's not just on-chain ownership it's also what's going on in those um exchanges as well but at least we use the data set that we have which is the on-chain ownership and that is definitely getting more and more uh decentralized and also more and more people are stacking sats or kind of dollar cost averaging into uh what ultimately will become probably pretty material uh bitcoin positions i mean the more decentralized and the more dispersed the ownership is the better i think it is for bitcoin you see all these others and you don't like talking about the like all coins but when the guy who created it owns 60 to

70 percent of the supply that's a big deal because he can crash the price if he ever tries to sell everything that they own or whatever right so i think the more decentralized and the more disruptive um or the more distributed the ownership bitcoin is the better it is for the asset yeah i I mean, I think we talk about this all the time also, but it's Bitcoin and everything else, right? Bitcoin is the most decentralized distributed technology from a money standpoint that's ever been created. So I think people need to take these things and see it as a good thing when these continue

to trend in the right direction from a decentralization standpoint, because anytime the Bitcoin network becomes stronger, right, more people are mining, there's more wallets with more kind of holding individual amounts of Bitcoin relative to one big holder. I think that's a good thing. the piece that uh i think folks forget about this is that it's a security mechanism having decentralized ownership is is very much a uh benefit or an advantage from a security standpoint it's not just about oh all of these other people get economic empowerment that is important right and the more people who get access to sound money and can prevent uh the negative effects of

currency debasement the better but also there is a huge piece of the security if everyone you know If one person owned all the Bitcoin, that wouldn't be too good for Bitcoin from kind of a single point of failure. Or there's an ability to go after that one person. You can manipulate it, right? All kinds of bad stuff. Bitcoin optimizes for security.

Of course it does. That's the whole point, right?