The Pomp Podcast - #781 Is The Bitcoin Bear Market Over? w/ Dylan LeClair

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. Dylan LeClaire is the Senior Market Analyst at UTXO Management. He also writes a newsletter with Bitcoin Magazine. In this conversation, we talk about Bitcoin, on-chain metrics, we talk about Bitcoin's price, the market structure, and what to expect in the coming weeks. I really enjoyed this conversation with Dylan, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. Today's episode is brought to you by Mode. Mode allows you to buy, earn, and grow Bitcoin all in one app. Not only is it a secure

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Starting point is 00:03:25 Again, that's fundrise.com slash Pomp. Go check it out. And when you make your first investment, they'll give you $10 on top of it. fundrise.com slash Pomp. 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. All right. Before we get started with charts, graphs, and cool visuals, how are you feeling

Starting point is 00:04:04 in terms of Bitcoin, obviously, just from a sentiment check, was at 69,000. Nice. And drew all the way down, was sitting around 50,000 or kind of high 40s at the beginning of the year. And over the last two weeks or so, it's kind of continued to fall down even more. Is this all healthy? Like, how do you feel about the Twitter sentiment? Just talk me through that. Yeah, I think it was a pretty cool graphic the other day when it was comparing January 11th or January 10th, 2021 versus 2022. And there's a fear and greed index. And last year it was at 90 at 40K. And just like yesterday or two days ago, it was at 10. And the fear and greed index is just sentiment, but it's crazy what a year can do. I think 40% correction from all-time highs,

Starting point is 00:04:48 it's nothing but a thing in Bitcoin. And I think just a lot of the stuff with derivative market liquidations and then kind of a lot of the macro talk, I think that's all already kind of been priced in. If you just look at like, say the Eurodollar futures for 2022 at the end of the year. So that means basically like the market's expectation for the Fed funds rate, the pricing at about four rate hikes. So you're seeing a lot of that. I think Bitcoin just being honestly the most free market in the world, that's already kind of been getting priced into the Bitcoin market. And so in terms of, you know, further downside, we'll have to wait and see. But I think, you know, 40K is a pretty strong level for bulls. And I think there'll be a lot of support there

Starting point is 00:05:24 uh for the time being i think that uh that's a pretty good way to uh to look at it and bitcoin is definitely the freest market in the world uh hopefully it will will uh will stay there um all right so i think that we've got a number of different uh graphics and stuff but before we get to that uh you basically have these like five key points of understanding um and i just want to uh kind of highlight those first before we get to the graphics so people keep these in the back of or head as as we go. The first is denominating performance in USD or Bitcoin. The second is the having effect on minor revenue. The third is interplay of hash rate difficulty and minor revenue. The fourth is hash price. And the fifth is balance sheets on a Bitcoin standard. One of

Starting point is 00:06:06 the things that I think is important here is you're talking about balance sheets with Bitcoin term of denominating performance in USD or Bitcoin. Historically, people obviously have thought about everything in dollars. And one of the reasons for that is they have to report in dollars and public companies, all of the accounting systems are built in dollars, all the taxes are paid in dollars, etc. Before we get into the actual kind of charts, do you think that that stuff has to change before people start thinking in terms of Bitcoin? Or can we have people thinking in terms of Bitcoin without, let's say, being able to pay taxes or change your accounting systems or anything like that? Yeah, I mean, you know, using Bitcoin as a unit of account on an individual

Starting point is 00:06:47 basis is definitely a little bit easier than a corporate kind of entity, just with the accounting standards and, you know, the tax reporting and all that. But I think more of it's just kind of a mental model, you know, operating on a Bitcoin standard, things get frequently a lot cheaper and a lot more expensive, you know, just a lot bigger kind of moves than you would on, say, a US dollar standard where things just gradually get more expensive over time um with bitcoin there's obviously volatility right where say things on the bitcoin standard got you know 40 percent more expensive uh over the last couple months but that's after you know anybody that's been doing been operating on a bitcoin standard for the last couple years uh life's gotten a lot cheaper you

Starting point is 00:07:31 know to the extent of 90 95 percent um experiencing these kind of exponential gains in purchasing power and so i think more so just kind of a mental model but more and more people and entities and institutions around the world. And, you know, I think slowly nation states are kind of coming to operate on this Bitcoin standard mental model framework. It's going to be amazing. All right, let's get into charts. We're going to go rapid fire through these over the next 20 minutes. Bitcoin mining difficulty. Nice little pink line here. What's this showing us? Yeah. So this whole kind of slide deck is just, I've heard a lot of buzz about publicly traded Bitcoin miners. And so I think, you know, what we really want to do here is, is if you're buying

Starting point is 00:08:07 publicly traded miner stocks or evaluating them, how are you actually evaluating the performance? So right here we have mining difficulty and this is in log scale. So if you look at linear scale, it's basically, it doesn't look like, it looked like it was at zero until like 2020 and then all of a sudden just went parabolic upwards. But in log scale, mining difficulty is appreciated by, you know, I think like 10 orders of magnitude or something outrageous, you know, as Bitcoin mining went from just doing it on CPUs where you could mine 50 Bitcoin just on your old crappy laptop to now, you know, these just an unbelievable amount of hashing power all over the world. So understanding mining difficulty and how basically Bitcoin supply and elasticity works, where every commodity in the world, as it gets more expensive than sent to produce it, obviously increases. But with Bitcoin, there's a difficulty adjustment. So as it gets more lucrative to produce, to mine, it becomes incrementally that much harder to get the thing. And so it's unlike any asset in the world in that sense. And I think it's really important to understand that if you're going into the business of Bitcoin mining or buying these miners. All right. Next, we've got hash rate here, which also seems to just be going up along with obviously the difficulty. But is there any end in sight for hash rate? Yeah, so I mean, essentially, this is the same chart. Difficulty is basically, there's a 10-minute block target over a 200, I'm sorry, 2016 block interval, right? So every 2016 blocks, if blocks are coming in faster than that 10-minute interval, then difficulty will adjust upwards. And likewise, if it's slower than that 10-minute target, then it'll adjust downwards.

Starting point is 00:09:44 So this is showing the same chart, but hash rate is derived by basically how fast blocks are coming in relative to how difficult it is to mine blocks. All right. Mining difficulty and hash rate. When you look at this, this is just literally overlaying them on top of each other for the most part. Yeah, this is just this is in linear terms. And this is just the last two years, just for some, you know, just for a visual graphic. OK, then we've got hash price, which is the minor revenue per tera hash. What is this showing us? Yeah, so this is that same chart over time. And this is in US dollars. So as Bitcoin's appreciated, you know, a bunch similar to how hash rate has risen. But you kind of see basically, and this is in log scale, but over time, a marginal unit of hash rate gets you less and less in terms of dollars as hash rate continues to just go exponential. And so what you kind of see is that, you know, a lot of these inefficient rigs over time have to get plugged into more and more efficient uses of that energy to stay competitive. And so it's kind of this Darwinistic process where, you know, basically the revenue is trending to zero in Bitcoin terms. And that's what we're going to show in the next one. But this one is in USD terms.

Starting point is 00:10:50 It's just pretty crazy how much hash rate continues to increase over time. All right. Then we've got hash price, the minor revenue per tera hash in this next chart. Yep. And so this is just an up-close view of the same thing, and this is in linear terms. And so this is dollar denominated, but basically what you can see is, and if you look closely to say May of 2020, you see basically a vertical line down. That is the halving event. And so if you tend to look at a lot of publicly traded miners, basically in Bitcoin terms, what you'll see is that they trade at a multiple or pretty closely to this metric here, because hash price is taking that minor revenue and it's dividing it by the hash rate. So as hash rate increases, basically

Starting point is 00:11:35 the profit margins for a lot of these miners compress. Got it. Then we've got more of the halvings kind of zoomed out here. You can see three halvings on this next graphic. And basically that's really what's helping to drive this down over time. Yeah. So this is that same hash price metric, but it's, it's denominating in BTC terms. Um, so when I say, I say things on Twitter a lot, like, uh, basically it's, it's the production price of Bitcoin. The cost to produce a marginal Satoshi is going, is trending towards infinity. And basically what this means is, is hash rates, essentially there's an economic incentive for hash rate to increase forever. Um, if you factor in Moore's law, basically, um, you know, processing power, computing powers is increasing exponential

Starting point is 00:12:15 terms, as well as there's this huge economic incentive to monetize wasted energy resources all over the world. What you see here is that along with the halvings and the difficulty adjustments, if you look very, very closely, you'll see it's like a step function all the way down in this chart. And that's every time difficulty increases or there's a halving event where you can really see it, it becomes that much more difficult to mine a unit of Bitcoin or a satoshi uh and so uh this is really key to to evaluating publicly traded miners or uh you know bitcoin bitcoin mining in general and and we're kind of working our way in to see some of these charts in bitcoin terms okay and then if we go ahead and we go to the next chart here this is

Starting point is 00:12:54 i think just having zoomed in where you can see a very significant drop uh in a in a single one um when you look at this uh what exactly is uh is this showing uh in terms of uh on this graphic here. Yeah. So I've kind of put a lot of similar charts in this slide deck, but really what I'm trying to show is with a mix of linear and logarithmic scale, just how fast this ecosystem is moving. So this chart is in linear terms. And what it's showing is basically how much Bitcoin, a marginal unit of hash rate or a tera hash can get you. So if you plug in an ASIC, what can you expect for revenue? And what you can basically see is since 2017, since the top, it's become uh unbelievably more difficult to mine bitcoin uh you know per per unit of hash rate and

Starting point is 00:13:43 so and you can see that kind of that having there there was a decrease of 50 and so uh when you look at a lot of these publicly traded mining charts and btc terms uh i think you'll notice you know you'll notice something pretty staggering and it might look a lot like this chart got it and then this last one here uh around the the hash rate uh this is the zoomed in on the having drop uh that's pretty significant when you zoom in on it. Is that something that we should expect every single time there's a having? Yeah. So this is minor revenue per pair hash and BTC terms. And so what you can see here is a lot of the variants and, and the kind of the, those, those step functions are that's difficulty and hash rate. And you can see some of the things like the minor capitulation

Starting point is 00:14:23 and with difficulty had this huge downwards adjustment. That's that spike you see kind of in, in July where it actually became a lot more profitable for any miners that were able to remain plugged in. But yeah, this is, this is in BTC terms and every having you can expect going forward, eventually fees will, will make up a dominant majority of, of the minor revenue. But for now, you know, fees as a percent of minor revenue is still one to 2% and that block subsidy currently at 6.25 every, every 10 minutes or every block makes up a dominant share of the minor revenue. All right. Now, uh, these next charts are, uh, are going to be fun. Uh, we've got riot denominated in BTC, right? Being the publicly traded, uh, mining organization.

Starting point is 00:15:08 We have Mara hut, BITF and hive. Basically you've got five of them here. What are you one trying to show? And then maybe we can kind of click through each one of them as, uh, as we go, But they're all down against Bitcoin. And so what exactly are you trying to show here? Yeah, I'm not trying to discourage anybody from buying mining stocks. I have no affiliation with any of these companies. I don't really have an agenda. The charts that I was showing earlier were really trying to do one thing, and it's trying to get people to think in a Bitcoin standard. And so if you look at a lot of these companies, especially over the last two years or since, say, the bear market in 2018, in USD terms, they're up a huge amount. But especially since

Starting point is 00:15:53 before the 2017 bull run, or say, you know, at the bottom of 2020, if you're looking at a lot of these companies in BTC terms, they're down almost, you know, some of them 90%, 90% plus. And this is because if you're evaluating these companies and their valuations in Bitcoin terms, the fact is, the fact of the matter is that basically their revenue, and if they increase their hash rate, they can attempt to keep pace. But the revenue in Bitcoin terms is essentially programmed to go down forever. Basically, all miners are in Bitcoin terms. And so playing with publicly traded miners, investing in them, allocating in them is totally fine. And I encourage people to do their own research. But at the end of the day, a lot of this performance is somewhat expected if you

Starting point is 00:16:40 understand the economics of Bitcoin mining. And so the companies that hyper-Bitcoinize their balance sheets the best will keep up. Say, Michael Saylor and MicroStrategy, since adopting a Bitcoin standard, I think are slightly underperforming Bitcoin itself. And their balance sheet is essentially 100% Bitcoin now. But a lot of these companies, they're buying a bunch of ASICs, they're trying to plug them in. And since they're, say, IPO, or just I chose three, four-year timeframes for a lot of these companies. They're underperforming Bitcoin by a wide margin because in USD terms, the revenue is increasing and they're growing and they're growing fast. But in BTC terms, the revenue is decreasing, programmatically so, because of the halving and

Starting point is 00:17:19 the difficulty adjustments. So these are just some things to kind of consider when you're evaluating, say, investing in mining companies or even any company, really. It's just the fact of the matter is it's going to get it's programmed to become you know uh to produce a marginal unit of bitcoin it's going to get harder forever if hash rate continues to increase so uh you know just some just some ideas got it and so when you think about denomination in bitcoin obviously uh denominating stocks in bitcoin uh like this or uh are pretty eye-opening uh if you were to do this for the s&p 500 if you were to do this for uh nasdaq etc let's say in 2021 all of them are down against Bitcoin. And that's just a function of Bitcoin was up, you know, 65 percent. They

Starting point is 00:18:04 weren't. And so naturally, that denomination ends up looking like it's just down. Do you think that professional investors kind of not the retail crowd, not the Bitcoin crowd, but Wall Street firms or hedge funds, big banks, like eventually do they start to change the way that they actually denominate these investments as well? Or do you think they're so kind of codified into the fiat mentality and the denomination in dollars that they stay without looking at it this way? Yeah, I think it's pretty standard for like, say, a lot of fund managers to get, you know, benchmark to the S&P or to the NASDAQ or just, you know, to a standard basket of equities. And I think it's going to be increasingly common for a lot of these managers as Bitcoin becomes,

Starting point is 00:18:47 you know, it's already kind of entrenched itself as a macro asset. But I think, you know, over the 2022, over the next, you know, say four years or decade, really, what you're going to see is Bitcoin itself becomes a benchmark. And I don't expect the volatility to completely go away. I actually expect volatility to persist for the most part. But I think the reality is as this asset class grows in relevance and kind of acceptance, it's going to be kind of a benchmark to say, why would I give you any money or why would I invest in your company when I can just buy this thing and outperform almost everything? And so whether that's for publicly traded miners or whether that's for hedge funds and their performance.

Starting point is 00:19:24 You know, if a simple retail investor can go buy Bitcoin and outperform you. And a lot of times with Bitcoin, you know, not in 2021 with so much volatility, but through most of Bitcoin's history, it was the best in vol adjusted or in risk adjusted terms. It was the best performing asset as well. And so it'll be interesting to see how it all plays out. But I think Bitcoin increasingly becomes a benchmark for performance for all of Wall Street and investors in general. Yeah. And when you think about this, one of the things that's most interesting to me is if somebody was to go and do a bunch of research on publicly traded companies and spend a bunch of time trying to understand valuation metrics and cash flow, you know, investment strategy, return on investment, taxes, like there's so much that goes into evaluating, let's say one publicly traded business. Let's just say Amazon. We were talking earlier about Bill Miller and his conviction in Amazon and kind of how he breaks that business down.

Starting point is 00:20:19 Uh, and then if you try to take that analysis and bring it to a bunch of different public companies, there's this feeling of like, you never can actually accomplish all of the analysis. You can't analyze every single public company. You can't actually continue to find what's the company that's, you know, got a brand new angel route. Okay. What's this? What's this?

Starting point is 00:20:38 What's this? What's this? And so there's this sense of like, just dollar cost averaging into Bitcoin and like Bitcoin and chill. It brings almost this like mental clarity. It brings this like very simple, long-term belief of like, look, I don't need to be a genius. I just simply need to understand a market structure.

Starting point is 00:20:55 And then I just chill. And like, I'm going to be perfectly fine. Is that kind of how you think about the difference between like the super hardcore analysis that goes on at these hedge funds, these large financial firms versus like the everyday Bitcoin pleb that just says, hey, I'm just going to dollar cost average into this. And, you know, good luck. Let's see what happens here. Yeah, I think, I think you kind of nailed it there.

Starting point is 00:21:17 There's a growing amount of people out there that say, none of this makes sense. The cost of capital is manipulated and broken. And I think there's a real reason that value investing since, say, 2008 or 2010 has underperformed by a wide margin. Value investing is basically baking into the cake of this assumption that the cost of capital or that the interest rate is fair, is actually positive, really. So when real yields are negative and you're trying to, what's the fair value of a company or a discount cash flow analysis when you're plugging in this formula into the equation, you're plugging in this assumption, this variable, and it's the cost of capital. And it's, you know, what is real yields right now? Five, negative five, negative 6%. And so I think that's where value investing has gone, you know, gone wrong this last decade.

Starting point is 00:22:10 And I think that's where it returns on a Bitcoin standard eventually. Obviously, there's a lot of volatility denominating everything in Bitcoin, using Bitcoin as your unit of account in 2022, 2021, 2020. Those who did have done great. But I think, you know, right now, a lot of people are saying, I'm not even investing. I'm just saving money. And five years down the line, 10 years down the line, when these companies, you know, maybe are on Bitcoin standards themselves or Bitcoin's appreciated by another order of magnitude or two, uh, it'll make sense to start investing and get that, you know, positive ROI and BTC terms. Uh, but for now, you know, while investing is very expensive, I'm just going to save some money.

Starting point is 00:22:49 Joe, John, what do you guys got? Dylan, what's going on, man? Good to see you again. So my question is just how interest rate fits into this narrative, right? So the general idea is obvious that, uh, interest rates will rise and risk on assets will depreciate in value or have a pullback specifically tech stocks and stuff like that. But I don't know if we've necessarily seen a period of a sustained period of high interest rates when it comes to Bitcoin's cycle, right, or lifespan. So I'm curious to know how you think or how you think about interest rates in the grand scheme of things. Like where does this take Bitcoin over

Starting point is 00:23:18 the next 12, 24, 36 months? Yeah, it's a great question. I think that's the that's a trillion dollar question. I think a lot of the people even, you know, running the show at the Fed don't even know and they're just kind of winging it and they'll put on a brave face and go out there and pretend like they they know how it's going to all play out. But they're just winging it. I think for the most part, real yields can't sustainably rise. Real yields can't even probably break zero. We can't have a positive real yield without the entire system just collapsing. And basically, since 1981, when the interest rates cyclically topped, we've seen just a secular trend of lower real yields over this time. And I think that's needed to keep this whole thing glued together.

Starting point is 00:23:58 And so, you know, with Bitcoin, you know, we have a couple, you know, key assumptions or things that we, you know, would like to say we understand, which is like kind of what we covered earlier, that it's going to become harder to produce Bitcoin, basically, not forever, which, you know, kind of sounds outrageous. But as long as there's an economic incentive to mine Bitcoin, people will do it. And as long as that's true, and people can plug in ASICs all around the world with just satellite signal and some energy resources, it's going to become harder and harder to produce the thing. There's an unforgeable costliness to Bitcoin, an asset similar to, say, gold. So regardless of if there is credit expansion or deflation, a deflationary bust, Bitcoin will have that production cost and have that absolute scarcity that no other asset on the planet has. So, you know, whether if interest rates rise sustainably, I think everything gets hit. I think there's a really good buying opportunity for Bitcoin, similar to, say, March of 2020, where Bitcoin bottomed first. and there was a lot of volatility along the way

Starting point is 00:24:57 and the 50% drawdown intraday, but it bottomed first and then obviously went parabolic in the later part of the year. And so because of the response of the money printing. And so I think interest rates can't sustainably rise without something breaking. And I think when the thing breaks the next time,

Starting point is 00:25:13 whatever it is, probably something in the bond market or euro dollar market or anything in this kind of very fragile financial system. But the response from that and what comes and what happens with Bitcoin after that i think i think that's the real next big move here gotcha john what you got dylan what are you seeing with long-term holders for short-term holders obviously we have seen a

Starting point is 00:25:35 drastic decrease in price our long-term holders still accumulating right now and is it the short term holders that are selling yeah so short-term holders are you know a little bit underwater here uh just because um you know we were ranging in that 50 60k range for a while uh we saw long-term holders actually um basically contrary to what we've seen in the past distribute into the drawdown and i think a part of that had to do with the macro worries and fears that have kind of popped up over the last couple months um you know we've seen like say arc invest or a lot of these what people would call speculative risk on assets have sold off in a big way and i think just more so kind of the the macro wall street investors that have come into the space who treat bitcoin like a

Starting point is 00:26:16 you know risk on asset and aren't evaluating things on a bitcoin standard uh you know they they'd probably trim their Bitcoin holdings, you know, just looking at correlations and treating it just like another asset in their portfolio. In the meantime, a lot of people that have kind of come to understand this as a monetary asset and are evaluating things in Bitcoin terms are pumped because, you know, their income in Bitcoin terms has risen and they're saving a lot more with the DCA, right? So I think there's like kind of two classes of investors that are allocating this thing. And on the margin, you know, the big guys that are, you know, are investing trillions of dollars across asset classes can have a pretty big effect on this price. But for now, I think,

Starting point is 00:26:53 you know, a lot of that's already been kind of priced in and the long-term holders are starting to accumulate again. What are your thoughts on Bill Miller saying his portfolio is 50% Bitcoin? I mean, that's a Chad move. I think, you know, it shows a lot of conviction. And I think what, you know, is kind of maybe not lost in all of that is similar to kind of what Paul Tudor Jones came out and said in 2020, not in terms of allocation size, because Paul Tudor Jones only had 5%. But, you know, this very, very respected investor in the Wall Street circles, billionaire investor, who a lot of people, you know, probably behind the scenes copy trade, or, you know, listen very intently to what he has to say. You know, Paul Tudor Jones had that effect in 2020,

Starting point is 00:27:34 where a lot of people said, Oh, my gosh, you know, I need exposure, this guy knows what he's talking about. And I think, you know, Bill Miller coming out and saying, you know, 50%, yeah, I don't care if it goes down, I'm gonna buy more, I'm never gonna sell. You know, there's a lot of there's a lot of billionaires out there that probably realized that they're short Bitcoin and then they need some more. I think that's a great way to look at it is that Bill Miller's in 50 and Paul Tudor Jones was out two to five. It's a big difference, big Delta. So we're going to see what happens here. Uh, before we let you go very quickly,

Starting point is 00:28:03 uh, any predictions for 2022, whether it's price, whether it's a milestone, what are you thinking, looking forward to in 2022? Yeah, I think we're going to get a, I think we're going to get a few more nation states that come that come pretty hard into adopting Bitcoin, whether it's legal tender or maybe adding it to the reserves or strategically mining Bitcoin, maybe, you know, an energy producer. I think that's coming. And I think, you know, Duke LA is kind of hinted at it a little bit. But there's a lot of people and, you know, I guess nations that are kind of looking at the playbook that El Salvador has has started to implement. And, you know, there's some bumps along the road, obviously, but I think that'll come. And I think, you know, we'll see El Salvador with this bond offering, right? They're just kind of routing around the IMF, laughing that, like Bukele actually laughing in the IMF's face on Twitter and not even paying down the debt that they owe and saying, we're just going to raise a Bitcoin bond.

Starting point is 00:28:58 And so if that's oversubscribed or that's, you know, there's some sufficient demand for that offering, it'll be really interesting to kind of see the response from other countries in similar situations that, you know, want to want to get financing or want to maybe attract foreign capital. all right my friend i appreciate you coming on newsletter is linked in uh in the twitter bio too so let's uh let's go man we got a lot of work to do in 2022 counting on you pay me in bitcoin basically yeah there you go it's perfect do that again real quick we get a little screenshot of you then yeah they're perfect yeah all right i appreciate you coming on uh for anyone who isn't following dylan go follow him if you're not subscribed to the newsletter go subscribe to the newsletter and i'll do this again next tuesday my friend see you guys appreciate it

The Pomp Podcast - #781 Is The Bitcoin Bear Market Over? w/ Dylan LeClair

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