The Pomp Podcast - #811 Bitcoin Steady After A Rough Start To 2022 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. This episode is brought to you by Mode. Mode is a trusted UK app that allows you to buy, earn, and grow Bitcoin all in one app. You can

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Starting point is 00:03:49 This podcast is for informational purposes only. All right, let's jump into charts. Then we'll talk about sentiment and kind of market structure stuff. This first chart you've got, you got the Bitcoin-NASDAQ futures 28-day rolling correlation. What is this showing us here? Yeah, so this is technically, it's like 672 hour, but four-week rolling correlation at 93%, 0.93. So basically tick for tick, even though the scales are a little bit different. Wherever the NASDAQ goes, Bitcoin goes.

Starting point is 00:04:18 Essentially, for Bitcoiners, it's treated as a risk-off asset. It's a monetary safe haven. But increasingly, over 2020, 2021, it's been adopted by macro allocators, and it's treated to them as a risk-on asset. And so I think there's somewhat of a bigger picture being missed. But that's opportunity for everybody that's happily stacking away. So if someone wants to sell Bitcoin because of auto correlations and just a volatility model, the VIX spikes. Look at every time the VIX locally spikes. I believe I put the chart in, but every time the VIX has spiked, if we look in a big way of March of 2020, but even local VIX correlations. Right here is the March 2020. You can see that big drop in price. Yeah, and that's the big one. And then we have an even kind of a more zoomed up version. And you can see kind of the last two months have basically been every time there's been a spike in the VIX volatility index for the S&P risk off in equities, Bitcoin's kind of hit somewhat of a local bottom or sold off in a way.

Starting point is 00:05:23 And so there's obviously its own variables in the Bitcoin market. There's derivatives. There's its own traders that don't even probably look at equities. But for the last two months, really, the tail of the tape has been Bitcoin is being treated as a risk on asset. And when things go risk off, Bitcoin takes a hit. And so that's where we are in the monetization phase. It's treated as a check on central bank irresponsibility. And if central banks become marginally more responsible, which the markets have kind of priced in as a as a probability, then Bitcoin is going to going to take a hit. And that's and that's fine. And so when you think about correlation between Bitcoin and some of these other Nasdaq, et cetera, type assets, is Bitcoin the leading indicator or the stocks the leading indicator? Like, do you have a sense for which one is leading the other or they're just moving in lockstep and it doesn't actually matter? They just go together. Yeah, funny enough, I think Bitcoin has actually become more of a pure signal in terms of risk on, risk off. It seems like it's more of a free market, obviously. There's a lot more capital in these equity markets, and a lot of it's just auto-allocated by pensions and all of this, where they just need to establish some sort of allocation and lock it in. And there's, you know, tens of trillions of dollars of assets in these equity markets where Bitcoin is an even trillion dollar asset.

Starting point is 00:06:42 And so funny enough, when we saw the VIX spiking, I believe two weeks back, hit like 38 and it was really bloody Monday. And then the following Tuesday after where equities closed in the green both times with the NASDAQ down like four and a half percent, Bitcoin bottom first both of those days. And we could see like in the spot order books that there are some huge buyers on Coinbase just happily stacking away in huge volumes. And so what that kind of tells me is, you know, the correlation is obviously there. But Bitcoin is being increasingly viewed as, you know, this more pure signal of the kind of a check on the financial system and how unsustainable it is. And so it's almost like a leading indicator. We saw that in March of 2020 as well. Bitcoin, obviously, is much more volatile, 50% in a day, but it bottomed two weeks before equities, and it was up 40% by the time that equities ultimately bottomed in that March 2020 moment. So that's kind of how I think of it going forward.

Starting point is 00:07:35 Is the volatility spike done? Are we going to see a liquidity crunch in 2022? Maybe. And if anyone tells you they know, they're just lying. But ultimately, I think coming out of it, how the response is after some sort of liquidity crunch, that's where Bitcoin really takes off. Got it. And then when we start to think about some of the other instruments around Bitcoin, let's look at the perpetuals funding rate versus kind of like an annualized basis.

Starting point is 00:07:58 What are you seeing there? Yeah. So we talk about this a lot, but here we actually took like an annualized figure of it. So in Bitcoin, there's a couple of different type of futures instruments. There's that perpetual futures, which is just a futures contract that never expires. It just rolls over. And then you have like the quarterlies, which is more in line with like traditional commodity future markets, right?

Starting point is 00:08:15 Like every three months, there's a quarterly futures expiry. And so we can take the spread between the current spot market and what that futures price is, and we can have a basis spread. And so if we annualize that, we kind of get almost a market neutral or risk-free rate in the Bitcoin markets. And so during April, that was hitting these really, really high figures, like 40%, 50% plus. In those perpetual swap markets, basically, it's kind of this basis between the spot price and that the funding essentially keeps, incentivizes allocators to remain tethered to that spot price. And so if the derivative is trading far above the spot market, funding will be really, really positive. So this is a 168-hour moving average of that PERPS funding, and it's annualized. But basically, what you see in February there is that traders were paying 100% annualized to long Bitcoin, right?

Starting point is 00:09:12 So obviously, that's not sustainable. It kind of shows you that these capital markets are the wild, wild west. But for some investors, it was a really big opportunity. You got paid outrageous rates to just short Bitcoin. And you could not even short it with your entire net worth. If you 1x short Bitcoin, you're holding a synthetic dollar. So you could harvest 50%, 100% annualized yields for a week on end for just sitting in dollar positions. And so we can kind of see these boom and bust cycles in Bitcoin with on-chain indicators,

Starting point is 00:09:41 but we can also see it in kind of the sentiment cycles in the Bitcoin derivatives market. And right now, we're basically completely muted. We're not severely negative, but over the last week, purpose funding has been on average negative. So what we really kind of see is it's not derivative driven at all. And actually all kind of long speculation has basically been driven out over the last two months. Got it. And so when you see us down kind of flat, do you think we have to go super negative before we get any sort of upward price movement? Or how do you think about funding being positive or negative in price? Yeah. So, I mean, usually in bull markets, it's always different.

Starting point is 00:10:17 This time it's different. Everybody longs their longs. You see the basis, futures funding, it explodes upwards as everyone's just trying to margin long Bitcoin, margin long crypto. And during bear markets, you saw the same thing at the bottom of the 2018 cycle. Everybody thinks Bitcoin's dead. It's all over. You know, they're longing the absolute or they're shorting the absolute bottom. And you see that like the perps market drives far below the spot market.

Starting point is 00:10:42 And so it's almost like the derivatives are trying to like push that volleyball underwater. That's how I describe it. They're pushing a beach ball underwater. um we're naturally that spot market is that you know gravity or physics is going to take over and uh we can't really go any lower and so we're not we're not at that total capitulation phase yet where derivatives are are you know driving driving us into the dirt but you know most of that that speculative air has been kind of sucked out of the room and so uh right now bitcoin seems to be pretty fairly priced from a derivative side of things uh and i think you know depending on equity

Starting point is 00:11:14 correlations. We can see some higher prices here, but that long kind of speculative activity that we see a lot of times in Bitcoin cycles, it's really not there today, which is actually a really good sign for bulls. Got it. And then if we look at the short-term holders and the long-term holders, they obviously act very differently given they're different in time horizon. What are you seeing there in kind of that ratio between the short-term holders and long-term holders? Yeah. So we talk about this chart a lot. This is the cost basis ratio. So we can see like the average cost basis of short-term holders, average cost basis of long-term holders. And really, there's a pretty big historical significance to what these two

Starting point is 00:11:48 cost bases are doing relative to each other. So when you think about Bitcoin bull markets, why does Bitcoin price go up? Well, Bitcoin price, it's an absolutely scarce asset. The Bitcoin price goes up when the marginal seller is exhausted. It's basically that simple. And obviously, there's more to it. But when that marginal seller is exhausted, it takes just a small amount of capital for Bitcoin to really, really run. So we can see when the marginal seller is exhausted when one, you have the short-term holders have really kind of capitulated and or rather, you see long-term holders have like a significant sum of supply, like a relative large amount of that circulating supply. So this cost basis ratio, when it's

Starting point is 00:12:25 trending down, it means that short-term holders, the cost basis is rising relative to those long-term holders. So why is that happening? Well, long-term holders have cornered the market and any new capital that comes in, any new money, short-term holder, on-chain Bitcoin that we can see moving around, transferring hands, that has to increase because they have to compete for that free float. They have to compete for those Bitcoins that are on the market for sale. And so we see during bull markets that short-term holder cost basis really explodes relative to the long-term holder cost basis.

Starting point is 00:12:55 And during bear markets, during downtrends, we see that it's kind of the opposite and there's some capitulation in play or that long-term holder cost basis is increasing because there's a pretty massive accumulation happening. So we're in somewhat of an uptrend for this metric, which means we're in that accumulation phase. But this is kind of that spring loading up for that bull market. We're seeing that accumulation phase happen again. We're seeing some of that short-term holder money capitulating on a loss. and this is really what kind of you know drives future bull markets when that when that marginal macro seller that we're talking about who is just trading equities or you know uh just looking at the vix uh when when those flip to marginal buyers or you know marginal buyers in a big way that spring's really going to be primed in bitcoins i think that's when bitcoin really runs

Starting point is 00:13:37 yeah it's absolutely fascinating to kind of watch how this uh part of the cycle has been different than the past cycles and i do think that a lot of it is because there's a different type of investor or different type of holder that's in the market, they treat the asset differently, and they act differently. Talk to me about those long term holders and their ability to hold so that if they do sell, it's in profit versus at a loss, which kind of goes hand in hand with what you're just talking about. But what are you seeing there? Yeah, so this is just relative long term holder supply as percent of circulating, we take out exchange balances, because there's some noise in that metric. It's been trending down for the past couple months, or the past couple years that

Starting point is 00:14:11 that exchange balance but right now we see essentially if you look at like the bitcoin price chart and we look at this long-term holder uh kind of supply uh as a relative percent of circulating we see that we're kind of in like this really big like accumulation or like bear market territory almost uh before bitcoin goes parabolic and so what this tells me uh and kind of when we're looking at the past couple months is that the demand side has always looked great i mean we saw a little bit of distribution a little bit of profit taking but for the most part the demand side of the spring has been loaded since September, since the fall, but we haven't seen the supply side of things. So on-chain analytics, it's gotten a lot of hate recently.

Starting point is 00:14:52 A lot of people have been kind of saying, oh, it's nonsense. What about the supply squeeze? The reality is the supply has stayed squeezed. I mean, it's looked extremely good since November, but that catalyst for funds moving in, for increasing amount of capital to allocate just hasn't been there. So it's still kind of in that supply squeeze type zone. There's still a pretty small relative free float for new capital to come in and bid up, but we have to see that tide turn. And so we're still primed and we're priming day by day more and more, but we got to see that marginal flip of selling to buying from the macro funds, the long short hedge funds. Got it. And then when you look at the daily transfer volume and kind of the efficiency

Starting point is 00:15:34 of settlement. I recently was explaining to somebody that the average Bitcoin fee is under $2 and the average fee for some of these other blockchains is significantly higher. It's actually significantly higher than Bitcoin ever was. So talk to me about these kind of transfer volumes on a daily basis and that settlement efficiency. Yeah. So basically it took the average fee and divided it by the change adjusted average daily volume. So change adjusted is just a way to kind of signal out some of that noise in the transfer volume. It's a little bit lower. That's a little technical. We don't need to delve into that, but basically we can see on a, like how much Bitcoin transfers on a daily basis per every dollar in fees, right? So for someone like

Starting point is 00:16:15 Elizabeth Warren that says, okay, Bitcoin wastes energy. Well, here we have a global monetary network that's apolitical, non-sovereign. There's no CEO, there's no board, there's no off switch that's transferring on average over the last two weeks, $35 billion a day globally, permissionlessly. And for every $85,000 of settlement volume, final settlement, like not like swiping your debit card, which isn't final settlement, that's just a company marking up their own kind of database, but like final settlement of value across the world, $85,000 of it for every $1 in cost. So the percentage cost of that settlement is 0.0001% or whatever it is. And if you're looking at, say, Ethereum, and this is why I think the comparisons are just outright dumb, to be frank, because they're so much different. Ethereum, in terms of settlement volume per $1 in fees, it's at $171, right?

Starting point is 00:17:14 Because Bitcoin is a settlement network. It's purpose-built to store value and settle value in the most efficient manner possible. Ethereum isn't. It's a smart contract network. You can do all sorts of things with NFTs or DeFi or all sorts of things with smart contracts, but it's not a purpose-built monetary settlement network like Bitcoin is. And so when we think about just how efficient Bitcoin is at doing this one thing it's purpose-built to do, nothing else competes.

Starting point is 00:17:40 And that's kind of why we're hammering the table, constantly being bullish, because we see a huge problem in the world and that money's broken and, you know, it presents a few hundred trillion dollars worth of opportunity that we think Bitcoin is pretty primed to take. And so all these sort of like, you know, all these sort of blockchain, Solana, Ethereum, whatever else kind of altcoin you think is novel, that's fine. But they're competing for something else entirely in terms of being, you know, a permissionless, decentralized, truly decentralized settlement network. Nothing else competes with Bitcoin. And it's not really close. Got it. And then when you start to think about kind of where we go from here, it seems like you're really paying attention to funding. You're paying attention a lot to kind of the consolidation of holders. Are we just watching the transfer from short term weekends to kind of strong, long term focused individuals? And therefore, it's a kind of a repeat of what we saw maybe in the summer of 2021 that eventually led to kind of a replay of the bull market?

Starting point is 00:18:42 Yeah, I think we're somewhere, I think we're a little bit kind of like 2020 almost where, I mean, we haven't really seen a huge macro capitulation, like to the extent that we saw in March of 2020. But we saw a VIX spike, we saw NASDAQ 20% off the highs, Bitcoin 50% off the highs, all the kind of short money or like the unconvicted holders are out of the market. If you, you know, if you were a little if you're unconvicted, then you already sold. And really, it's just kind of those hodlers of last resort, those stackers of last resort that understand Bitcoin is the best money the world's ever seen. And they're accumulating. And so we saw Bitcoin range at nine thousand dollars for months in 2020. Well, while every other asset was moving, but under the surface, that supply got tighter and tighter and tighter. And so I think that's what's going on today. I mean, we can see that's what's going on today. And in reality, it's a pretty good time to buy Bitcoin relative to the news events that's happening, the geopolitical game theory that we talked about just a couple of weeks ago, Pomp. It's picked up even since then. And so it's really exciting times. And I think Bitcoin is extremely undervalued relative to just what's happened in the last year. I mean, if we're thinking about Bitcoin being as cheap as it was a year ago, a lot's happened since then. And so I believe it's pretty undervalued here. And again, I'm a buyer.

Starting point is 00:19:57 Got it. John, you got any questions? Yeah, Dylan, I'm curious what the data is showing about the support levels. I've heard everything from when we're going down, $50,000 was a support, $40,000 was a support, $30,000 is a support. Where does that sit now? Yeah, I mean, from a kind of a technical level, which I think has a lot of merit. There's a lot of limit orders.

Starting point is 00:20:17 There's a lot of buy interest at $32,000 at that $30,000 level. Um, it was tested just briefly, uh, during the height of that kind of macro sell-off. And so, uh, I expect if we get there again, strong support there, uh, 28,000 kind of that summer, the, the, the March, or I'm sorry, the summer open or the summer close, as well as like kind of the 2021 open, uh, that's really a pretty strong support level. And I think, uh, a lot of kind of like risk models and, uh, derivatives are, are set to kind of write, like write at that threshold. So if we go below there, it could get a little ugly. I don't think we will. But again, non-zero probability. But that's what I'm kind of seeing for support. In terms of resistance on the way up, kind of those key levels, the big round numbers are probably going to be some resistance for the time being. But I think, you know, once that kind of like, again, that macro flips, it really, it's going to be like most of the resistance is probably like butter on the way up as that marginal seller is just not there. You know, most of the weak hands have already kind of capitulated at this point.

Starting point is 00:21:17 that makes sense dylan before uh before we let you go when you think about uh kind of sentiment in general it oh i think a lot about like uh price comes down people obviously get less excited there's not as much kind of fomo hype you know frothiness whatever uh but we still see you know michael saylor buying 660 bitcoin we see yesterday jack dorsey uh clearly articulating what's going on in the bitcoin world and kind of how he sees the asset why it's so important like how much of the dying down of the froth and hype is healthy and, you know, isn't necessarily reflective of some sort of slowdown in progress of Bitcoin versus is that something that you worry about where you see sentiment, you know, kind of tailing off, if you will? No, I mean, I think this is just

Starting point is 00:22:01 nothing but a thing. I mean, for anyone that's new here, it's like, and I'm not some grizzled vet, like I've only been in the market for a few years, but, you know, relative to when I first started allocating Bitcoin significantly higher. And for anyone in 2021 or 2022 that just started buying and this is underwater, I think you should embrace it because the reality is Bitcoin just with absolute scarcity and with the kind of the individual game theory at play, everybody's trying to acquire a bigger slice of this supply. And so, you know, Bitcoin's underlying number go up technology ultimately will always kind of win out. And so you'll kind of wish you stacked at lower prices. And so, no, I mean, I think nothing's changed. Obviously, the price,

Starting point is 00:22:44 marginal seller, marginal buyer, price has gone down. Derivatives are not overly extended. We'd be higher if there was some kind of speculative activity in the derivatives market, but it's totally healthy. I mean, we've seen this over and over again. Bitcoin's not going to go away. You have Bill Miller coming out saying he has 50% of his net worth in Bitcoin. A lot of billionaires are opening their eyes when he says that. So, yeah, just nothing but a thing. I mean, we're going to see nation states adopt Bitcoin over the next 10 years, mine Bitcoin. It's going to be legal tender. We have states proposing as legal tender. Tahini's restaurants just went out and talked to the Canadian house committee and said, we should buy $10 billion of Bitcoin. Like,

Starting point is 00:23:21 obviously I'm not that, you know, it probably won't happen tomorrow, but you know, these things are accelerating and the trend is pretty clear. If you just zoom out more than a couple months. I love the Tahini's guys. They just continue to push the pace. Just literally just killing it. absolutely amazing. All right. Where can we send people the folly? What's your Twitter handle and where, uh, where should we send them for the newsletter? Yeah. So, uh, the charts I showed today, uh, just brief sneak peek of our monthly report we're dropping. Uh, it's going to, we're, you know, dropping some facts about blockchain analytics, uh, Bitcoin derivatives and, and kind of the, the macro outlook. So, uh, just took about like a quarter of the charts that were laying out,

Starting point is 00:23:58 uh, in that report. So subscribe to the deep dive. Uh, if you're interested in that, I think it's going to be a banger. Uh, it's in my bio if you're interested. So, uh, that's kind of what we're covering and you know, if you enjoy it, make sure to check it out. Awesome. John, any last comment? Dylan, you're streaming on Twitch now. Oh, uh, yeah. I mean, it's kind of an impromptu thing. I just, uh, you know, Twitter spaces is fun, but, uh, we don't get the visual, right? Like I like doing the visual here with you guys. And so, uh, I've hopped on with Will a couple times and we just, just look at trading view and all that and just shoot the shit. So, uh, you know pop if you guys are interested in coming on i wouldn't do that sometimes i think i would pay

Starting point is 00:24:36 like i don't know maybe maybe five dollars a month just to see dylan and will communicate with each other dude did you see the rsi you you two in a conversation uh like via text when no when you know no one's watching i can only imagine how much fun you guys are having so i have a good time i appreciate you coming on we will do this again next tuesday uh and keep up the great work man people learn a lot so it's super super valuable appreciate you guys have a nice week see you later buddy thanks so much for listening to today's episode i really hope you guys enjoyed this one make sure you're subscribed on apple spotify or your favorite podcast player and if you're looking to try to transition to get a new job in the bitcoin or crypto industry we've got

Starting point is 00:25:19 you covered head over to palmscryptocourse.com we've developed a curriculum with the top teams across the industry it's a three-week intensive training program with over 50 events packed into that three-week time period. Go to pompscryptocourse.com to learn more, and I'll meet you guys for the next episode.

The Pomp Podcast - #811 Bitcoin Steady After A Rough Start To 2022 w/ Dylan LeClair

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