The Pomp Podcast - #818 Bitcoin's Comeback 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 sponsored by the Bitcoin 2022 conference. Bitcoin 2022 is the largest Bitcoin event in the world that takes

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Starting point is 00:03:33 risky extensions. It's time to switch to Brave Wallet. Download Brave at brave.com slash pomp and click the wallet icon to get started. Again, go download Brave at brave.com slash pomp and click the wallet icon to get started. All right, let's get in this episode. 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 all right let's get into bitcoin obviously bitcoin went down a lot

Starting point is 00:04:16 uh start the year uh december and january uh pretty big price drawdowns but now bitcoin has come back it didn't die didn't go to zero all the bears are wrong they're stunned in disbelief uh let's start with uh just price weighted by hourly uh purpose funding rate obviously last week and the week before you were talking a lot about the funding rates and kind of waiting for negative funding what are you seeing now what's this telling us yeah so i mean we got it you know, we talk about derivatives a lot here. And really, we like this graphic a lot to show kind of the bearishness or bullishness in the derivative market. So when there's negative funding, essentially what that means is that derivative bets, you have longs paying shorts,

Starting point is 00:04:55 or I'm sorry, shorts paying longs. Okay, let me spit it out here. When this line is red, what you have is longs are being paid by shorts. So when you see kind of a short squeeze in Bitcoin and Bitcoin's going vertical, oftentimes what's happening is in derivative markets, you have shorts that are being forced to become buyers, or they're actually being liquidated, margin called, in the legacy system, that's what it's called. And so you have kind of that organic spot price, but oftentimes when you see these volatile moves at tops and at bottoms, oftentimes it's really the derivative markets that's driving the price action. And there's these forced unwinds that are happening. So we kept talking about, Will talks about it a lot, when we're going to

Starting point is 00:05:36 get a regime of negative funding. What that means is that you're getting times where shorts are paying longs to enter a position. They're paying longs to sit in a derivative long position. And so we saw that. We saw that at the bottom. And we saw as price was going up, funding was staying negative. So what that means was that that perpetual swap price was under the spot market price. So whether it's on Binance or FTX perpetual swap or BitMEX, it was under, say, the price of bitcoin on coinbase it was under a spot bitcoin market price and so that you can think of like i like this analogy a lot when funding is negative when when you see that positioning under the spot price it's like a beach ball underwater and so uh it wasn't as significant as say market 2020 or

Starting point is 00:06:20 even this summer but this kind of recent squeeze we've got this you know we've almost kind of vertical to 44 000 or around there um it's because of you know the derivative bets that have started to really unwind. And so, uh, you know, that's what happens when, when bears get too bearish at the bottom. Got it. And so if we look at the supply held by whales, that seems to be significantly changing and they just seem to be gobbling up Bitcoin right now, holding as much of it as they possibly can. Yeah. So we have here, uh, we have, uh, basically a 30 day percentage change of whales and retail. And so, uh, with the blue pattern is the blue color is when both of these cohorts are accumulating. And so you can kind of see, like, you can think of whales as

Starting point is 00:07:01 like the smart money, and maybe they're not so smart just as much as they really can change the market structure just with how much capital they have. So when you see both retail and whales accumulating, it's usually somewhat of a bottom or it's a pretty good time to buy. And so recently, we saw retail has continued to buy the entire drawdown. Whales were actually distributing, and recently that flipped. So both whales and retail are big buyers here, and we've seen that over the last month or so. And so, uh, I think that's a trend that's, that's pretty good to see and we'll see if it continues into the future. Got it. And so then if we move and we look at actual, uh, retail entities and, uh, the whales, when you start to compare these, uh, over like

Starting point is 00:07:43 the 30 day, uh, percent change to me, what is a little bit hard to understand, maybe you can kind of help clarify this is it doesn't seem like there's been that big of a, a kind of Delta or movement, uh, since maybe December or so, how do you, uh, look at this? And then if you look over kind of the last few years, what are you seeing here? Yeah. So I think, uh, maybe I think our slides were mixed. I changed it. Uh, so right, right now I'm looking at the supply held by only whale entities. Um, so, so we're seeing that, that accumulation happened. Um, and, and we saw that distribution at the, at the, basically the top of the bull market and into the downturn. And we saw that distribution kind of flip from November as that CPI print came in really hot.

Starting point is 00:08:27 And Powell said, you know, hey, we were wrong. Inflation's not transitory. And you saw somewhat of the smart money, like the big whales, start to distribute a little bit. So that's flipped in accumulation mode again. And really, like, you know, these 30-day trends, it's interesting to monitor. But the reality is, for the most part, Bitcoin's always in an accumulation mode for most or a lot of market participants. and new market participants. It's really just kind of incumbents, how much do they control and what are they doing? And so we're seeing that accumulation happen again. And rightfully so,

Starting point is 00:08:58 with Bitcoin kind of down 50% from the all-time highs. Maybe not now. I think we're actually like 40%, 30% off the bottom. So quite a good bounce. But it's good to see that those whales, that traditional smart money crowd, step in big at that low 30K range. Okay. And now this next chart, I think, is one of the most important ones in all of Bitcoin, which is the correlation between the NASDAQ and Bitcoin. And obviously, given all the Fed's interest rate comments and kind of the anticipation of them raising interest rates, Bitcoin's been treated up until the beginning of February as a risk asset. There's been a heavy, heavy correlation between Bitcoin and the NASDAQ, but it seems to decoupled now. What does this mean? And what are you seeing here?

Starting point is 00:09:38 Yeah, so that rolling four week correlation at 672 hour here, this is NASDAQ futures and Bitcoin Bitcoin got as high as like 0.94. Right now it's at 0.89. But if you're just looking at the chart, Bitcoin has, you know, quite a big pop. You know, one of the days it was up, I think, 10% when that short squeeze happened. And the Nasdaq was flatter, I think a little bit down in the day. So quite a decent decoupling. I don't think, I think we're not, you know, out of the woods yet in terms of the heavy correlation between Bitcoin and Nasdaq or Bitcoin and risk on assets. I mean, really, the reality is everything's kind of a function of of the liquidity, you know, liquidity tide, whether that's like pulling in or pulling out. And so I think really what you're seeing here is Bitcoin often decouples or bottoms first or even like forms a top first. Right. If you're thinking about what happened in November because of kind of the free market nature of Bitcoin and also the derivative market, it's the wild, wild west. But that's the beauty of it. So Bitcoin bottoms, Bitcoin decouples because there's these derivative dislocations that resolve and big volatility moves to the upside or downside. And so recently, everyone got over bearish. Macro sellers, I think basically it looked like they sold all their coins or for the most part, they didn't have any more coins to sell. And those crypto natives, those Bitcoin natives stepped in and happily accumulated and a short squeeze ensued. And so that's why we saw that recent decoupling. And so, you know, we're going to monitor this relationship over the coming weeks, over the coming months, quarters, years. But I think it's a pretty positive sign to see that that pop and kind of decoupling from the NASDAQ.

Starting point is 00:11:13 And I can tell you one thing is that every risk manager worth their salt is looking at that relationship between those two. Yeah, completely agree. And I think that it's a very good, positive development and one to keep paying attention to. We've got a chart of the Treasury yields and everything seems to be ticking up a little bit. What what do you see in here? Yeah, so this is bond yields across the US Treasury curve. You know, we've been talking about bond market a lot. And really, you know, inflation coming in at 7%. The entire curve is still, in real terms, deeply negative. But interestingly enough, you see the short end of that curve really bending upwards. And this is before the Fed has hiked whatsoever. So Powell said, all right, we're going to hike, but really, the market is telling him he's got to hike or he's, you know, they're almost like, you know, moving his hand without him actually doing anything. The curve is telling the Fed what it's going to do. And I think this has a couple of different implications. One, yields and the principal value of bonds or really debt securities is an inverse relationship. So as yields go up, the principal value of these debt securities go down. And so especially on the long duration part of the curve, these 10-year, 20-year, 30-year bonds, as the yields are ticking up, they're getting killed in principal value. And I have a TLT chart.

Starting point is 00:12:27 It's a long-dated treasury bond ETF later in the slide deck. But really, the chart looks really, really ugly, not only in the treasury market, but across all debt and credit markets. And so this, basically, we can kind of see that there's some pain being felt in these asset markets. and everyone likes to look at equity markets, myself included, but really credit markets tell a big picture. And what it's saying is that inflation, as well as I think the thing that's not very understood is kind of that solvency risk. It's starting to pick up a little bit. And I think we're seeing somewhat of a downturn in the credit cycle. And so it's going to be really interesting to see how it all plays out going forward. All right. Next, we've got the

Starting point is 00:13:07 U S oil price and, uh, it's going up, baby. I remember at one point we got like, uh, what was it? The, um, uh, futures in oil went negative, uh, in, uh, in 2020, which is a pretty wild situation that, uh, I wrote quite a bit about at the time, but this is the actual oil price. It was like the spot oil price, if you will. Uh, and it continues to tick off. Why is this important? Yeah. So, uh, I mean, I'm no expert in, uh, in oil futures or are they these markets, But what I can say is that kind of paradoxically, as oil takes higher, despite it, you know, thinking maybe it's inflationary, it's actually rather deflationary over over a kind of a medium term, because a higher oil price really impacts corporate margins, as well as consumer spending, oil, not only oil, gasoline, but really everything that's a byproduct of oil, which is like almost everything we touch and use in day to day life. as this takes up, really, it's felt across the board for consumers, for retail, for corporate margins. And so if we see $100 oil, $150 oil, I've seen some pretty crazy price targets.

Starting point is 00:14:11 It's going to get kind of crazy. And I think it's not good for a lot of things in the broader economy. A low oil price is better for the economy, that's for sure. And so there's going to be a lot of pain points here if oil continues to rip. And I think it's something that everyone should have on their trading viewer, on their dashboard. Yeah, I think that's a great way to look at it. And then now we've got high yield bond ETF, JNK, what's going on here? Yeah, so talking a lot about credit markets, it's not everyone's favorite topic here, but it's something to really watch. It's under the surface, right? Everybody likes to look at equity indices, Bitcoin. And I think over the long term, Bitcoin is kind of not isolated from all of these things, but it has its

Starting point is 00:14:52 own monetization process. But over the short term, when you see things like junk bonds, the high yield credit markets, corporate bond markets really rolling over, it's a sign that something in the broader economy isn't too healthy. And so this is really telling a picture here that's the credit worthiness of a lot of these borrowers and really what creditors are demanding in terms of yields, because as these prices fall in these bond markets, yields are going up. And the reality is creditors don't want to lend to junk borrowers at four or five, 6%, right? Because inflation is 7%. So before any default risk, you are negative real yields. And so it's basically a guarantee to lose money. And I think what people are starting to realize

Starting point is 00:15:35 is inflation is not transitory. Why would I ever lend money at 5% when inflation is 7% or inflation is whatever the reading is this next Thursday. And so it's a really interesting dynamic that's occurring here. And I think if we see junk bonds, if we see these corporate bonds really start to sell off in a big way, there's going to be liquidity and solvency problems across the broader economy. And I think that's something that despite the recent bounce in equities, despite the VIX coming down from a tie of like 38 over about two weeks ago, I don't think we're out of the woods yet. And I think it's going to be one of the bigger stories of 2022. And then lastly, let's talk on the 20-year treasury ETF. What do you see here with TLT?

Starting point is 00:16:14 Yeah. So this is just that when we were looking at the government bond yields, this is just the principal value. This is actually like the real value of those notes. So if you're just looking how far it's down from the 2020 high, even from the 2021 high, there's a lot of pain being felt here. There's tens of trillions of dollars. uh well in in there's 30 trillion dollars in government debt not all of that's 20 year long dated but uh basically that the the value of every asset in the world is based on on the value of of these debt markets and so uh when there's pain being felt here uh you know there's knockoff effects and equities and even bitcoin to an extent as is basically uh you know a function of what these markets are saying what that cost of capital is based off of in these markets and so if inflation continues to be persistently 7%, 8%, even 10% if we start to get kind of crazy with these inflation prints, there's going to be a lot of pain felt in these debt markets. Equities are

Starting point is 00:17:10 going to have a very hard time doing well. And I think over the short term, if there are any kind of macro allocators, I know there are people in the crypto, Bitcoin kind of world that don't even care about any of this and are just stacking regardless. But there are kind of broader effects on balance sheets and the broader macroeconomic landscape when debt markets are saying these things. And so all these things are rolling over. And I think it might be an opportunity for buying opportunity coming up. Completely agree. Joe, John, what questions you got? Dylan, I just want to know what the vibe is like down there in Austin. What are people saying at the conference? What are you guys talking about? Yeah, I mean, a lot of big mining

Starting point is 00:17:48 companies here. Riot, I mean, just across the board, a lot of publicly traded miners. So having really cool conversations i can't lie a lot of it goes over my head i feel i mean i'm learning a ton but uh i mean it's it's exciting there's a bunch of different kind of like innovative things i don't even know are happening immersion mining all this stuff uh i mean it feels like we're really on the cutting edge here and the i guess the the vibe is that despite it you know everybody feeling like you know we're 12 13 years into this it's still really really early and a lot of oil and gas guys are here and they're kind of they're kind of blown away with with what they're seeing from the mining side of things.

Starting point is 00:18:22 So it gives me a lot of hope that, you know, despite it feel like, you know, we're really deep into this, it's still really, really early for most people in the world. And that's, you know, that's obviously there's opportunity there. It's a good sign.

Starting point is 00:18:34 Dylan, how do you, excuse me, Dylan, how do you view kind of the macro sense of things? We were comparing crypto adoption to the internet adoption earlier in the show. What are your thoughts around like that chart that's gone viral? Yeah, I think, I mean, it's a pretty good comparison.

Starting point is 00:18:49 I think it's, you know, in terms of like users, every user in Bitcoin or crypto isn't, you know, isn't comparable to say, you know, the Internet or, you know, maybe like a telephone adoption, cell phone adoption, because, you know, one user's capital isn't equal to another. But in terms of just broader adoption, Bitcoin is not even a trillion dollar asset. It obviously passed that threshold earlier, but there's, you know, a few hundred trillion dollars of monetary energy, as some people like to say out there. And so Bitcoin is continuing to monetize. It's continuing to just serve as a black hole for for for capital. And I think that we're still probably in the second or third inning, maybe maybe even not even that far. So very exciting and obviously got a long way to go. But we're just starting to see things. I've heard some rumors, actually, of some some some pensions and some some other big allocators over the past couple of weeks here starting to dip their toes. So we've been talking about it, but I think it's coming to fruition now. And that's obviously very exciting.

Starting point is 00:19:45 Glad to have a guy like you on the road for Bitcoin. Dylan, last question for you is how much of the conversation there at the mining conference is about price versus hash rate or some of the underlying fundamentals and lead times of hardware, et cetera? Yeah. I mean, obviously prices, it matters, but the reality is I think anybody that has a decent source of power and a lot of these are like contract negotiated, they're really really deep in the money um the margins for a lot of these publicly traded miners are like are actually extremely wide um and so you know price even when it goes to 30k like it's nothing but a thing for these miners uh i think the real thing that's kind of shocking is that

Starting point is 00:20:29 a lot of these lead times for stuff like generators for asics for rack space uh it's it's it's crazy you know backed up for for almost you know a year maybe two out um i i heard that a couple publicly traded miners have like, you know, three, four, five, six X a hash worth of miners. So like two to 3% of the entire network's hash rate currently just on pallets. So what that means, you know, they have the ASICs, they've already bought them, but they just don't have a place to plug them in. And so, you know, everybody's scrambling to build out infrastructure to plug these things in. And it takes time. And so, you know, obviously there's, there's a, you know, that's going to come and that's going to be built out, but you know, there's a, there's a lot of

Starting point is 00:21:08 people working really hard on this and especially in north america so uh it's it's exciting for 2022 and beyond to see what you know what comes of that yeah that that um it's very interesting to kind of see that miners you know to some degree they're so in the money that uh price move is you know it's not that they don't matter but they're just so much less susceptible to them whether it's 35 000 43 000 60 000 you know it's just all bitcoin to them at that point um and if they can hold it, obviously that's pretty beneficial. And it feels like that's where a lot of them have ended up now, right? Yeah. Did you see what happened with the Texas grid last week? Explain real quick what happened with the miners in Texas. Yeah. So Riot negotiated with

Starting point is 00:21:53 the Texas grid ERCOT to basically buy power at a fixed price. But when there's these times of excess demand from the grid, Riot agreed to sell that power back to the grid at actually a pretty high price because that demand is so high. And so Riot makes a lot of money mining Bitcoin. But when that Texas grid is really, really stressed, they happily shut off their machines and they sell that power back to the grid at actually a higher price than what they would get mining Bitcoin. So they win, the Texas energy grid wins, the people that actually need the power wins because they're mining Bitcoin creates excess, you know, demand for Bitcoin or for energy when no one else is using it. So overall, you see like people like the Texas governor championing Bitcoin

Starting point is 00:22:36 mining as something that builds out a more robust grid. So this is something that's, you know, still very like not well understood in mainstream circles, but it's increasingly become, you know, more of the mainstream conversation. And it's really, really encouraging to see that happen because just a couple of years ago, it would have been, you know, unbelievable. And now it's just nothing but a thing yeah it's uh uh completely contrary to the public narrative of like mining is bad all of a sudden people in those geographies they're very happy that miners are there right like they're they're uh uh thankful to some degree and uh that doesn't mean that there's not more work to do not more improvements to make but definitely uh not the public narrative

Starting point is 00:23:17 i think that uh that elizabeth warren is in disbelief yeah she along with many people uh which is uh which is pretty comical to me but hey they'll all figure it out eventually my friend as you already know all right let's do a quick follower check how are we looking on uh on followers for you where are we at cross the 120 500k by the end of the year you think you think he's laughing i don't think it's i don't think it's uh can i give you a uh can i give you a suggestion on uh on the twitter game i think that you should get rid of your current profile picture and we should just like screenshot you just like this and then you put that as your as your twitter profile screen grab it you are the only you are

Starting point is 00:24:01 the only person that has successfully conducted an interview on this uh on this show with their sunglasses on the entire time which i respect gotta be at first all right man listen thank you for taking the time to do this while you're at the conference uh anyone who does not follow you on twitter you're missing out anyone who's not subscribed to the newsletter go don't click let me read it first just type your email in hit subscribe that's the best way to do it and uh and get all the good information that's true gotta ape into it yeah just just go like what are you what are you doing uh and then we'll uh we'll talk to you next tuesday be safe travel back cheers guys later thanks so much for listening to today's episode i really hope you guys enjoyed

Starting point is 00:24:39 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 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 palmscryptocourse.com to learn more, and I'll meet you guys for the next episode.

The Pomp Podcast - #818 Bitcoin's Comeback w/ Dylan LeClair

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