The Pomp Podcast - #837 Current State Of The Stablecoin Market 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 pay

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Starting point is 00:03:27 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. Let's get into some of the charts that you've got for us today. You've got the USDC and USDT circulating supplies.

Starting point is 00:03:56 So this is Circles, Stablecoin, and then Tether. The numbers just keep going up and to the right, man. It's pretty impressive to see how fast this stuff's growing. Why is this important? Yeah. So the past couple of weeks, we talked about equity market correlations. We looked at on-chain stuff. We looked at derivative stuff.

Starting point is 00:04:13 So today, I thought I'd just throw together some stuff about the stablecoin market and how that's blossoming, just to cover something a little bit different, but an important part of this entire ecosystem. So Circle, Tether, the two leading stablecoin issuers, we see rumblings of CBDC talks, whether that's Congress or the, you know, Fed governor saying, hey, we need a central bank digital currency. We're seeing what's happening in Canada with that, you know, aggressive overreach by government on people's bank accounts and financial services. So all of this stuff is going to be, you know, heavily debated over the coming years. And so, you know, do you want to hold something

Starting point is 00:04:51 like a stable coin that can be, you know, like choke point by some central issuer? I think a lot of people are going to come to realize that their money isn't actually their money. So stable coins um they're actually serving a pretty big purpose in in the world in like in this ecosystem and no it's not uh immutable decentralized money like say bitcoin is that's censorship resistant seizure resistant but what it does do is it allows dollars to kind of flow freely on crypto rails so this next chart the circulating supply here is about 120 billion year over year uh the growth is like 200 it was about four it was about 40 billion dollars combined uh a year ago today and And so over the last year, these two stable coins have done like $2 trillion of transfer

Starting point is 00:05:35 volume each, which is like an order of magnitude, a couple orders of magnitude more than their actual market cap. So they're actually like the circulation rate or how fast these things are changing hands is actually remarkable when you're thinking about this versus say dollars in the banking system. And so for the longest time, the crypto market didn't even have any stable coins. It's just like Bitcoin was your was your kind of your safe haven. And when the when these kind of local bubbles pop, you had nowhere to really run.

Starting point is 00:06:03 And the on and off ramps are really, really tricky to use. So now people and you can debate, you know, how safe something stable coins are, if their reserves are backed or not. And that's an entirely different discussion. But a lot of these stable coins, and I think, you know, increasingly so, will just hold treasuries. And essentially, they're just like, you know, US dollars, treasuries that can be changed hands in crypto markets in, you know, a couple seconds around the world. And so in terms of innovation, I don't know. I don't know. It's just, you know, another kind of database entry on a centralized ledger. And that's fine. But it's a lot better than, you know, say the legacy banking system and integration with the crypto markets today. So when you look at the stable coin, like we looked at both the circulating supply and the annual transfer volume, is it your thought process that just more and more of the financial system is going to move over because these are superior rails to other dollar rails and people who want that stable value as long as they can get comfortable with any perceived or real risks of what's backing it, auditing it, et cetera. Once they get comfortable with that, just the entire financial system will flow over into stables. Yeah. So, I mean, how I think about it is, and I focus on Bitcoin, you know, with almost all my time, because I think it fixes or addresses one of the biggest problems in the world today. There's a $300, $400 trillion problem. And we've talked about that. It's a broken cost of capital, right? So if you have money in the bank account, you deposit with a bank, they actually lend your money out for you fractionally. They fractionally reserve your deposit and lend it out to other debtors.

Starting point is 00:07:34 but you don't get any of that yield. You don't get any of that upside, even though they're lending it out on your behalf. So that 0% yield you get in a 7% inflationary environment, you're not doing too well. But with, say, stable coins or in this kind of emerging crypto Bitcoin ecosystem, what you can do is you actually lend peer-to-peer. So say on FTX, a centralized exchange, you can lend your dollars to someone else that's using margin or, you know, let's say a DeFi protocol, right. You're putting, you're putting stable coins into a liquidity pool. And right. There's, there's a debate about, you know, what's the custodial risk. What's the, uh, the platform risk on a lot of these protocols, um, is, you know,

Starting point is 00:08:16 are they going to get hacked? Are there exploits? And that's something that people are finding out in real time. Like it's not risk-free in the sense that, you know, nobody there's not the FDIC going to back you if you get hacked. Right. But what you can do is you can lend your stables out you can borrow dollars at a really a market rate, right? So sometimes that market rate in this ecosystem is 5%. Sometimes it's 20%. But these markets are free and open. And these stable coins allow basically, you know, creditors, debtors, people that want to collateralize their assets and borrow or lend to someone else to do that at a rate that's decided by the market and not 12 guys sitting in a room saying the Fed's fund rate is going to be 0% again. And so I think

Starting point is 00:08:56 that's the exciting thing about what's happening with, you know, kind of dollars on crypto rails. Yeah, it's wild that there's 12 people who make that decision, but that is the world that we live in today. You've got this chart on stablecoin supply ratio. Explain what you're looking at here. Yeah, so this is just over the last couple of years as stablecoins have become a bigger and bigger part of the market. This is the stablecoin supply ratio is basically the Bitcoin market cap divided by the stablecoin market cap. So right now I just included USDT and USDC because they're the two biggest, but there's other stablecoins out there. there's some kind of, you know, algorithmic stable coins. So like they're collateralized with other assets and they're not actually backed by dollars in a bank account. There's all sorts of things, but basically this is the aggregate stable coin market cap as a percentage of the Bitcoin market cap. And what you can see is with this ratio falling you know, the buying power of these, of the, of this dry powder in the market relative to the Bitcoin market continues to get

Starting point is 00:09:49 larger and larger. And so I have these kinds of Bollinger bands on this, on this supply ratio. And when it gets to the upper band, it's basically that the Bitcoin market cap is really big compared to the size of like the dry powder on the sidelines, stable coins. And when it hits that kind of lower threshold, it's showing the opposite. It's saying that that dry powder is a pretty significant portion of this Bitcoin market cap. And so we're on one of those lower bands. All that's showing and we're honestly at like a near historic low in this supply ratio. So it's showing that the stablecoin dry powder on the sidelines, you know, $120 billion plus relative to the Bitcoin market cap is pretty substantial. And so there's, you know, there's a lot of people on the sidelines waiting to buy the dip.

Starting point is 00:10:33 Yeah, that's probably going to be a good decision if we look at the historical perspective of what usually plays out. You've got Bitcoin futures open interest. Why is this important? Yeah, so this is the stablecoin margin open interest, right? So with Bitcoin futures, you're basically you're entering a contract and that contract is marked to market every second. And you can enter that contract with various sorts of collateral. And traditionally, when these derivative markets first were spun up, you were actually collateralized. If you were long Bitcoin, you were collateralizing that contract with Bitcoin or with another crypto asset, but mainly Bitcoin. And, you know, I guess sometimes, you know, you can do it with ETH, but traditionally it's Bitcoin as collateral in these markets.

Starting point is 00:11:16 And so now increasingly, so what you're seeing is stable coins as as basically collateral in these derivative markets are becoming more and more prevalent. And so that that actually is pretty good in terms of risk profile for bulls, because when there's these downturns, these these big market crashes and your long Bitcoin with Bitcoin as collateral, it gets pretty ugly. And that that unwind is somewhat reflexive. Your collateral is going down in value. Your profit, your P&L is going down. And so it basically forces people to sell. It's these cascading liquidations that you see. And so stable coins as collateral and kind of entering these derivative markets really is advantageous for these traders. And I think that's why you're seeing it become more and more prevalent over the last couple of years. All right. And then when we look at Bitcoin percent futures, open interest, crypto margin, this is kind of another variation of a similar thing.

Starting point is 00:12:09 Yeah. So this is just the percentage of that. So with this chart declining over time right now, about 42% of the market is crypto margin. So if you can think of the inverse, 58% of this market is the futures open interest in Bitcoin, which is, you know, a $10 billion plus market. And on the futures open interest, I quoted it in Bitcoin terms. So it kind of, you know, like it evens out that volatility. But 58% is stablecoin margin compared to, say, 30% at the top of the market. so in the top in april you had basically 70 of the derivatives market they were taking their bitcoin they were longing bitcoin with bitcoin as collateral right so that's obviously not very

Starting point is 00:12:49 sustainable and we're seeing you know that trend actually uh reverse big time and so much more healthy state of the derivatives market and uh you know i expect that trend to continue into the future got it and then when you look at this three-month annualized rolling basis of bitcoin futures what are you seeing there seems just kind of have just going down uh since about november Yeah. So we talked about this, one of our episodes, podcast episodes we did where we talked about Bitcoin as a solution to the broken cost of capital. And we talked about how Bitcoin is a spare asset, but the markets around Bitcoin kind of are entrenching themselves as this new form of, or like almost risk-free cost of capital. So this futures rolling basis, what you can do is

Starting point is 00:13:30 you can sell futures and you can long the spot. And oftentimes, or most all the time, the futures, the front one month or three month futures is trading ahead of that spot market price. And so right now with this metric at about 5%, you can capture about a 5% annualized yield by just selling the three month forward futures, longing spot and your market neutral, but you're collecting that yield. And so during times where the market's very speculative, bulls are very speculative, say in November of 2021, this was about at 20%. So you could capture a 20% annualized At the top of the market in about April, you could get about a 45% annualized return. And so this just kind of shows that speculative nature of the market.

Starting point is 00:14:11 But increasingly, you see institutions coming in that really are market neutral. They're taking no upside or downside risk in Bitcoin, but they're collecting this annualized return. And so this kind of basis, this risk-free yield, if you want to call it, it's all throughout the crypto Bitcoin ecosystem, whether it's futures, whether it's perpetual futures, whether it's DeFi protocols or yields, uh, basically this there's kind of this new, uh, you know, cost of capital, uh, that that's, uh, completely like contrary to the, the wall street, walled garden legacy system where, you know, junk bonds are yielding you 5% before inflation

Starting point is 00:14:46 before default risk. Uh, you know, it's, it's, it's almost like there's this new parallel system where people are saying, Nope, this is actually the real cost of capital. And I'm not parting with my money for, for a negative yield. John, what questions you got? Dylan, how do you think about the different stable coins and evaluating them? So if you want to put money into the stable coin market and kind of collect those yields that a lot of companies offer, what do you choose between like USDC, USDT, Gemini, USD? Like how do you think about that? Yeah. So, I mean, I think, you know, a lot of, a lot of the Tether truthers have been, uh, not proven wrong, but there's definitely some questionable things in the past about whether they're fully backed and the things

Starting point is 00:15:24 that Bifinex and Tether did. And there's a whole kind of rabbit hole you can go down with that about were they fully backed throughout time. But I think, you know, the recent audits looked good. But I think the biggest thing is, I would say probably USDC is the strongest in terms of like, you know, the regulatory environment

Starting point is 00:15:40 and having a proof of reserves. But, you know, if you are, say, a Tether truther and say that Tether is fraud, if you really believe that, well, there's a simple thing you can do. You can simply go into the market, you can borrow Tether and you can buy USDC, you can buy Bitcoin,

Starting point is 00:15:56 you can buy any asset. And if Tether turns out to be fraud, well, congrats, you shorted it. So like, you know, I think a lot of it is more so talk when in reality, if you have this strong thesis, if you really believe that, you know, some of these stable coins are fraudulent or not, well, you know, go out and short it

Starting point is 00:16:11 because there's, you know, there's huge markets with billions of dollars to do this very thing. Dylan, when you start to look at a lot of what's going on in Canada, obviously the Russia, Ukraine stuff, I've seen a number of headlines that are like, oh people are selling their bitcoin because russia is going to invade ukraine or oh people are buying bitcoin because of what's happening in canada uh one like how do you evaluate uh what of that is true and what is not and also two is do you think that the geopolitical uh movements globally have

Starting point is 00:16:41 uh that much impact on bitcoin buying and selling market price etc yeah so i mean i think the the canadian kind of uh thing is uh somewhat not unprecedented but if you would have said a liberal democracy first world country you know our our friendly neighbors up north uh would kind of turn to author authoritarianism rather quickly uh where you know anyone that is peacefully opposing uh the kind of political party in power would have their bank accounts frozen assets potentially sees you know credit cards turned off uh you know i don't think a lot of people expected that so whereas bitcoin was kind of this digital gold narrative speculative asset now it's okay wait the the theories about censorship resistance uh and you know being your own bank it's not more

Starting point is 00:17:27 it's not a theory anymore it's like you know it's happening in practice and we need we need money that can't be that can't be arbitrarily taken from us and so i think a lot of people are waking up and saying i my money's not safe in the bank uh you know and they just you know people average people that donated their money to peaceful protesters. This is not like, you know, this isn't like they're radical extremists at all. I mean, have you seen the videos? They're just waving flags and jumping around in bouncy houses. It's like rather peaceful. And so I think a lot of people are waking up to what's happening up north in terms of, you know, the geopolitical instability. I put out kind of a joke tweet yesterday about, you know, a thread about my

Starting point is 00:18:05 observations on Ukraine and Russia and then said, like, I'm no expert. I have nothing to offer here. I'll leave that to other people. But, you know, a lot of people are trading this. And if you're looking at Bitcoin and equities trading tick for tick over the last couple of weeks, I think more so that's what's happening is that the implications of what's happening in terms of currency markets, bonds, equities, there's ripple effects into the Bitcoin markets. And so, you know, if people are buying or selling Bitcoin because of what Putin said in his speech or not, I think that's more short term noise. And, you know, the bull case for Bitcoin and why we need it in the world today is never been stronger. And I think that's clear for anybody that's kind of paying attention to what's happening. Yeah, it makes a lot of sense. The other piece, too, that seems to be interesting development is we're seeing more and more politicians start to get into Bitcoin, stable coins, crypto conversation in general.

Starting point is 00:18:54 Now, we've seen everything from politicians put forward legislative ideas around, hey, you will not be able to create a central bank digital currency that doesn't meet these criteria that basically preserve the benefits of cash. There's people who have put forward at the state level legal tender legislation for Bitcoin. Like, how do you think about politicians and their participation in some of this stuff now? Is it just a foregone conclusion that they're all going to have to get on board or can some of them still fight it? Yeah, I mean, the Overton window is shifting rapidly, right? Where, you know, it was kind of this niche thing to support Bitcoin crypto a couple years back. And now it seems like it's totally shifting to where if you don't support this openly, you're not going to stand a chance. And so, you know, the midterms are going to be really exciting. We talked about it, I think, a month or two back about, you know, how this incentive has changed pretty rapidly. So I think that's going to be kind of a trend this midterms and especially in the 2024, you know, presidential elections. A lot of stuff's going to be happening. It's pretty exciting. And I think incentives align. And this isn't just a U.S. thing. This isn't just a state level thing.

Starting point is 00:20:02 This is kind of a game theory that's playing out everywhere in the world, right, where we see Bukele and El Salvador. They're just the first domino. And so we're going to see a lot of exciting things happen that I think you're going to catch a lot of people by surprise over the coming years. got it before we let you go real quick how are we looking on followers uh not not too not too much growth here i think not too much growth what's going on that's the you've been doing threads or what yeah it's a tweeter machine oh you're at 125 you're you're uh you've now hit like a nice round number there yeah not too bad i'll pick up the pick up the tweeting this this this week he was taking a little bit of a break yeah just say just you know there's a couple strategies you can employ on twitter you can basically uh say smart things

Starting point is 00:20:44 you can say dumb things or you can say hot takes and sometimes you could wrap all three of them in the same thread and then you're viral and makes you know you got 200 000 followers don i saw you were getting ragged on for your podcast take the other day yeah what was your podcast i said to replace music with podcasts oh like pete like not i think people took that i think people took that out of context i meant like on a road trip like at the gym what did you say it no that's how twitter it works it's how you get engagement all right that's fine speaking of uh music uh kanye still has not dropped his album today people are pissed they bought a 230 piece of hardware that looks like he put it together in his garage uh i love kanye but uh people are pissed and uh i'll be

Starting point is 00:21:26 i'll be at the concert tonight yeah is it a concert launch party viewership like think about this he's about to fill lone he's about to fill lone depot park and people don't even know what they're going for they're like that's a 50 50 shot kanye shows up 50 50 shot we listen to new music 50 50 shot we listen to him just yelling to a microphone about topics that's what i said but i'll be there he may not even show up yeah i mean didn't he not show up to one of them last time i don't know hey whatever but watch the documentary he uh he can do whatever he wants he's good in my book uh all right dylan thank you so much for uh for joining us we'll do this again next tuesday all right guys thanks so much for listening to today's episode i really hope you

Starting point is 00:22:07 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 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 - #837 Current State Of The Stablecoin Market w/ Dylan LeClair

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