The Pomp Podcast - #878 Is a Bitcoin Supply Squeeze Underway? 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 FTX US. FTX.US is the safe, regulated way to buy and sell Bitcoin and other digital assets. You can

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Starting point is 00:03:33 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, ladies and gentlemen, our friend Dylan LeClaire. He's back. Dylan, what's up, buddy? Hey, guys. How are we doing today? We're doing fantastic. How are you? Never been better. All right. Bitcoin's price climbing up. How are you feeling market sentiment wise right now as it feels like there's chaos across the world? Feels like Bitcoin may be the signal in the noise. What do you think? Yeah, I mean, I don't think too much has changed since our last convo. Still kind of a similar backdrop. I mean, there's three things that I look at. Like from a market standpoint, there's the macro, which is the big driver right now. But from the Bitcoin standpoint, there's the kind of the supply dynamics, which we can see with the on-chain stuff. And then there's the derivative stuff, which is kind of the speculation, the leverage in the system.

Starting point is 00:04:31 And so really, you know, from those two fronts, the on-chain supply side dynamics and the derivatives, the markets look really, really healthy. And so, you know, bullish for a long time. It's just this macro backdrop to uncertainty and the kind of liquidity tied to the legacy system is really what's making the difference right now. I think that's a great way to kind of frame it. Let's start with the charts you have. Bitcoin balance on exchanges just continues to fall off a cliff. What's your read on this? Obviously, that seems to be pretty bullish, but how are you viewing this? Yeah. So, I mean, obviously a really good trend to see from just an adoption standpoint and, you know, the not your keys, not your coins concept is really taking hold. I think a lot of the stuff that's happened geopolitically in 2022 has been a big advertisement for self-sovereignty and holding your own money. You know, obviously, not everyone is a nation invading another nation or, you know, living under a dictatorship or whatever, where, you know, you're going to have your money seized. But just the principles of being able to control your own money is something that doesn't really exist within many other things, or really at all, in the sense that, you know, Bitcoin's network is completely censorship resistant.

Starting point is 00:05:42 And so this is a really good trend to see. And I kind of expect this to continue just kind of chipping away at new lows. I think we're at almost four year lows here. Absolutely. And I think it only is going to continue. Talk to me about the Bitcoin long term holder relative supply as you look at this. Yep. So this is just, we can kind of see, we can quantify long-term and short-term holders. And if we remove the exchange balances from this metric, what we can see from the circulating supply rather, we can see relative as a percentage, long-term or short-term holder supply. And so when we kind of see exchange balances falling at the same time as this long-term holder supply is kind of in this like supply squeeze threshold, right? It's like near that, it's above 80%. percent uh if i'm seeing it right here um i should i should know this off the top of my head but uh

Starting point is 00:06:30 this is kind of at the level where you start to see if there's any really marginal like you know amount of inflows into the market and obviously at a higher market cap it takes more more money to really move up the price in a significant way but what we're seeing here is that the circulating supply rather that that free float supply that's available to be purchased is just really really low so when the inflows come back into the market and this has kind of been i've been repeating myself here for a couple of months and price has just been ranging around. But at the same time, under the surface, the amount of Bitcoin that's able to be purchased, you know, the hot, the stackers, the hodlers under the surface continue to just buy. And so, you know, when the big wall

Starting point is 00:07:06 street funds, when, when anybody that doesn't have exposure and is somehow sitting at zero wants to come in and secure their slice, well, they're going to have to bid up the price in a pretty big way. That's the beauty of this whole game. My friend is that the Bitcoiners are not selling their Bitcoin for $42,750. When you look at the illiquid supply shock ratio, this thing has just been taking off. What's this telling you? Yeah. So looking at long-term holder supply, that just measures the days or how long the coin's been held. The liquid supply, we can do a pretty cool thing where we can, with like wallet heuristics, we can basically quantify how likely an entity is to spend their Bitcoin. And so a liquid supply is quantified as the least likely

Starting point is 00:07:47 cohort to spend. So this is basically just taking a ratio of illiquid coins to liquid or highly liquid coins. And so we can kind of see, and there's this trend shift that I didn't capture in the image, but historically this ratio was trending down the whole time as supply issuance continued to basically increase that circulating supply faster than coins would be quantified as a liquid. But in 2020, whether it was COVID or the halving, or I think a combination of both, we started to see that illiquid supply outpaced the new issuance, the new coins coming into circulation. And so this ratio has been bending upwards as a result. And there's a pretty nice correlation to price, which, you know, correlation, causation, who knows.

Starting point is 00:08:30 But what this is telling you is that free flow quantified by the likelihood of these entities to ever spend their coins again is really just bending upwards. And so just kind of another cool way to look at and visualize the supply side dynamics. When you start to look at the futures market, you talked a little bit earlier about like open interest and everything. You've got this chart here as a percent of market cap. What is this showing? Yeah, so 2021, we saw, you know, kind of exaggerated tops, exaggerated bottoms, and really it was a lot of it was driven or maybe exacerbated by the derivative market. And so this is just the open interest as a percent of market cap. And you can see kind of at the top of the range, you got like the open interest was 2% of that market cap. And so those were near the tops. And then, you know, at the bottoms or, you know, like, say, in July, we saw open interest really, really increase at the same time as there was a really strong short bias. So derivatives, they're not something that, you know, maybe the super long term investor really even has to care about.

Starting point is 00:09:29 But when you're looking at these shorter term price moves and why these, you know, sudden volatility events occur, it's it's most always kind of driven by the derivative market and the positioning of those participants. Yeah, it's fascinating to kind of see how compared to the historical numbers where we are there. When you look at the perpetual futures funding rate, I know there's another thing that you've looked at in the past. What's this showing? Yeah, it's just kind of a dead zone in terms of, you know, speculation, which is a good thing, right? You can see in early 2021, market participants were paying an outrageous amount to go leverage along Bitcoin. So at certain points, say at 0.1%, they're paying, I believe it's somewhere around like 100% annualized. And it wasn't obviously a super long period of time. But at 0.1%, that's a periodic funding rate that occurs every three times a day. So you just run the numbers there. It's around 100% annualized. They're paying to leverage long Bitcoin. Right now, it's around 5%. And so it's really just that's kind of a neutral market rate. And oftentimes for the last couple of months, that's been somewhat negative. And you see, say, at the bottom in July of 2021, you saw that that funding rate was negative, meaning that shorts were paying long to enter positions. So you can kind of see there's like this, you know, it's very volatile, but it's kind of like a cost of capital for margin in the Bitcoin derivatives market. And this often has a pretty strong correlation with price because it's traders, it's sentiment, and oftentimes Bitcoin is reflexive in the way it trades. Stablecoin ratios.

Starting point is 00:10:59 What are you seeing here with the stablecoins given the current market conditions and Bitcoin kind of grinding up here over the last couple of weeks? Yeah, so there's a couple of cool things that I'm seeing here. It's one, the amount of stablecoins in the market continues to increase.

Starting point is 00:11:12 So the stablecoin supply ratio, when it's trending down, it means that the amount of stablecoins relative to the Bitcoin market cap is increasing. Okay, so that's one. Two, there's kind of these Bollinger Bands in this chart. And it's just a cool way of kind of just showing the relative change in the trend. And so these Bollinger Bands, when it's at the

Starting point is 00:11:29 top of the band, it's saying, hey, maybe Bitcoin's a little pricey relative to the kind of dry powder on the crypto sidelines. And when it's at the bottom of these Bollinger Bands, it's saying, hey, there's a lot of dry powder relative to the Bitcoin market cap. So two trends is that, one, the amount of stable coins, and we're seeing stuff like algorithmic stable coins, You have custodial centralized stable points like USDC, USDT. And I think that continues to grow. But two is that kind of just recently, we're at the lower range here where there's saying, hey, despite Bitcoin maybe pumping a little bit off the lows off, what is it, 32 last

Starting point is 00:12:04 month in February, there's still a ton of dry powder on the sidelines that could FOMO and really pump this price up. Yeah, it's a huge, huge piece of the market. And then of course, I can't let you not show the chart of the 10-year treasury yield. I feel like every week we just keep looking at this thing and we've got the 10-year treasury yield and then we've got the 10-year two-year yield curve, which is just bending downward aggressively. What's going on here? Yeah. I never thought I'd be looking at bonds as much as I have been recently, but yeah, it's a big story. So I think Raoul Pal calls this the chart of truth. Basically

Starting point is 00:12:41 this 30, 40 year trend of bond yields, debt demographics, all pushing these yields lower for longer. But we still have kind of been in this range, this trend. And so now I think we really might see a test of this trend, right? We have inflation coming in at multi-decade highs. CPI probably hits double digits here in the coming month or months. And then this yield curve, right? Why does the yield curve matter? Well, it matters because in the current legacy system and the financial system, creditors, banks, they borrow short to lend long. So when the yield curve inverts, when short-dated bonds have higher yields than long-dated bonds, well, there's liquidity issues and it predates really every recession. So we've seen multiple

Starting point is 00:13:29 yields flip, whether it's 30s and 5s or 10s and 2s haven't flipped quite yet, but it's flattening in a really aggressive way because of this inflationary print, these prints that we're seeing. And so I think, really, this is one of the things I'm watching. And I think, honestly, because of what we're seeing in energy prices, because of what we're seeing in credit markets, Bitcoin could relatively outperform for a little bit. But I think the generational bottom comes when we see kind of the panic and volatility and liquidity event that'll come in the legacy system where you know powell inevitably i'm sorry stumbled my words powell will inevitably be forced to pivot uh and that's when it gets kind of crazy joe john what questions you guys got dylan what's

Starting point is 00:14:10 going on man uh good my question is just around um tara and tara's luna buying bitcoin right so they've come out and said they're going to buy 10 billions 10 billion dollars of bitcoin i believe i think they've already done 100 and something 125 million or something like that what impact do you think this has, if any? Yeah, it's a very interesting dynamic. I've been kind of looking into how it works. And it's an interesting idea. I don't know how sustainable it is. A lot of this stablecoin growth with UST is basically incentivized by the 20% yield that this protocol spits off the anchor protocol. And so I think total stablecoin supply for UST is around 15 billion. And then they're taking that UST, selling it for Tether, and then they're going and buying

Starting point is 00:14:55 Bitcoin. So obviously a pretty, I mean, it would be a pretty big driver. There's not a lot of liquidity, a lot of sell-side liquidity. So, you know, 3 billion, Do Kwon, the kind of the founder of this protocol is saying, you know, they hope to make it 10 billion eventually. That would make an impact, but it's just a matter of, you know, do they have to unwind that eventually? And to be honest, I don't know the answer there, but it's definitely a very strong narrative. And, you know, maybe we see this as kind of the start of a new catalyst, but I don't have a definitive answer there. John, what do you got? Dylan, you started this conversation off by talking about how not much has changed in the last week. So when weeks like this go by, how do you rank things on a

Starting point is 00:15:37 importance scale? So for hash rate, for Bitcoin on exchanges, for whales buying, like how do you rate all this stuff? Yeah. So, I mean, I think definitely a lot has changed, but more so kind of speaking about how I like my framework for thinking about the Bitcoin market. I put out kind of a detailed thread on my thoughts in December and was just with some on-chain stuff in the macro backdrop saying, you know, I think that the driver is going to be really the Fed being, and I didn't see their Ukraine-Russia conflict coming up in the, you know, the second order effects with commodity markets, obviously. But just with how inflation was running and what the bond market was kind of saying, it was, I think we're in kind of an accumulation phase

Starting point is 00:16:18 And Bitcoin most likely just probably chops around for a little bit. I mean, this is nothing out of the ordinary for Bitcoin with, you know, we have these accumulation markets. Everyone kind of forgets about it. The speculators and and kind of the visitors in the market just completely leave and forget about it. And meanwhile, the people that have conviction under the surface just increase their stack. They build and the infrastructure kind of in the system is stronger and more resilient than ever. And so I think that's where we are. Really, the driver of since 2020, as Bitcoin has become this macro asset, has been this excess liquidity, real yields lower than they've ever been. And now the bond market's starting to say, hey, this inflation is not transitory and something's wrong. And so, you know, the money is no longer free, although it kind of still feels like it for a lot of participants.

Starting point is 00:17:07 And I think the event that comes where people realize that maybe, hey, this fiat money, while still being really cheap, isn't entirely free and everyone kind of panic sells and then comes to realize, wait, the system isn't sustainable at all. And the Fed comes in and interjects again, which who knows when that timeline comes? It could be this quarter. It could be this year. It could be maybe 2023. And that's what I think Bitcoin really outperforms. I kind of feel like a broken record there in terms of, you know, price action itself. But, you know, Bitcoin is in a position stronger than ever to kind of come out as a winner in this environment. Dylan, when you start to think about the price grinding up here, Bitcoin's up like approximately 25% since the start of the Russia-Ukraine conflict. also uh we're starting to see more and more uh folks realize that hey the lack of uh censorship the lack of caesarship etc is uh pretty important we see the stable coins we see bitcoin coming off

Starting point is 00:18:06 of the exchanges is this leading us to a potential massive uh kind of price squeeze upwards where we'll see some uh pretty large volatility if there's any sort of catalyst uh to the situation that's been laid out here? Yeah. So, I mean, everything I kind of view with this market is probabilistic. So like, there's definitely a probability that kind of, we see a recession, we see all of this stuff in legacy markets, we see bonds selling off, equities stalling, and Bitcoin could break all time highs. I mean, that's not my base case, but it's certainly not out of the question just with all of the kind of the catalyst that we're seeing and the new proponents of Bitcoin, whether they like it or not, realizing that there's no other alternative.

Starting point is 00:18:50 So while I still think we're going to see somewhat of a consolidation, and I think that denominator of BTC USD is kind of is leading the charge right now, where, you know, periods of time we see BTC, the numerator is really that narrative and that adoption is driving the price action. I think the dollar strength, even though even though the dollar is politically programmed to debase. It is the world reserve currency, and I've heard people refer to it as the cleanest of all the dirty shirts. So it is still the strongest fiat currency, and I expect the dollar to outperform a lot of these other fiats. And so what that means is financial conditions will probably materially continue to tighten. And so for that reason, I'm just cautiously optimistic about the

Starting point is 00:19:34 price. Would it surprise me to see all-time highs this quarter? Absolutely not. And that's why I've continue to say I own more Bitcoin than ever. But at the same time, if we continue to just chop around and agonize Bitcoin Twitter, crypto Twitter, it wouldn't surprise me either. So just cautiously optimistic here, but excited to see how it all plays out with the legacy system and these credit markets that continue to sell off. I couldn't say it better. I feel like we're watching this all unfold in slow motion. It's like the same story over and over and over again you watch the supply uh circulating supply become more and more illiquid you start to see all the stable coin movements you start to see the macro environment all this stuff bam catalyst

Starting point is 00:20:17 lights on fire takes off and all these wall street losers are sitting there scratching their head asking themselves like why'd that happen and it's literally the same thing over and over and over again i say wall street losers i'm joking uh but the idea being that uh they're evaluating these assets based on old models, old frameworks, and they're not using the data points that are now available that previously weren't like the on-chain metrics and data like that, that tells a completely different story than what you would use from a valuation framework or something like that. Yeah. They're not going to understand why Bitcoin 10X is right after the Fed kind of flips and turns on the spigots again. But we're going to know why, because there's just not all that

Starting point is 00:21:00 much supply to bid, right? So when everybody runs back into the trade, right? Because I think there's definitely a good chance that the whole kind of QE forever, yield curve control, like Fed liquidity everywhere kind of event, I think that that'll happen again. It's a matter of when. And they're going to say, oh, what happened last time? Oh, Bitcoin outperformed everything. Oh, Bitcoin is an order of magnitude higher than it was trading last liquidity crisis. oh maybe i need some and so you know while we're just saying you know in our echo chamber saying orange coin good every day uh these guys don't care anymore and it's just kind of funny to see i love it all right where can we send people to find you on the internet or uh subscribe to the

Starting point is 00:21:40 newsletter yeah uh you can just find me on twitter like always uh right the the deep dive with bitcoin magazine uh getting a getting a rebrand there soon uh so to be announced but uh it's pretty fresh um but we kind of cover this these uh sort of metrics every day so just you can find me there you're killing it my friend keep up the great work we'll talk to you again next tuesday and uh hopefully between now and then the trends continue because uh looking pretty uh pretty bullish right now love it peace guys later buddy amen 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

Starting point is 00:22:19 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 - #878 Is a Bitcoin Supply Squeeze Underway? w/ Dylan LeClair

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