The Pomp Podcast - #978 Dylan LeClair On Bitcoin’s Illiquid Supply Continues To Hit All-Time Highs

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 00:03:11 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. We've got Dylan LeClaire, Bitcoin Magazine, joining us. Dylan, how are you? How are you doing? I'm doing fantastic. I'm super excited to talk to you. We got a crazy macro environment, Bitcoin market going up, down, sideways.

Starting point is 00:03:44 Sometimes maybe it feels like it's going backwards. Let's start. We've got some charts and then we can kind of just talk. But we've got the Bitcoin reserve risk. And this looks like it has just dropped off a cliff since the beginning of 2021 and is now pretty much in this green area. What does this measure and kind of what does this tell you for Bitcoin reserve risk? Yeah. So, I mean, first off, I just want to say for anyone that missed it,

Starting point is 00:04:09 Your recent segment with Brent Johnson was fantastic. He's one of the best macro minds out there and is just kind of dollar milkshake theory. And just thesis and understanding of how the global economy works is almost second to none. So check that out if you missed that just right before me. In terms of Bitcoin, in terms of reserve risk, you know, a lot of fun recently with the macro environment. I just pulled this up, reserve risk, as kind of one of the more advanced on-chain indicators. and it takes a lot of different variables that we have with uh you know this public blockchain data but essentially what it is is it just takes price uh and overlays it with hodl bank and essentially

Starting point is 00:04:45 what hodl bank is is just the accumulate uh the cumulative opportunity cost of hodlers um so every time the coins are hodled and don't move uh you can kind of think of that as like a pent-up opportunity cost and so when you have price the incentive to sell uh up against what is the hodl bank or the, you know, the accumulative opportunity cost of all the hodlers, you get this really interesting oscillator that maps out the Bitcoin cycles quite well. So now what do we see is we're kind of in this green zone. For those that can't see, it's obviously a deep value zone. And it's just interesting to see kind of, you know, the historical cycles mapped out with so much data just kind of packed into one metric.

Starting point is 00:05:24 Got it. And so when you then start to think about this type of metric, Is it something that you can evaluate just on its own? Or do you normally look at a lot of these metrics and say, hey, deep value is measured across metrics. And it's really important to kind of see, you know, that the almost confirmation across so many metrics, or is it possible just to look, hey, look, I'm looking at this one thing and it's telling me something. Yeah.

Starting point is 00:05:46 So, I mean, I really love to take a multifaceted approach with the analysis, which is why sometimes I come up here and only show on-chain data. Sometimes we talk about bond yields and currencies and the dollar index, like Brent Johnson likes to talk about. But with on-chain indicators, you can almost kind of compact all the different variables into one, right? You can see, well, hodlers are spending, hodlers are hodling. Why? Well, it could be partly the macro environment.

Starting point is 00:06:08 It could be partly because of a derivative margin call. It could be all these sorts of things. But net-net, right, we can see, you know, there's 19 million Bitcoins out there, and these are moving, these aren't. And when a lot of Bitcoin are being hodled, which we're going to kind of cover a little bit later in the show, And, you know, price is really far down historically. And obviously, past performance is not indicative of future results. But historically, it's been a fantastic time to allocate to Bitcoin with size. So we're in one of those moments. And again, you know, nobody wants to buy blood. And everybody talks about wanting to buy blood until it actually comes in, you know, 55% from the highs, whatever it may be. It looks like one of those times. Got it. When we start to look at things like the percent supply of Bitcoin that's in profit, you've got the seven-day moving average here, again, falling off a cliff since the start of 2022. What is this telling you? Yeah. So, I mean, obviously, you have a lot of people saying unprecedented macro environment. We're already in a S&P 500 bear market, only have two rate hikes. We're spiraling towards a big

Starting point is 00:07:10 recession. How will Bitcoin do? The reality is that Bitcoin in its own volatile monetization phase, it's kind of had these huge boom and busts beforehand. So really, even though it's multiple orders of magnitude larger this cycle, in the realm of Bitcoin itself, it's nothing out of the ordinary, right? If you want to look back into the early, early days, there was really only one global exchange, Mt. Gox, and it collapsed and the price of Bitcoin collapsed with it. And what happened? It recovered just fine, right? And, you know, a huge percent of the circulating supply was underwater from a dollar cost basis standpoint. But what happened? It recovered, weak hands transferred to strong. And, you know, the resiliency of the Bitcoin network just continued to chug on

Starting point is 00:07:50 block by block. So I love looking at this data because we can kind of see like, hey, you know, 50%, 60% of the supply is underwater, right? And oftentimes when you get to these levels, you see the top buyers capitulate further, right? Which further drives down the price. So we're kind of, you know, we're seeing a huge transfer of weak to strong hands. And we can see that with the data with just so many people underwater. Yeah, it is incredible to see something that is a public narrative expressed in the data. I think that's one of the beauties of Bitcoin. We have the Bitcoin a net realized profit loss, again, I think just showing exactly what you're talking about here with more and more people being in this kind of loss position. What is this telling you,

Starting point is 00:08:34 if anything different? Yeah, so I forgot to label it, but it's a 30 day moving average here. So it smooths it out a little bit. And also you have on one side, a linear scale of the net realized profit and loss and a logarithmic scale. And I like to use the log scale, the Bitcoin price, just to kind of, you know, to map it out. And it's a little easier to kind of see the cycle buy cycle moves. But essentially, this net realized profit loss, what we can see is when a coin is acquired. And obviously, we can see when that coin was moved and the difference in those prices. So when the price is going parabolic, you see a ton of realized profit. I acquire a coin for $1,000. I move it at $10,000. I have a $9,000 realized profit. Maybe I didn't actually

Starting point is 00:09:10 sell the coin. But just in terms of on-chain analytics, we like to call that a realized profit. And so what we're seeing over the past month is essentially the biggest capitulation are the biggest series of realized losses in absolute terms we've ever seen. So nothing short of historic here. And obviously, I mean, it makes sense given that Bitcoin, previously a trillion dollar asset was bigger than it's ever been, but just goes to show you just the size of this move, the magnitude of it, and just how much the market's absorbing at these prices. Yeah. I mean, just literally staggering when you see this. Another statistic that I spend a lot of time looking at, and I'm actually surprised we're not hearing more people talk about it right

Starting point is 00:09:50 now, is the percent of the circulating supply that has not moved in the last 12 months. We crossed over 12 million Bitcoin that hasn't moved in the last 12 months. And this only continues to go up and to the right as a number. What do you make of this given kind of all of the other volatility in the market that still such a high percentage hasn't moved? Yeah. So, I mean, in terms of the on-chain analytic, the Hodler metrics, this is probably one of the most simple, which is honestly why I like it the best. Or not the best, but it's one of my favorites. It's just so easy to kind of digest. And so this is showing in absolute terms the amount of Bitcoin that haven't moved in a year. It's at 12 million, I think 470,000 Bitcoin,

Starting point is 00:10:29 around 66% of the circulating supply. This just goes to show you, right? Bitcoin's 55% off the highs, unprecedented macro environment. People are worrying about a recession and what's happening. The Bitcoin hodlers, I mean, you can hear it. You can see it on Twitter. You can see the sentiment of the hodlers that are just relentless and have unwavering conviction, I'd like to think of maybe us too in that cohort, right? They're not moving their coins. And then in fact, they're buying more. And so if you think about just strip all of the data, everything else, all the narratives away, you have an absolutely scarce asset. On the other side of it, you have more and more going into the hands of people that are unwavering in their conviction and not going to sell onto the

Starting point is 00:11:10 market. In the end, only one thing happens. And so we're kind of living through this and obviously the market's consolidating, but this is why Bitcoin always resolves to the upside following these periods. Yeah, it's incredible. You've got a new metric in here, the minor revenue per terahash. Explain to folks who aren't familiar with this, what this metric is showing and then kind of how you read its relationship to price, which looks pretty inverse. Yeah. So I was actually listening to your previous segment with with brent johnson and he was talking about you know uh unfortunately the the odds of hyperinflation right uh are higher than than most would like to to say i'm just given the unprecedented amount of dollar denominated debt all these emerging

Starting point is 00:11:53 market currencies and economies and essentially kind of there's this this uh binary end game of fiat currencies around the world and and the dollar is probably the strongest biggest of those dirty shirts in the sense of it's either deflationary collapse or just based on pure political incentives and just the math of a debt-based monetary system, perpetual monetary expansion, right? So inflation or deflation, and in either one, it ends in tears. And so if we think about Bitcoin as this monetary asset, right? Well, let's think about it also. I mean, it's a currency, but it's also somewhat of a digital commodity, right? So this minor revenue per terahash, You can think of this as almost, it's the inverse production cost, right?

Starting point is 00:12:31 So a terahash is essentially, if you want to think of hash rate, it's just a unit of computational power. That's a pretty basic way of saying it. But a terahash, you know, the new S19 ASIC is 100 terahash per day, okay? So if we think about this as just in revenue terms, right, a marginal unit of hash rate is buying you less and less and less, you know, dollar value of Bitcoin. And this chart's even more dramatic if we just plot it in pure Satoshi terms, right? So what's happening here?

Starting point is 00:13:02 It's becoming harder and harder and harder to produce a marginal unit of Bitcoin. If we think of this as a commodity, it's a commodity whose production cost is literally programmatically skyrocketing. And so this is in log terms. The reason why I labeled it five times is just to highlight just how dramatic of a chart this is. And I have a second chart that shows further that $53,000 in 2011, $13,000, $848, $3. Now it's at $0.12 of minor revenue per terahash per day, right?

Starting point is 00:13:33 So an S19 ASIC with 100 terahash will get you about $12 of Bitcoin a day. And the reason that this is so significant is because it's literally programmed into the monetary policy with the difficulty adjustment and inelastic supply issuance. It's going to be harder and harder and harder to mine a marginal unit or say a Satoshi forever. And so we have this digital synthetic commodity that's absolutely scarce, that has a programmatic production cost. And it's this, there's still so much information asymmetry with this fact. It's a fact. And we can see it with the data, but it's still very misunderstood.

Starting point is 00:14:07 And so this is why I remain steadfast in my conviction with Bitcoin, because I understand, I think we understand the reality of the situation, but it's still, you know, very misunderstood in the investor community. When you start to think about the miners, they seem to be outside of maybe a GBTC, a BITW, you know, kind of these like indirect exposures. They're really the majority of the way people in the public markets are getting exposure to Bitcoin. Obviously, you can buy MicroStrategy. Maybe even if you really, really go indirect, you can get like a Square or a Tesla that's got a little bit on their balance sheet. But the miners themselves, they had an epic run.

Starting point is 00:14:49 And we've seen their prices crash pretty significantly. We've also seen Coinbase's stock come down to about two times revenue. How do you look at these publicly traded stocks in relationship to Bitcoin's price? Like, is there something that we can pull out of some sort of comparison or analysis there? Yeah, so I think the first thing I would say is you whenever you're talking about a Bitcoin miner, or even a Coinbase for that matter, I would always evaluate the price, but more so the market cap in Bitcoin terms. That's, you know, if you're investing in Marathon or Riot or not, you know, no one even in particular, just mining companies or Coinbase. Look at the market cap in Bitcoin terms. I was saying in April 2021, hey, think what you want about Coinbase. I don't think it's worth 2.5 million Bitcoin. If you really believe in Bitcoin and you believe in the crypto economy, it's probably not worth that much. So you can think of that as kind of the Bitcoin trading pair.

Starting point is 00:15:44 If you're kind of an avid listener of The Best Business Show, a few months back, we talked about Bitcoin miners. We had a whole segment on it, and we looked at all these market caps and all the price charts in Bitcoin terms. And since then, really, in 2022, all these miners are down 50%, 60%, 70% from the 2021 all-time highs in Bitcoin terms. And why? Well, partly it's because of the hash price. That miner revenue per tera hash is going way down. So their margins, even though they're quite large, their margins are getting cut. But really, I think a lot of these miners, maybe they have lower to go. But in Bitcoin terms, you know, some of these stronger miners are looking quite attractive, right? Their balance sheets hold a significant amount of Bitcoin depending on the miner and also just their net income. You know, the P.E. ratio in BTC terms is about, you know, two or three. Right. So there's obviously operational risk. There's obviously risk of a rising hash rate and a falling price, which further diminishes these miners margins.

Starting point is 00:16:42 But really, you know, it's starting to look like some of these are pretty good buy. So nothing obviously is perfectly replaceable for Bitcoin itself. you know, in cold storage that you can self custody. But if you're looking at the public markets, some of these share prices are really, really beaten up. Not even not even just in dollar terms, but in Bitcoin terms, which is what you want to measure against. Yeah. The other thing that I find very fascinating right now is Ray Dalio was on CNBC this morning, and he was talking about cash is trash, as he's been saying, he still has gold. But he says, Hey, look, I do have some bitcoin i think that it's interesting uh brent johnson as well saying hey look uh you know i

Starting point is 00:17:20 have gold um that's what i uh recommend to my clients but we do have a couple of clients that started by bitcoin uh how much weight do you put on this idea that like people will have gold and bitcoin and it'll be two assets in their portfolio versus maybe more of a binary world that we hear of in the bitcoin community so it's drop gold by bitcoin or it's only bitcoin there there will be no gold that people hold. How do you think through those two assets and their roles in people's portfolio? Yeah, I think, you know, there's obviously a younger class of investors, myself included, that probably would be allocating in size relatively to gold, right? That isn't buying it. There's obviously the class of investors that own gold, the older investing class that

Starting point is 00:18:04 said, okay, hey, maybe I should hedge my bets here. I should own a little bit of Bitcoin as kind of a hedge against the system or just my bias, my sound money bias. But I think really, it's not mutually exclusive, maybe in the end game. But Bitcoin is what, $600 billion, $700 billion. I should probably know that reading off the top of my head. But gold's around a $12 trillion, $11 trillion market cap. The fixed income market, even though its bonds have gotten absolutely killed recently with real yields as measured with year over year CPI, still deeply negative. The fixed income market's around $100 trillion. Some people think it's a lot more. So there's such a huge pool of assets out there. And Bitcoin's still so, so small. And just the

Starting point is 00:18:48 realities of this fiat system, they're going to have to reinflate the kind of everything bubble once again. And so Bitcoin, obviously, is a monetary predecessor to gold. But I don't think it's mutually exclusive. And I think both will probably do quite well this decade. Yeah. And I guess another piece of it is like equities. How do you think about equities in general? It's not just, you know, Bitcoin related or crypto related equities, but what's your expectation for those as we kind of continue in this, you know, macroeconomic environment? Yeah, so here's the really interesting thing. And I've been doing some thinking on this is, you know, a lot of people, myself included, have been narrating Bitcoin's really almost, you know, one to one correlation with the NASDAQ over 2022. But here's the interesting thing is a lot of people say, yeah, well, Bitcoin is just another risk asset. And it's basically just an equity derivative. And I think of it the opposite in the sense that Bitcoin's 100% monetary premium. It's just money. There's no cash flow. There's no price to earnings ratio. It's just money, right? And so obviously, there's a little bit of speculative aspect to it. And there's ebbs and flows and volatility. But if we think about the last decade, or really even just the last two years, equities themselves, partially because there's no yield in fixed income markets, and there's no yield in savings accounts, and inflation has eroded people's purchasing power for the last decade and the last two years, especially, equities themselves, especially from this kind of younger class of investors, were monetized, right? You see central banks, you see the Swiss central bank buying U.S. tech stocks. Why?

Starting point is 00:20:23 It's essentially these equities are monetized in the sense that they're going out the risk curve. They need a money-like liquid alternative, and fixed income doesn't do it for them anymore. And so I think of it almost as not Bitcoin being treated like an equity, but equity is being treated like money. And so in that sense, the correlation makes a whole lot of sense, as just the kind of investable assets went from fixed income becoming monetized back 40, 50 years ago, and now in this kind of monetary endgame, equities themselves being like a money-like substitute. Yeah. Another

Starting point is 00:20:56 piece that seems to play into this is bonds. And obviously, we know a lot of pension funds, a lot of endowments, the fixed income makes up, in some cases, majority of their portfolios. And obviously 10 year, 30 year, uh, uh, treasuries are getting absolutely smoked right now. Um, we've heard a number of people tell us, uh, kind of, uh, taking that duration and shortening it over the last couple of months, obviously it's done pretty well by them in comparison, but what's going on in the bond market? Like, are we at an environment now where people are just like, screw it, let's just drop bonds and go somewhere else or, or, uh, some other thought process? Yeah. So, uh, I mean, bonds relatively compared to what they were, you know, the last

Starting point is 00:21:35 couple of years are more attractive. But even still, the 10-year treasury is around, I think, 2.7% nominal yield. And so I think the forwarding inflation expectations for five years or 10 years out is actually above that, around 3% top of head. And I actually think that's quite optimistic to think that inflation will be that low compounded annually, just with what we're seeing in supply chains and potential deglobalization. So I still believe that based on where we are, just from the global economy, but also from the U.S.'s perspective with over 100% federal debt to GDP, real yields have to remain deeply negative or at least negative for a sustained period of time to kind of erode this real debt burden. So personally, I'm not going to be investing in fixed

Starting point is 00:22:22 income, especially kind of on the long end. Maybe you can kind of trade these long bonds if you think yields are going to go lower. But I think anybody that's tried to do that over the last two years has been picking pennies up in front of a steamroller. Maybe the shorter end of the curve where, you know, the treasury notes where you can just kind of get a 2% yield on your cash and there isn't that duration aspect to it. I know we're kind of getting more in the weeds of the fixed income markets nowadays, but I really think, you know, if you're looking at bonds as an investable asset class, the biggest move here has been about duration, right? It's been yields have risen. So the long dated bonds, the value has fallen. And I think now, if you especially

Starting point is 00:23:00 look at the corporate world, say corporate bonds, they've been crushed because of the duration aspect. But I think now is where you start to see, especially if this recession, this recessionary environment comes comes true, we're going to see that credit risk starting to be priced in quite significantly. And I think that's where, you know, potentially more pain can come from. Got it. And I guess my last question for you is when you start to think about Bitcoin's performance, you know, there's a lot of folks who say, hey, the Federal Reserve is going to continue doing what they're going to do. But we've seen Bitcoin draw down. It's had a high correlation to the NASDAQ. In some cases, I think I saw somebody tweeting the three-day correlation

Starting point is 00:23:38 to the NASDAQ hit an all-time high. At some point, do we get a decoupling regardless of what the Fed does? Or is your expectation that as long as the Fed is tightening and pulling liquidity out of the market, we'll continue to have high degree of correlation between Bitcoin and NASDAQ or other types of risk or growth assets? I think we do get into coupling and it's a fool's errand to say it's going to be tomorrow or next week or next month. But just the reality of the supply side dynamics, the reality of the Bitcoin derivatives market, and also I don't spend as much of my time in the crypto land. But if you look at any of the altcoins against Bitcoin since the top, they're getting murdered. So especially post-UST Luna collapse, I think you've seen a whole lot

Starting point is 00:24:22 of funds say, okay, hold up. Maybe, you know, this investable asset class that I thought I was holding isn't as investable and I need to, you know, I need to reach for a flight to safety. And, you know, those guys aren't going to go buy bonds. They're not going to go buy equity indice funds. They're going to go buy Bitcoin. And really, I think a lot of those guys in the crypto world were really short Bitcoin as an asset itself. And so I think we're going to see a bleed out in all coins, a flood to Bitcoin. I think, you know, stable coins will continue to increase. But really, the decoupling will come probably because of a derivative dislocation and because of those relentless, you know, stackers and hodlers. When that happens is really anybody's

Starting point is 00:25:02 guess. But you know, I continue to increase my allocation because I don't want to be short Bitcoin when that happens. And so happy to be a buyer here and happy to be a buyer for however long that decoupling takes. But I think Bitcoin will be the best performer on the other side of all of this. Legend. Couldn't have said it better myself. Where can we send people to find you on the internet, follow you on Twitter? Where do you want us to send them? Yeah, just find me on Twitter at Dylan Leclerc underscore. If you want to take a past look at some of the videos we've done, Tom, I think some of them have aged quite well. Just talking about the bonds and the macro environment and the Bitcoin scene. And also I document all of my writing and research with

Starting point is 00:25:41 Bitcoin Magazine Pro, where we have, you know, pay lists and a free tier if you want, you know, to pick either one. I love it, man. You're doing a fantastic job. Keep it up as every time you come on here, I learn something. So I appreciate you taking the time to do it. I know other people do as well. So keep going. And somebody called you a whippersnapper in the chat. So you must be doing something right. Appreciate it, Pom. Catch you later, man. 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 you covered. Head over to palmscryptocourse.com.

Starting point is 00:26:23 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. Thank you.

The Pomp Podcast - #978 Dylan LeClair On Bitcoin’s Illiquid Supply Continues To Hit All-Time Highs

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