The Wolf Of All Streets - Bitcoin Plunges 20%, Millions Of Ether Could Be Destroyed If This Happens | Friday Five

Starting point is 00:00:00 Bitcoin has had a rough week, down as much as 20%, although it seems that we might possibly, potentially, maybe be so back, baby. And apparently millions of Ethereum, millions of Ether, at risk and could be destroyed, and nobody is talking about it. As always, it is Friday, 9 a.m. Eastern Standard Time, and I've got NLW Nathaniel Whittemore here to do the Friday Five, reviewing the biggest stories of the week and what they mean for the market. You guys don't want to miss it. Let's go. Let's go. anticipation. But are we so back, baby? Is it time? Are we celebrating yet? We never left. We never left. We just needed something else to talk about for a minute. That's right. But when in doubt, there is something we can always talk about. And story number one on this Friday Five, of course, is the Bitcoin spot ETFs, right? I've got this dashboard here from the tie showing the market cap. iBit, iShares Bitcoin Trust, that's obviously BlackRock,

Starting point is 00:01:26 over $2 billion now in market cap, which I was surprised. But more interestingly, I think GBTC down to 20.95. It was 21 when I loaded this this morning. So clearly there are still some outflows happening here in real time. And Fidelity right in the race with 1.7. So the story obviously has been the outflows of GBTC, that people are selling their GBTC and then Grayscale has to send their Bitcoin directly to Coinbase to dump on the market on everybody's heads. This is not very dumping, people seem to think. This is just the mechanics of the ETF. But Grayscale's GBTC profit taking likely over easing Bitcoin selling pressure. This is from Jamie Dimon's own JP Morgan. Do you think that we might finally be done with this

Starting point is 00:02:13 temporary selling pressure and pain that we've been seeing? Well, it seems like, so there are a couple of cute sources of this, right? Last week, we talked about the discounted NAV trade, and that on one. That's what JP Morgan has been focused on, right? So people who came in just to sort of arbitrage that discount that was there for a little while, and now that trade is over, right? So they're getting out. JP Morgan, I think, estimated that was about $3 billion. That's the one that they're sort of saying is largely gone. Then we also learned this week, or last week, I can't even remember, I've lost track of time that FTX was one of the big sellers, right? They had, you know, a huge grip of GBTC that they had just been waiting to get rid of that, that they now have that. So that's gone. And the the sort of the there does

Starting point is 00:02:57 seem to be some slowdown in the speed at which these sort of outflows are happening. It's interesting, though, Eric Balkunas, who obviously everyone is, you know, paying attention to more than ever, had previously, you know, a while ago estimated that that he thought that GBTC was going to lose about 25%. And we're somewhere between 15 and 20%. Now, I think, of what they've lost. So there might still be a little bit to go. But if that estimate is anywhere near correct, we're certainly sort of starting to get closer to that, that sort of bottom part. But you know, listen, it was always going, this was always going to be a part of this process. And, and to some extent, we just got to grip and bear it until it's done.

Starting point is 00:03:39 Yeah, in my opinion, this is sort of ripping the bandaid off fast. I actually love the way that it's happening much better than this being a sustained thing where they go down to zero over a really long period of time. We were literally watching $500 million to a billion dollars worth of Bitcoin being sent directly from Grayscale to Coinbase. This is as transparent of selling pressure as we've ever seen. It's not amorphous like United States government unloading Silk Road, which we're seeing potentially this week, or the seven years of waiting for Mt. Cox to finally dump on us. This is pretty clear. And so, yes, as it says here, Bitcoin ETF flows show negative trend for first time since launch. But that's the natural tendency, obviously,

Starting point is 00:04:21 of the people who are willing to get in really fast at the beginning. They've done so. And the people who are willing to exit really fast have done so. So I think over the next few weeks, we're going to start to see this return back to inflows. James Safer gave an update for day 10 of the Bitcoin ETF coin Tucky Derby. Volumes and flows are both slowing down a bit. Another slight negative day on flows. Total net flows standing at $744 million. I-BIT likely crosses $2 billion in assets today. I believe that has technically happened. I know Valkyrie made it over $100. I mean, take GBTC out of the equation, and this is just an incredible success in my humble

Starting point is 00:04:54 opinion. Absolutely. And listen, one of the things that we've identified or one of the questions that we've had is how much the GBTC selling is just rotating into other assets. And it really does seem at least meaningfully disconnected. It's certainly some part of that is people moving their GPTC into a lower fee option. But given that a billion or so was FTX and 3 billion or so might have been this sort of discounted NAV trade, that's a huge grip of the net inflows to the other ETFs that isn't accounted for,

Starting point is 00:05:27 which means it's other people. Now, they could be existing market participants increasing their stack. And in some ways, one of the interesting debates has been, is this sort of a failure from a normie perspective? So Jim Bianco had an interesting tweet earlier this week where he's sort of warning. It's a cautionary tale that when the spot ETFs launched, it was 49,000. Now we're down at 40,000. Some number of retail investors got rugged. And what will it take to get back? And the comments were largely, it just doesn't seem like retail was paying attention at all. This didn't seem to represent some big boom of new retail investors starting to come in. And if that's the case, it really feels like,

Starting point is 00:06:13 even in spite of how exciting this was to all of us, this wasn't that sort of immediate catalytic event for a new set of buyers to come in, which makes all of these movements sort of much less significant in terms of the overall impact to sort of the broader growth dynamics of sort of the Bitcoin holder base. Yeah, I brought up a tweet. I'd seen it earlier this week as well. Crypto is now at real risk of seeing its great hope to get serious trad fi money fail. What can save it? Take out 49k? How long will that take? What if it's a year or more? I mean, this is just hyperbolic. I think a fundamental misunderstanding of what's happening. To your point, I don't think retail is even watching at all. They don't feel rug pulled.

Starting point is 00:06:55 They probably don't even care. The real story here is that the marketing is about to take it. We know that most RIA platforms are not even offering this to their clients yet. They're just still doing due diligence. They waited for the approvals to even start wasting their time and resources on this. They weren't going to spend their time in advance when we know that over 60% of them thought this wasn't even going to get approved based on the Bitwise survey. But now, now we have the Bitwises and the Blackrocks of the world going out to educate these RIAs. From Eric Balchunas, BlackRock is hosting an educational webinar Friday on getting BTC access through an ETF IBIN. This is where the education and the marketing starts. I had Hunter from Bitwise on the day that the ETFs launched,

Starting point is 00:07:38 and he told me they had already had 20,000 calls with RIAs and institutions before the approval. And that was just literally wetting their beak because they were about to, you know, 5, 10 X that in the coming years to educate these people. So I think any extreme take about this being a failure and people being rugged and trad by now is not going to believe in us. It's just nonsense. Let's let's go through the other stories but then come back to I want to end today on the way that I see the shape of the next narrative taking form sort of in a persistent question

Starting point is 00:08:14 of what the next narrative is I don't think it's Ethereum but let's come back to that at the very end Well, alright now you've got me in suspense and so you tend to talk about that in advance and all Story number two that was number one I think we've ETF'd ourselves to death once again All right. Now you've got me in suspense. And so we tend to talk about that in advance at all. Story number two, that was number one. I think we've ETF ourselves to death once again.

Starting point is 00:08:33 A little bit out of the crypto sphere, but certainly going to matter. China weighs stock market rescue package backed by $278 billion. China considers offshore money for stabilization fund sources. Some policy measures could come as soon as this week. We've been long talking about the inevitable pivot in the United States while China is pivoting and pivoting hard. Although my first reaction, I'm not going to lie, is why a billion? And why aren't we talking about trillions right now? Billions are so meaningless at this point in the world, aren't they? We had trillions in debt seemingly every couple of months over here. That's largely been the reaction in China as well. It's a really interesting place that the country finds themselves where they've spent the last couple years talking about needing to move away from the sort of big bombastic, you know, packages that were that were happening in the,

Starting point is 00:09:20 you know, 2010s. And, you know, there's been a lot more rhetoric around the importance of work and all, you know, all these sort of like things that you would hear from like the American right, you know, in terms of people's motivation and things like that, like China is clearly trying to psychologically transition its audience to stop thinking about the government bazooka. However, the issues just keep stacking up, right? Last year, the story was over and over and over again, these giant real estate projects that were, you know, just sort of, you know, failing left and right, and, you know, potentially cratering the economy. They're doing all sorts of weird stuff. I mean, those have gone out of the news, but they haven't sort of stopped being an

Starting point is 00:10:00 issue. You have the weirdest promotions going on in China right now where people are offering gold bars for buying a house and all these sort of things. But the stock market this week or in advance of these moves hit its lowest point in a very long time. In fact, India's stock market, its total market cap is now bigger than the Hong Kong stock market for the first time ever, which is a really significant sort of shift from a global perspective. The question is, can China sort of take half measures and get people back on board? So far, the reaction that almost everyone has had is the exact same one that you just had. Yeah, I mean, here you go. China's stock's lost decade means an uphill battle to regain trust. Effectively, their index is down 17% since 2013. This kind of reminds me of the lost decades in Japan. And it seems that this is likely to accelerate with their population decline, but things obviously not

Starting point is 00:10:56 looking good in China. But to your point, the first story was this is really stock market stimulus, but there's also likely other stimulus that's going to be more targeted. So I think, like you said, people don't want to see the multi-trillion dollar package anymore in any country. They want to see small targeted amounts that probably add up to the same but make for a better media narrative. Yeah, we'll see. I mean, to some extent, the point of those... It's like power creep in a game or something like that, where you keep going bigger and bigger and bigger and the psychological impact of 278 billion is nothing. And really a lot of the job of these sort of stimulus packages is not about what those

Starting point is 00:11:36 dollars do. It's about what it provokes other investors in aggregate to do. And so you really are playing a sort of a game of psychological chicken where it just has to get bigger and bigger and bigger. And you start to try to go the other direction. And you get the situation that they have in China where they're basically just pouring $278 billion into the fire because it's not doing anything. Yeah. And for anybody who's on Team America, F yeah. US extends lead over China in race for world's biggest economy. U.S. gross domestic product rose 6.3% in nominal terms. That is unadjusted for inflation. The cheating numbers. Last year, outpacing China's 4.6% gain. So anyone who's been extremely concerned with China and their growing influence on the world and their massive economy, it seems like they may

Starting point is 00:12:23 be on the way down and our economy is still somehow humming along strong. It is a whole different conversation to have about how quickly AI has become a massive geopolitical player. But we'll save that for another time. All right. I'm earmarking that one for next week, except for I think there was something we earmarked last week for this week and forgot to talk about already. So I'm going to start to actually start looking back. Number three, speaking of China and a non-Chinese Chinese company, Binance, SEC finds more favorable judge in DC as Binance tries to dismiss lawsuit. Now, just over a week ago, we saw the SEC and Coinbase go to court and every crypto lawyer in the world went to attend and have a little bro down and watch.

Starting point is 00:13:11 And they enjoyed how the judge dunked all over the SEC. This trial, or I shouldn't say this trial, this hearing went off without anyone paying any attention. Why was the SEC and Coinbase such a big deal? And now we have SEC and Binance, and it seems like really nobody's talking about it at all. Well, there's a couple reasons. One is I do think that at the end of this cycle, in the beginning of the next cycle, Coinbase's importance as one of the rock solid institutions at the center of this industry, particularly the Western crypto industry, has been reified in a massive way, right? When you had FTX go down and Binance go partially down and just all of these sort of exchange

Starting point is 00:13:57 failures, all of a sudden Coinbase, it's always been a significant player, but it looks much better. Its destiny feels more tied to the sort of destiny of this in the United States. Second, it's a US-based company. And to some extent, all of these things are being seen as proxies for US policy, right? And so there's naturally sort of more attention being paid to this US company that's listed on US domestic markets, et cetera, et cetera,, etc. I think a third piece, though, is that Coinbase's case is a hell of a lot better than Binance's case. And part of the reason, you know, that this judge seems so much less favorable is that you have BNB at the center

Starting point is 00:14:36 of this, right? And Binance can talk about all these other things all at once. But at the end of the day, there is this very core thing, which is BNB feeling very clearly like a security to the judge and that being sort of an inescapable part of this. I think that the healthiest reason though that we were paying less attention is that Binance is still an incredibly important institution structurally for millions of people around the world to access crypto markets, it is no longer a significant institution from an influential perspective. It's just gone. That went away with CZ retiring, I think. And we're going to see that influence, that relevance diminish more and more and more. And I almost don't think it matters whatever

Starting point is 00:15:21 punishment he ends up, whatever sentence he ends up getting. Him being removed as the leader of that company, just Binance no longer factors as a meaningful leader of the industry from a sort of a perception standpoint, even if it continues to have a big market share. That's my sense. And I think this sort of put a fine point on that. Yeah, actually, really interesting point. I never considered the very basic level that Binance has a token and Coinbase doesn't. Yep. That is a huge differentiation that wasn't really even on my radar until you just said it.

Starting point is 00:15:55 Also, I think that the fact that the SEC charged Binance in the first place so many months ago, already marginalized Binance and made them less relevant, as you sort of said, even in advance of CZ retiring. And then, of course, we have the fact that the DOJ has already sort of handicapped Binance, right? Once the DOJ comes in, nobody really cares about the SEC civil complaint anymore. At this point, I think we're literally watching both of these cases just to find out what is and is not a security. Yep. 100%. 100%. And I think, you know, here's the other thing. I think that preferentially, most of the crypto legal core

Starting point is 00:16:36 really hopes that Coinbase gets decided before Binance so it can move to the Supreme Court potentially before Binance because Binance is a bad case for us and Coinbase is a good case for us. It's pretty much as simple as that. Yeah, I think it is. If anyone's looking for a really good summary, met a lawman, James Murphy, who's often on the show, did two tweets here. You can go back and find these. But he basically summarized this. Didn't seem anything anything hugely groundbreaking like the coinbase case and i think that's probably why it sort of got lost in the in the ether along the same vein this isn't a new story but ftx must appoint watchdog to probe reasons for its collapse judge

Starting point is 00:17:16 says i just find this story amazing because uh the guys who took over, obviously, have said, we got this. We're not involved with FTX. Trust me, bro. The judges say, no, we actually want to see what happens. was that even if it is redundant, and even if it does end up costing some additional amount of the creditor's estate, that the world needs to know all of the details. And the fact that Sullivan and Cromwell... Look, I don't think that you have to conspiratorially think that Sullivan and Cromwell was up doing things with Sam. I don't think that they were. I think that just the reality is that from a prudence and a sort of reasonable standpoint, with the stakes this high, unfortunately, part of the tax to be paid for those creditors is that independent examiner, even if it takes $50 million or whatever, right? So I think that people basically think that this should have happened right away. And John J. Ray should have dealt with the fact that it's going to be

Starting point is 00:18:29 duplicative and annoying to him. But listen, John J. Ray gets to be advocating for where he is advocating for, but there needs to be someone who's advocating for the broader public interest. And that's what an independent examiner does. Yeah. I don't think there's anything nefarious here. I just think that there's no reason for the bankruptcy estate to dig as deep as there is reason for the government to dig, to get answers. That's not their mandate, not what they're going to do. Now we do have to talk about our favorite security, non-security, Ethereum. We could have put this one at the top, spot Ether ETF applications, decisions delayed by SEC. We chose to keep the Bitcoin spot ETF separate. Grayscale and BlackRock are among the companies trying to bring spot Ether

Starting point is 00:19:16 ETFs to the market. They were both delayed. This is just the Bitcoin spot ETF playbook, right? There's nobody on the planet who expects the SEC to jump ahead of this decision until the last possible second. Then we'll dig more into Ethereum. Yeah. I mean, I think that what everyone's waiting for is May, when there's an actual final deadline for the VanEck application, which is the first final deadline to come up. And the question is, I think that the, or the sentiment is, how could the SEC possibly deny this when they've approved a futures ETF? And the whole decision in the Grayscale case was about it being arbitrary and capricious that you could approve a futures ETF and not a spot ETF, right? You still have Bloomberg handicapping it at like 70% for May, which feels intuitively higher than the signals the SEC is sending. We're not seeing any of the engagement with issuers like we saw starting in last October

Starting point is 00:20:13 with the Bitcoin ETF issuers. Gensler continues to use his made up word of cabined to talk about how his strategy was cabined to Bitcoin. I don't think that they're going to approve in May. And the question then becomes, are they just okay with another court case because they just want to drag it out? Do they think that they can sort of make the argument that Ethereum is sufficiently different to Bitcoin that there's more space? But it's a weird one to me. It's weird because nothing about the SEC's posture right now indicates that they are even considering this with any meaningful sort of

Starting point is 00:20:52 intensity, but it's very hard to see how they don't just see a wave of lawsuits the day after a denial, you know? Yeah, it's sad that we can say there's no indication from the sec because that really means there's no indication from gary gensler because of the way that the sec is structured because of course this week we did have hester purse saying that the sec will apply precedent when making decisions on spot e3 etfs she effectively said we won't wait for a court case right but she's not in power yeah right so we we we've seen this language from her and Yeda for everything crypto related for seemingly years now, and that doesn't change the way the SEC operates. So I think you're actually correct. It is just important to note that we do have friends at

Starting point is 00:21:38 the SEC who understand this and would, in theory, if they had the power, push this for an earlier approval. One of the things that's interesting, I think, in our, if they had the power, push this for an earlier approval? You know, one of the things that's interesting, I think, in our sort of dream speculation about the future of the SEC, I don't think that Hester Peirce's behavior and position and, you know, sort of stance on all these issues has been lost on traditional market investors who are also frustrated with the way that the SEC has behaved in the context of traditional markets, where they've chosen to focus, what they've chosen to go after. She looks very vindicated, let's put it that way. And I think that that's a net good thing for markets, not just for crypto. I heard her name a lot this week from unexpected sources, for sure, which was nice to see.

Starting point is 00:22:19 So finally, to wrap this up, the end of the Ethereum story is a humongous story that is seemingly being untold until we said, hey, what five stories should we discuss this week? I hadn't even heard about this. And this article, I think, is from Monday. That's how off the radar it was for me. But bug that took down 8% of Ethereum's validators sparks worries about even bigger outage. You've got some pretty incredible Twitter threads about it, and even Coinbase confronting client diversity risk following the nether mind. Well, dude,

Starting point is 00:22:52 I am a boomer. I have no idea what's happening here. I read it twice, a little bit over my head. I conceptually understand what is going on here. Look, the part that's understandable for anyone without getting into the super deep mechanics of how the Ethereum network works is that decentralized networks, one of their risks is centralized infrastructure choices that happen over time because the market chooses the best option. Geth is the chosen market validator. It has a huge, huge portion of the Ethereum market. It's used by the big custodians, the big staking partners, and it creates de facto concentration and centralization out of something that's good. It's a better product or people have determined it to be a

Starting point is 00:23:37 better product and so they use it. But the problem is it creates less redundancy in the system. And so the problem or what we've seen is that these sort of smaller minority validators have suffered some of these bugs and these issues. And it hasn't been an issue for the Ethereum network because they represent such a small portion of validators that doesn't stop the network from confirming blocks. If that were to happen with the sort of majority validator in Geth, it would be hugely, there would be huge potential issues. So the way that sort of the positive spin from folks who are concerned about client diversity and issues like that in Ethereum is that these situations create a, they're a test run. They are warning shot to help people

Starting point is 00:24:22 try to think differently about things like client diversity, which would stay at the bottom of the to-do list forever until something like this bumps it up. And I think that you can see that in a sort of a context and a reason to become a bigger issue that they actually try to figure out and solve, even though it's going to involve time, cost, resources in the short term. But this is a, there is always the Achilles heel of these decentralized networks when they get to scale is, you know, sort of accidental pieces of centralized infrastructure around them. And that's what we saw with this. Yeah.

Starting point is 00:25:07 They say here, when a minority client fails, the penalty is losing ETH at the same rate as you gained it. But if Geth fails because it instantly stops the chain from finalizing, the penalty is much harsher. So as you explain this, and as I've dug into it myself, this seems like one of those things where we had an exceptionally manageable incident that was sort of a shot across the bow for what could possibly happen. And now we're likely going to get a solution for it well in advance of it becoming a problem now that's on everyone's radar. Maybe that's my glass half full optimistic view, but it sounds like

Starting point is 00:25:40 hopefully this happened in the right way that it gave a warning and it will be dealt with. That's the hope. I mean, listen, the Ethereum network is full of people who are serious about these issues. And Geth didn't become dominant in this way because of some Joe Lubin conspiracy and everyone deciding to do it. It became dominant because people voluntarily, independently chose a thing that they think is best. It's just there's

Starting point is 00:26:05 a different set of dynamics that play in crypto markets in the sort of markets that surround decentralized networks that that constantly needs to be addressed for, even if it's sort of market inefficient in the way that we normally think about it. So, you know, I think that there's a things like this, this is a that which does not kill us could make a stronger type of moment, if people kind of use it for what it could represent for them. How much of this, just curious, as a result, obviously, of the move from proof of work to proof of stake, is this one of those give the, I guess, the proof of the POS truthers more ammo, or is that just a dead battle? No, I mean, it is for sure, but it's almost, it's sort of like there is an a priori understanding that staking creates a new set of infrastructure that could end up centralized.

Starting point is 00:26:59 And this is that playing out. I mean, we're talking about the validators, but the actual stakers like Lido and the concentration there is another source of independent centralization that can come in. Decisions come with consequences. And having to deal with the new consequences of those decisions doesn't mean the decisions were wrong. You just have to deal with the new consequences of those decisions. And that's sort of the place that I think Ethereum finds itself after the transition to POS. Yeah, I think we're being intellectually honest, we have similar debates with proof of work, mining pools and other sort of de facto forms of centralization

Starting point is 00:27:37 with a decentralized network. Sure. It's also listen, it's a it's a totally reasonable argument for the POW people to say, the reason that we find POW superior is that it doesn't have this set of risks in the same way. And sure, we do have our centralization infrastructure risks, but they're very different. And they're ones that we can handle, right? That is a great argument for why you would like proof of work versus proof of stake versus, for example, I hate Ethereum and Vitalik sucks, you know, which is sort of what these conversations denigrate to. So, you know, which is sort of what these conversations denigrate to. So, you know, listen, if everyone is having conversations about proof of work versus proof

Starting point is 00:28:09 of stake because of the concentration risk of validators, we'd be in a much better place than I think our general discourse is. Totally agree. Still, when you see an ad line that says, you know, 8% down and millions at risk, why wasn't I thinking about this all week? Definitely scary. All right, guys, that's the Friday Five. That's everything that we've got for you today. Of course, you can listen to this on The Breakdown this weekend and all of his other shows at LW on his channels.

Starting point is 00:28:35 Check those out and we will be back next Friday with the next Friday Five, man. Thank you. This was great. We cooked through it. Hopefully next week will be net inflows that we're talking about. You'll be out of the conversation. Or maybe we won't talk about the ETF at all. Could happen. Good luck with that. But great to see you guys. Talk soon.

Starting point is 00:28:54 Couldn't happen. Couldn't happen. All right, guys. Thank you. See you next week. Bye. Let's go.

The Wolf Of All Streets - Bitcoin Plunges 20%, Millions Of Ether Could Be Destroyed If This Happens | Friday Five

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