Unchained - Crypto Prices Are Way Down. Is It Time to Buy the Dip? - Ep. 684

Episode Date: August 6, 2024

The recent crypto crash has left many investors questioning the way the market is going. In this episode, Jeff Dorman, chief investment officer at Arca, provides a deep dive into the factors behind the crash, the macroeconomic influences at play, and why he remains optimistic despite the downturn. Expressing surprise at Ethereum's underperformance this year, he describes how the Democrats’ handling of crypto is an own goal, and how TradFi and DeFi differ from each other during market upheavals. Show highlights: 00:00 Intro 01:38 The two main reasons the markets crashed this past weekend 05:29 How the macro environment has affected crypto lately and why the market has gotten “way ahead of itself” 12:44 Why ETH was down so much, more than other cryptocurrencies 16:52 The “most important” shift in crypto policy that has occurred this year 21:19 The Japanese yen carry trade that was one of the key factors in the market meltdown 30:20 Whether Genesis distributing $4 billion in assets had an impact on the market 33:39 Why Jeff believes that the data we have today does not point to a recession in the U.S. 36:49 Why Jeff says he’s "buying the dip” 40:47 Crypto as a political issue and why he thinks Harris winning would not be as bad for crypto as many believe 48:19 Why bitcoin doesn’t always act as a hedge against equity-related or geopolitical risk, in Jeff’s opinion 52:56 What Jeff thinks about the proposals for the U.S. government to buy bitcoin for a strategic reserve 54:15 The stark contrast between TradFi giants halting trading and the permissionless nature of DeFi Visit our website for breaking news, analysis, op-eds, articles to learn about crypto, and much more: unchainedcrypto.com Thank you to our sponsors! Polkadot Token 2049 Guest: Jeff Dorman, Chief Investment Officer at Arca. Previous appearances on Unchained: How Elon Musk Pushed DOGE Up and BTC Down, With Arca's Jeff Dorman 3 Things SushiSwap Needs to Get in Order, According to Arca Links Market crash: Unchained:  Ethereum Drops Below $2,300 Amid Jump Crypto Rumors Bitcoin ETF Trading Volume Surges to $4.7 Billion Amidst Market Selloff Bitcoin and Ethereum Funds Record $546 Million in Weekly Outflows: CoinShares The Block: Cryptocurrency market capitalization registers largest daily drop since 2022 Japan BBC: The Bank of Japan raises interest rates for second time this year The Defiant: Here’s an ELI5 on on How Japan Sent Global Markets Tumbling SEC: Eleanor Terret’s tweet on the SEC’s funding Unchained: Can Gary Gensler Be ‘Fired’ If Trump Becomes President Again? Others: The Block: Genesis completes bankruptcy restructuring, begins distributing $4 billion in crypto and cash Poylmarket: US Presidential Elections odds Learn more about your ad choices. Visit megaphone.fm/adchoices

If there's more data that comes out that suggests the economy is really slowing, then, yeah, the Fed will have to act quicker and there will be reason to believe that we could be heading towards a recession. But again, based on what we see right now, I just don't see any evidence of it. And I think that this is one of the best buying opportunities that you will see all year as a result. Hi, everyone. Welcome to Unchained. You're an Ohio resource for all things crypto. I'm your host, Laura. author of The Cryptopians. I started coming crypto nine years ago and as the senior editor at Forbes was the first Main Tree Meter protector took over cryptocurrency full-time. This is the August 6th, 2024 episode of Unchained. Get ready for the world's largest crypto event, Token 2049 Singapore, September 18th to 19th. While J. Sreeny Boston, Richard Tang, Arthur Hayes, and 300 others will hit

the stage, joining 20,000 attendees. Visit token249.com for 15% off with the code unchained. Link in the description. Pocodot is the original and leading layer zero blockchain with over 2000 plus developers. And the Pocodot 2.0 upgrade will be a massive accelerator for the ecosystem, making it faster, more secure, and adaptable. Perfect for GameFi and Defi to build, grow, and scale. Join the community at Pocodot.network slash ecosystem slash community.

Today's topic is the recent crypto market crash and also the broader sell-off. Here to discuss is Jeff Dorman, Chief Investment Officer at ARCA. Welcome, Jeff. Hi. Thanks, Laura, for having me. We're recording on Monday, August 5th, which has been an absolute bloodbath in the equities markets, and we saw all three major indices, the SME 500, NASDAQ, Dow-Town's Industrial Average, followed by more than 2.5%. The sell-off started in crypto over the weekend, especially seemingly with jump crypto unwinding some positions. As of the time of recording shortly after the equity markets closed on Monday, most major crypto assets are down by more than 8.5% with ETH, Lido, and TUN leading the way at 11% or higher.

So, Jeff, given all that's happened, what is your best explanation for what we're seeing in the markets? Yeah, it's the first thing I do whenever I see big price dislocations is I try to figure out what is new information versus what is, you know, information that was already out there, but is now maybe getting a different response. And it's hard to pinpoint exactly which of these factors is driving price more than others. But, you know, I, in my opinion, there's six major theories behind the market weakness. And most of it, in my opinion, seems really short term in nature. But I'll go through just quickly and then you can expand on any of the six that you want. But, you know, the first one clearly being some of the global macro issues.

led by the B.OJ raising rates, which was... Bank of Japan. Yep, the Bank of Japan. And not expected. The NICA fell almost 8% at the end of last week and then fell another 12% last night, as you mentioned, fully erasing all of the year's gains in about a week. And then also a massive rise in the VIX came with that. You know, I think that certainly had an effect on the digital asset market.

But what's interesting is that the digital asset response was way bigger than anything else. I mean, even the Hengsangang last night was only down 1.5% and you really didn't see any real Asian spillover outside of Japan and a little bit in South Korea. And then European equities were only down 2% and U.S. markets down about 2.5%. Really, the crypto markets down almost 30% was just a huge outlier as a response to that. So the only real connection there, in my opinion, would be if some of the bigger crypto market makers were actually affected by the rise in rates. and the rise of the end and therefore had to sell some crypto as collateral calls. And maybe that goes into number two, which was Jump trading being a big seller of ETH. It's possible that Jump was hung up on that as well.

And that is what caused them to decide to sell almost $600 million worth of Eath on a liquid Sunday. You know, the Jump guys are smart guys. They're not going to just sell for no reason on a liquid Sunday. there's really only three plausible scenarios for why they would do it on a Sunday, right? One is that they are being forced to unwind, you know, either because of, you know, what we just mentioned, a collateral issue with the Yen-carry trade or maybe something else that we don't know about, like feds or regulators, you know, telling them they have to rid themselves of crypto, given all of their issues they've had with, from FTX to Terraluna and other areas.

Or they were just using crypto as a proxy to get ahead of what they thought was going to be a Black Monday event. Maybe these guys were just incredibly ahead of the curve and said, we want to de-risk ahead of what we think is going to be a bad week. And crypto is the best game in town. Or three, quite frankly, is that they were just stop hunting. And they saw an opportunity in a liquid market on Sunday to push the market down, either to buy it lower or because they had puts. Regardless, 90% of their wallets are now instable, so that's over. There's plenty of other factors, which we can get into as well that I think may have affected the overall market.

But those are the two that were new information. over the last 72 hours that probably weighed on markets the most. Okay, yeah. Well, let's actually start with something that happened Friday because I also saw this was mentioned a lot in the commentary, which is that perhaps some of the market jitters started with Friday's jobs report. And I wondered if you could talk a little bit about what that news was and why it might have spooked investor confidence.

Yeah, and this is where, you know, tying macro to crypto has been just interesting. over the last six, seven years is that it comes and goes. I remember, you know, I think, you know, you know, you know, I started my career 25 years ago in traditional debt and equity markets. And we were always following the Thursday jobless claims as well as the monthly jobs reports. When I started in crypto eight years ago, nobody cared about this stuff really until, you know, 2022. It just wasn't a part of crypto analysis.

this. And then because of the crypto correlations going to one with everything else in 2022, all of a sudden, following this stuff mattered a lot more. But even in the last, I don't know, year, year and a half, it really hasn't been a big focus up until recently. And again, it's sort of, you have these spurious correlations that come and go and you never really know when it's going to have an effect. I mean, the jobs number that came out on Friday was definitely soft. This was the monthly, not the weekly jobless claims that come out on Thursday, but this was the monthly jobs report. And, you know, you had unemployment at a three-year high coming in a little higher than normal, as well as a much higher jobs lost in June. And you also had a big revision

in both June and May, or sorry, in July, and then we had a big revision in June and May with additional 30-some thousand jobs being lost as well. So the reason the market freaked out about this was not in isolation. It wasn't just because of the jobs report. it was because you also had the Fed, Powell, speaking on Wednesday, basically being non-committal about rate cuts saying that there's no real evidence yet that we need to cut, indicating that the next move was definitely going to be a rate cut, but we don't really have any pressure as to when, where the market wanted them to be much more committal about, committed to saying, you know, we're going to cut in September or we're going to cut in November. And then two days later, you get this soft jobs report and it made the market freak out saying the Fed is behind the curve. They clearly don't know what's going on. Here's this bad jobs report. They should have already been committing to cutting.

They're going to wait too long. And the reason that matters, and this is really important, it doesn't necessarily matter, again, in isolation with the jobs number. That's not the most important part of this. The most important part of this is that if you look at the series over the last call 25, 30 years of rate cuts, there's been very different responses to the equity market depending on why the Fed starts to cut. So if you look at 2001 and 2007, the Fed cut 50 bips on the first cut, and the market fell 20 to 35%. So almost 20%. Over the next two years, the equity market in 2007 fell 25%. In 2001, it fell 30%. And that was because the Fed was clearly late when they started cutting. You already saw real economic

weakness, real GDP weakness. In 2007, obviously, that was leading up to the housing crisis and ultimately the financial crisis in 2001. It was right after the tech bubble and heading into the recession in 9-11, and you saw a real negative response. But if you go back to 2019 or even 1998 or 1995, equity markets are in the after the first rate cut have been up anywhere from 40 to 75%. And that's because the Fed was ahead of the curve there. And they were cutting not because of a financial crisis or some sort of calamity that already happened. They were cutting because it just made no sense to continue to be restrictive given where jobs employment and where inflation was at the time. So that's the tricky mandate for the Fed right now is that if they wait until there's actually a need

to cut because there's some sort of recession or panic in the market, there's a good chance that you're headed lower. Whereas if they get ahead of this and just say, you know, look, inflation's down to two and a half, three percent. There's no reason to have a five and a quarter percent fed funds rate anymore when inflation is down to two and a half three percent. The Treasury market's already telling you that we should be closer to three and a half to four percent on Fed funds, why not get ahead of the curve and lower it now? So that's why the market freaked out so much on Friday. But again, it feels like the market is getting way ahead of itself. Because even today, you know, just we're talking on Monday, August 5th, you had the ISM report, which is the manufacturing

report. And that showed strength in the economy as well as in job rates. So there's just a lot of conflicting data right now, and it was, to me, a little odd that the market keyed in so much on one data point when there's been conflicting reports back and forth for months. Okay. Yeah. I mean, clearly there's a lot of differences in also interpreting this data. I hilariously, the Bits and Bips guys who they do a show, Joe McCann, had actually called that he thought they might need to cut in July. And so I feel like he's a little bit vindicated right now. but one thing that I want to ask about was we had been talking about the crypto prices and about ETH and as we saw there was that huge drop in the price of ETH on Sunday in particular.

It started that date around 2,900. It traded to less than 2,300 near the end of the day. And as we talked about, there was that rumor that it was because Jump was unwinding trades. But, you know, Ether is down just broadly over the last week. it's about 20 some percent, 25 percent or something like that. And I wondered, 26 percent. I wondered what you thought just in terms of if it really was just jump crypto or if there were any other reasons.

Because if I look, yeah, like Solana is also down 29 percent over the same seven-day period, but like Bitcoin is only down like 19 percent. Yeah. And before I get into that, I want to say one more thing about the Fed rate cuts that you talked about a minute ago is that, you know, I woke up. this morning, you know, most, most crypto traders are like me. They're unshaven today. They were up all night. They were watching everything. You know, you had the, you had the Niki down 12.5% in Japan last night. And then U.S. equity futures in the NASDAQ were down as much as six and a half percent overnight.

People were expecting just a calamity this morning. First thing I saw on CNBC at 5 a.m. was people calling for an emergency Fed meeting where you're going to have a 75 basis point cut. And it's just, it's just ridiculous. It's price-setting narrative rather than narrative setting price. there's just no reason for the Fed to do anything before September. The economy is fine. Earnings were great last quarter. GDP is probably still going to be in the one and a half to two percent range. So it's just a very strange, like it's a very strange response to a single piece of data. There's no, there is a chance that in six to 12 months we look back on this and say this was the beginning.

But based on the information today, it's just a massive overreaction. And the market told you that today, which is why once the market's actually opened, you had less of an equity down day than people thought. Treasuries were actually unchanged today. It was a much more muted response to actual markets than there was the fearmongering going on on C&BC and other places this morning. So I think it's very unlikely that the Fed is going to do anything before September other than maybe coming out and just easing the market with some statements. With regard to ETH, though, and then jump, I mean, it's never one thing. I think you could you could say that the jump trading, and for those not familiar, I mean, you know, the beauty and the curse of on-chain trading is that you can see everything in real time, right? Unlike, you know, some people may have saw that Berkshire Hathaway sold all of their, or most of their Apple.

That happened three months ago. It's just that the report came out last week. You didn't know that in real time while they were selling. You found out three months later. Here, you have jump moving wallets and immediately, you know, on-chain sluice and shout out to those who are monitoring wallets on a real-time basis. We're on top of this seeing the movement of the eth out of jumps wallets into exchanges. And it definitely freaked the market out. there's no question that that was the straw that broke the camel's back in the sense that the timing of that was definitely lockstep with the start of the sell-off of Ethereum.

But what typically, there's two things, right. One is, again, there's other factors that were driving markets lower before Jump decided to pile on on a liquid Sunday morning. But also, as we've seen this 100 times with these supply issues, anytime there's supply moving in the market and it's a known quantity, the market always front runs and sells more ahead of the actual. supply than what actually comes to market. For example, I used to work in the high-yield bond market, which is a very illiquid market relative to crypto and equities. And you know, you might hear a rumor once in a while like Pimpco is going to sell $100 million worth of XYZ pot.

Immediately, a hundred funds that I know would sell $5 million each to make room for that. So all of a sudden, you have $500 million in sales for a potential $100 million that's going to get sold. And eventually the $100 million gets sold. And the other $500 million that sold is like, wait a minute, I didn't even cover any. Now I've got to go cover it and go right back up. And the same thing has been happening in crypto all year, which is whether it's the Mount

Gox distributions or it's the Genesis distributions or it's jump selling or it's the U.S. government or the German government selling, you have this front running that sells way more than the actual supply that's coming ahead of it. And when you have in a liquid market, which is what we have right now because market makers are just not there anymore in crypto, you have these exacerbated price moves. And again, there's no question that the jump. selling on Sunday triggered the reaction. But the markets were weak before that because of, you know, what we talked about, the Bank of Japan raising rates, the VIX being up 25% on Friday,

a 50 basis point move in treasuries last week after the soft economic data, jump was just piling on into what was already a weaker market. Okay. Yeah, because, I mean, I think that the ether price is surprising also given the recent introduction of ether ETFs. But, yeah. Well, I mean, in a vacuum, if you told somebody at the beginning of the year, said the market is pricing in a 0% chance for an Ethereum ETF and Democrats hate crypto and are doing everything to stifle it. But out of nowhere, you're going to have an Ethereum ETF approved and you're going to

have a complete shift in the U.S. Congress and presidency with regard to expectations of who will win the presidency as well as, you know, just the crypto voter base starting to be heard by Democrats across the aisle to say that ETH is going to be basically flat year to date would be insane. I mean, nobody would have predicted that. It is incredibly shocking that Ethereum is underperforming Bitcoin, underperforming Solana, underperforming things like B&B and Telegram. I mean, there's not a lot of assets that are higher year to date now. Most are down in the, you know, 30 to 70% range year to date. But you certainly would have expected one of the benchmark assets that has nothing but

positive news coming out to be performing better than it has. And I think that's probably been, in my opinion, at least the most surprising trade of 2024 is how Ethereum continues to be weaker, not just relative to Bitcoin, but just relative to equities and other areas of the market, given the news. And just to clarify what you meant when you, when you said something like a shift in the election, are you talking about the recent search in the polls by Kamala Harris? And so traders are potentially kind of less bullish. Is that what you were saying there?

No, that's a different. Sorry, let me clarify. What I was saying was, you know, back in May, I believe it was, I think you had the biggest shift in U.S. policy in terms of favoring crypto that you've ever seen. It was probably the most influential and important month in crypto's history, in my opinion, when basically it started with Trump saying that a vote for Trump is a vote for crypto. That was on May 8th, followed by May 16th when the Senate voted to repeal SAB 121, which was the accounting rule that was negatively affecting digital assets to May 20th, when that was when the Bloomberg research team said that we're upping our expectations of an Ethereum ETF from basically zero to 75%.

followed by the House passing Fit 121 to ultimately the ETF being approved. I mean, that was a two-week period of time in May that was a complete about face with regard to what we thought the U.S. regulatory environment was towards digital assets to where we came. And I think it was largely because the Democrats probably had one of the worst miscalculations in history. I mean, the anti-crypto stance in an election year, you know, what I wrote at the time in back in May, I said, you know, there's at least 60 million, if not 100 million Americans who like crypto. There's probably another 200 million that are completely indifferent and don't care. And there's maybe six that hate crypto so much that they would actually vote somebody who's anti-crypto. I've just never seen a miscalculation like that.

Like, why you would alienate, you know, somewhere between one sixth and one-third of the American voting public by being so anti-crypto. And all Trump had to do is say, oh, I get it. there's more people who like crypto than there are who don't, and I'm going to be pro-crypto, and it completely changed what Washington, what the narrative coming out of Washington was with regard to digital assets. So to me, that was, again, the most important couple of weeks in crypto's history, certainly from a regulatory standpoint, combined with the new inflows from the ETHETF. And that's why I think it's, again, it's just one of the biggest surprises in the market to me that Ethereum is not only lagging its peers, but is basically flat to now negative

year to date. And that's just incredibly surprising. With regard to what you're saying on the other side is, I think, you know, when we were talking at the top of the hour about what are some of the other factors besides jump trading and the Japanese market that are affecting crypto right now, I think the fact that Trump and Republicans are viewed as so favorable for crypto, as soon as Biden dropped out and Kamala Harris was given the nod, and you started a shout out to the guys at polymarket. You started looking at the odds on polymarket of who was going to win. Trump went from 76% expectations of a win down to about 52%. So as the market is pricing in a greater chance of Kamala Harris winning and Trump losing, that has weighed on crypto prices. And again, I don't think a loan

that would have taken the market down, but that was just another contributing factor to weakness that when Jump decided to sell $500 million worth on a liquid Sunday morning, it just snapped, you know, some of the liquidation levels that were set in the market, you know, due to some of these other factors that we're pushing on the market. Yeah, so let's also now talk a little bit more about a factor that everybody's calling this Japan-Yen carry trade. Can you explain what that means and how that potentially contributed to the sell-off? Yeah, so, you know, cash and carry trade is not a terribly difficult concept to understand. It happens across a lot of different markets. I mean, for those who are more crypto-native who are listening to this, it's really no different than when you hear about spot futures arbitrage, right?

The idea is buying at one price, you're selling at another price and effectively have somewhat of a risk-free trade on, right? If you're buying Spot Bitcoin at whatever, 55,000 and you're able to sell futures at 60,000, obviously there's some risk, there's counterparty risk and there's unrealized market risk, but essentially that's a fairly risk-free trade. The same thing happens in currency markets all the time, a little less risk-free but similar constant. which is if you can borrow at interest rates in one currency and invest that money into another currency at higher interest rates, it's a fairly risk-free trade, right? Not risk-free, but fairly risk-free in the sense that, you know, Japanese rates have been negative to zero for almost 20 years. If you can borrow in Japanese yen and you can convert that yen into dollars and you can take those dollars and invested in money markets at 5%, that's a pretty good arbitrage yield. And this is a trade that's been around for decades. You know, for those who have been in the market longer, you know that Japan has real structural

demographic issues with an aging population, low marriage rates, low birth rates. They have had no ability to spur inflation for almost 30 years. And this trade has been going on as a result for, you know, decades. I mean, I remember back in 2015, this was the trade de jour when everyone was doing the the Japanese yen trade and abenomics. And the Japanese government has been doing everything they can to try to facilitate growth and to spur inflation and to facilitate investing in Japanese equities. So a seemingly simple trade that's been going on for decades at time hiccups.

And the hiccup came over the last couple weeks when the BOJ, the Bank of Japan, first raised rates from negative to zero. And then again, on Wednesday, which was the surprise rate from zero to a quarter. percent. It seems like a tiny move. You wouldn't expect a quarter basis point, or rather 25 basis points, a quarter of a percent to upend markets. But when you have funds that are 10, 20, 30 times levered doing this trade, and all of a sudden, you have the yen strengthened as much as it did, as well as the fact that what you're borrowing at is going at a higher rate, you immediately have to start unwinding those trades. And that's exactly what happened is that if you look at a graph of the

yen versus the dollar, the yen has become so strong. And if you're borrowing, in yen and buying dollars, and then you have to go back and pay back that loan in yen at a higher rate, you can lose substantial P&O. So, you know, and this is what we see in finance every, you know, 10, 15 years or so, is you see what is supposed to be a simple arbitrage get so highly levered that it blows funds up. You know, similar things happen to, you know, for those who have heard of the 1998 long-term capital management, very similar, different currencies.

but very similar type of a trade. So one of the things that we have to differentiate when we look at sell-offs in markets is technical trades versus fundamental, right? Fundamental trades being you're seeing a real rise in unemployment. And as a result, people don't have incomes. And when they're losing their job, they're not being able to pay their rent or their mortgage.

And they're having real consumer spending downticks, which affects earnings of companies, which affects default. rates, right? Those are examples of fundamental problems that lower valuations. Technical sell offs are when it's simply just a leverage on wind or some sort of short-term sort of effect in the market, things like when the repo market went haywire in 2018 or, you know, what we're seeing here, which is just a leverage unwind. Again, for crypto-native traders, you see it all the time. You might be like, hey, why was Bitcoin down 12% today? Oh, I just saw on Coinglass that there was a billion two

of liquidations because a bunch of people trading crypto at 10 or 15 times levered just got wiped out on a small 1% move and it led to cascading liquidations, knock the market down, and then over the course of the next 48 to 72 hours, order was restored and bids filled in. The same thing is true here with the Japanese yen carry trade is it's affecting a small amount of funds. It's a leverage on wine, which might affect the collateral that you have to sell and some short-term hiccups, but it doesn't usually lead to any sort of systemic risk unless the trade is so big that you have to see a bailout, which is what happened in 1998 with long-term capital management. So it seems fairly contained.

That's why I mentioned earlier that even though the Niki was down 12.5%. You saw other markets only down like one and a half or two percent. It really didn't feel like this is big enough to be a global contagion. And also just for context, I mean, the Japanese, the Niki, for example, is like a $6 trillion market or $5 trillion. after falling 20%. I mean, that's the size of like Apple and the video combined. I mean, this is not a giant market. This is not like the U.S. market spiraling or, you know, Chinese markets or European markets. It's a much smaller market. And one question, as you mentioned, the Bank of Japan raised the rates last week a few days ago.

So why would it take that number of days for the market to have this major sell-off? Well, it started, I mean, if you look at a graph of the NICA, the NICA selling pressure started last week. I mean, this is a, the market hit an all-time high on July 8th, you know, a month ago. And it's been down pretty much since then. So even though we were down 12.5% on Monday, it had already fallen almost 15% in the weeks prior. So it wasn't that it would just came over out of nowhere. It was already in motion and then just was exacerbated over the weekend. And this is why, again, this is speculation. I don't have any insight here. A lot of people are tying the jump trading, ETH sales on Sunday to the Yen-Carry trade,

completely guessing that why else would these two things be tied, right? Is it possible that jump in their course of market making and investing had a big, you know, yen carry trade on throughout the course of the last couple of weeks was losing money, realized that it was going to open again down on Sunday night, had to sell whatever collateral they could to free up cash. and ETH is the only market available on a Sunday morning. So it's plausible. I certainly don't have any knowledge for sure to know if that is the case.

There are rumors that, you know, Jump is exiting crypto and shutting down. I think that is incorrect. I think we have a fair amount of data points to suggest that Jump is not going anywhere. So I don't think that's the case. So it's possible. You know, it's also possible that there were just two unrelated events, that there was some other funds that, you know, just were continuing to get unwound through the Japanese end. carry trade and separately, you know, Jump was selling ETH, doing a liquid market on Sunday.

But, you know, sometimes, again, these things kind of have a snowball effect. They just start to move and then eventually they get too big and they're out of control. And that's why I mentioned earlier that the data we have right now, certainly in the U.S. from an economic standpoint, is not at all flashing recession signals, not at all. I mean, you do not have anything in a snapshot in time right now that says recession. But we could look back six or 12 months from now and say, well, it was clear that August, 24 was the beginning because you started to see some signs. So I'm not suggesting that it can't happen, but the market reaction to the data that we have thus far is completely out of whack with what the actual information is saying. All right. So we're going to talk a little

bit more about potential other factors in this downturn. But first, a quick word from the sponsors who make this show possible. Join 20,000 attendees for the world's largest crypto event, Token 2049 Singapore, September 18th to 19th. Anatoli from Salana, Kyle Simani, Imad Mostock, and 300 others will hit the stage for an immersive festival experience ahead of the Formula 1 Grand Prix weekend. Singapore will transform into a buzzing crypto hub from September 16th to 22nd, with over 500 side events taking over the city. This is an event you've never seen before, with paddle courts to rock climbing monoliths and mixed market. Art shows as the global crypto community takes over the iconic Marina Bay Sands to spark connections and define the future. Visit token 2049.com for 15% off tickets with the code

unchained. Link in the description. Pocodot is the original and largest layer zero blockchain with over 2000 plus developers and the anticipated Pocodot 2.0 upgrade will be a massive accelerator for the ecosystem. Upgrading the infrastructure with eight times higher transaction traction throughput, and twice as fast block times, perfectly tailored core time for the needs of every protocol, trustless bridges internally and into Ethereum, Cosmos near Binance Smart Chain, and revised tokenomics and the implementation of a token burn to reduce inflation. Perfect for GameFi and Defi to build, grow, and scale with one of the most active crypto communities in this space.

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Yeah. And again, maybe it sounded a little bit like a broken record here. I think in isolation, it probably wasn't enough. But in a combination of these other things that we mentioned, it certainly added to the weakness. You know, for those not familiar Genesis, somewhere around $4 billion of cash Bitcoin and Eath as a result of the end of their bankruptcy process is distributing those assets. back to creditors, I believe you got, I think you got something like 100% back if you had cash and you had a little bit of a haircut if it was Bitcoin underneath.

Anytime there's in-kind distributions, meaning you're getting the actual asset back, there's a chance that when you get those assets back, you're selling them. It's not guaranteed. People who are comfortable to enough owning crypto and lending it to a company like Genesis probably had a long-term view on crypto and maybe pretty positively disposed. and maybe they aren't selling any of it, or maybe they're sending it right to an exchange and selling it. So it's one of those things that you'll know after the fact.

You'll be able to track those flows and see exactly how much of it is sold. But in real time, again, it's one of those things where the market has a number in their head of how much is being distributed back to investors, and they just immediately start front running and selling those assets ahead of time. Again, you look at Mount Gox. I mean, how long have we been talking about Mount Gox and the $9 billion of Bitcoin that's coming back to market. It's been 10 years we've been talking about that. Well, seven of that $9 billion has already been distributed and for the most part hasn't really been sold. So a lot of

times these supply issues are, again, it's just an opportunity for bears or for short-term traders to try to front-run those flows, regardless of whether or not those flows actually happen. But if you look at aggregate of all the different supply pressures we've had in last four months, it's real. I mean, we just mentioned Mount Gox with the Bitcoin Cash and Bitcoin Tal. about $9 billion. You had $3 billion of German seized Bitcoin that has already been sold into the market. You know, earlier in the year, you had all of the locked salana and other assets from the FTCS estate that Galaxy was facilitating the selling of. You know, you had this Genesis bankruptcy. You know, there's a lot of assets that have been put back to the market this year. The flip side

of that is that, you know, FTX, probably at the end of this year, if not early next year, is distributing everything back in cash. And that's going to be somewhere in the $12 to $14 billion range. So it'll be interesting to see if next year, if the market starts front running that demand saying, here comes this new influx of cash back into the market for people who are already positively crypto, uh, uh, native and disposed. Like, you know, is that market, is that, is that, is that money going to get immediately siphoned back into crypto and support asset prices? So we'll see. But, you know, again, this is, this is why I keep saying it's both a blessing and a curse having on-chain real-time analytics is that it's really nice to have this information in real-time,

but it also, you know, it's like a 5- or 10x magnitude effect when you see these assets, given how many people have the ability to front-run the actual flows. So before the commercial break, you did also say that you didn't think we were entering a recession. Obviously, you know, as we discussed, that is something people are chattering about. So can you just explain a little bit further why you think, It's probably not likely. Just to be clear, I don't actually have a strong opinion of whether we are going to eventually be in a recession or not. Where I have a strong opinion is that there's nothing in the data today that suggests we're anywhere close to that.

A recession is defined by two quarters in a row of negative GDP. We're likely to get second quarter GDP in the one and a half to two percent range. We just had second quarter earnings, which I think were up 12 percent relative to expectations of 9 percent. The economy is humming along right now. There's certainly, you know, just like any bull or bear analysis, I mean, if you're bullish, you can come up with reasons why the market is strong. If you're bearish, you can come up with some charts and reasons why it's not. There's some mixed data, right? The increase in the unemployment rate is certainly suggesting that the economy is slowing.

You know, we've had even on those second quarter earnings that were strong, you had some revenue, decreased revenue expectations, especially from some of the big tech companies. So there is certainly a possibility we are heading towards a recession. But I just don't see it in the data right now. There's nothing in the data right now that I have seen from unemployment to ISM to GDP to revenues and earnings. Not to mention, I was just on vacation last week and the airports are absolutely packed. He can't get a rental car anywhere. Hotel race are flying. In 2008, I had people sleeping on my couch who were out of work for six months and couldn't find a job.

you'd walk through the airport and there'd be six people on your flight. You know, restaurants were literally empty. That's just not what you're seeing right now anywhere in the world. So again, we may look back in 12 months. We could be in a massive recession and we'll say, yes, there were certainly some signs in August of 2024 that indicated that that was starting to crack. But for, I mean, for context, back in COVID in March 2020, ETH felt 52% and the S&P fell 26%. So you had a 2x response to the equity market because of an event that affected both.

In the last week, ETH was down 30% and the S&P was down 4. There's just no reason to believe that you have a 7x multiple on crypto versus equities because of one data point that tends, because of one unemployment data point that suggests that we might be inching closer to a recession. So I sound a little bit like the Fed. We're very data dependent right now. But we're data dependent. If there's more data that comes out that suggests the economy is really slowing, then, yeah, the Fed will have to act quicker.

And there will be reason to believe that we could be heading towards a recession. But, again, based on what we see right now, I just don't see any evidence of it. And I think that this is one of the best buying opportunities that you will see all year as a result. Matt Hogan of Bitwise tweeted, quote, one week ago, the market was pricing in. an 11% chance of a 50-bips rate cut in September. Today is 100%. Things come at you fast. And as we discussed, you know, this is likely to happen.

So since people are expecting this, if the Fed does indeed cut rates, how do you expect the market to react? So going back to what I mentioned earlier about, you know, there's two different reasons why the Fed cuts rates and the market reacts differently based on those reasons, right? If it is viewed universally that the Fed was late and the economy is crashing and it is a very defensive rate cut to try to prevent catastrophe, it's likely that crypto and equity markets will go lower. If it's viewed as our job on inflation is done, it's down back to a more reasonable two and a half to three percent. There's no reason to have this restrictive of a monetary policy with five and a quarter percent

rates when inflation is down to two to three percent. And the economy is still fine and you have a soft land. scenario, it's likely that equity and crypto prices are, you know, multiple percent higher, you know, 20 to 100 plus percent higher. I'm in the latter camp, again, because the data suggests to me right now that the soft landing is is more likely. And I think as a result that at this point, it's sort of a quandary. If the Fed overreacts to this recent equity sell-off and does an emergency rate cut, it probably

causes more panic than it does good to probably tell people, hey, we were right. The economy is way worse than we thought of the Fed. had to come out and react quickly and do something, therefore, you know, we're in trouble. If they just, you know, ease markets, like I wouldn't be surprised if Powell was on CNBC, or sorry, well, on CNBC or even on 60 minutes this weekend, and says something reassuring, you know, similar to what he said a couple months ago when the press was attacking him on stagflation, he said, I don't see stag and I don't see flation. And it was just end of story. Stop talking about it. I could see the Fed saying something along those lines. In fact, I think you already saw, I think it was

Gouldsby or one of the other Fed governors came out this morning and said, you know, the Fed will do what it always does and it will support, you know, markets. I mean, basically saying, like, we're not doing anything yet, but like we have the tools and the ability to support things if we need to. I think if you see some reassuring comments, in fact, I actually put out recently on Twitter, I said, there's three things I'm looking for right now to confirm my bullishness. And make no mistake about it, we are bullish. We are buying the dip. We are continuing to buy the dip. We think this is one of the dumbest sell-offs, certainly in terms of magnitude that we've seen in years, and we have no problem buying this dip and continuing to buy. The three things

I'd be looking for to confirm that bias would be one to see if Japanese equities stabilize, which you're already seeing the Nikai futures up about 6% right now heading into tonight. I'd like to see some ETF inflows, you know, confirmation that after a big move like this lower that, you know, some of the Bitcoin and Ethereum retail and institutional investors are actually willing to buy the Bitcoin and the ETFs. And the ETH ETFs. I think we'll see that data. By the time this goes out, we'll already have seen that data for Monday, but we should see positive creations all week, in my opinion.

And three would be the Fed reassuring the market without doing a panic rate cut. I don't want to see them panic and cut rates for no reason. I think they'll say things like, you know, we're still monitoring the data. The ISM number was good. The jobs data was bad. Our first move is going to be a cut, and we're probably aiming towards September. The news that would make me scared and maybe rethink my bullish view would be as a result of this Japanese yen trade and some of the crypto stuff, if you see something break, right? If you see

the repo markets break or the FX market break, you know, something that would create a panic that would make the Fed step in more quickly, that would probably scare me a little bit, or if we see a string of continued bad economic data, because that would be more confirmation that we may not be heading towards a soft landing. But from what I've seen, I think it's much more likely that we go considerably higher from here. I wouldn't even be surprised if ETH retraced the entire move from this weekend by the time this podcast goes out. All right, yeah, we'll see because it's going out in less than 24 hours. So obviously, this is a crypto podcast, but as I'm sure you're highly well aware,

and as we've discussed this year, the election really has become a huge kind of narrative in crypto and vice versa. And I wondered what you thought this crash in the markets, it's not a a huge crush, but still it's like, you know, major drawdown. How it's going to affect the potential election outcome? Do you think that this could help Trump? You know, as we mentioned earlier during the show, just in the last, I guess, week or so, Kamala Harris had been really rising in the polls. Yeah, and I don't actually have this data in front of me, so I'm going to speak a little off the cuff here, but I believe it was Charlie Bellello, a creative planning who I saw this from. But there's no

statistical evidence that says equity markets do better under Republican versus Democratic leadership. I think it's generally viewed that Republicans are better for markets in the sense that they support free markets. They tend to have lower tax rates. And I think that's no different than what we're seeing now. There has been, quote unquote, a Trump trade going on recently, which is up until three weeks ago, everything related to AI and tech and crypto were going higher.

And then again, as soon as Kamala Harris entered the market and Trump's odds of winning went down, you saw a reversal of that trade. So there is certainly a narrative or a common refrain that a Republican victory would be good for markets in general. I'm not 100% sure if that is true in practice. Generally, especially what we saw in the last two presidential elections, is that markets tend to be volatile leading up to an election and then they go higher after an election regardless of who actually wins just because markets hate uncertainty more than they hate bad outcomes. So even if your candidate doesn't win, at least some candidate won and you're back to normal instead of the volatility that you see pre-election, you know, you can look at November

2020, you can look at November 2016. It all looks the same. You see real choppiness in August, September, October, and then it's off to the races. I think November 2020, for example, when Biden beat Trump, even though Trump was viewed to be better for markets, I think the equity market went up 11% in, if I remember correctly, in November of 2020. And then, yeah, the, let's see, I have right here. In November, 2000, Yeah, the S&P was up 11%. The NASDAQ was up, I think, 14%. And Bitcoin was up 42% in November 2020.

And then that continued into December of 2020 as well. And obviously, 2021 was a great year too. So there was tons of volatility leading up to the election because nobody knew if there was going to, you know, if whoever won, if there was going to be riots and things like that. And then once it was a peaceful transition, it was like, okay, great, markets are going straight up. I think you're likely to see something similar here. The only caveat I would say is that at least as it pertains to crypto and not necessarily the broader equity market is the Democrats are on notice.

They have seen the political pressure being caused right now by the crypto industry. There are plenty of members of Congress, both in the Senate and House of Representatives, who have seen how much crypto cares about, or how many people care about crypto, rather, and how much political lobbying pressure they have. I think that even though Trump is basically using crypto as a partisan tool right now to win voters, I think the Democrats have certainly recognized that they can no longer be as anti-crypto as they have been. Because, again, it is just one of the dumbest miscalculations in history, given that, again, there's like six people total who care enough to vote on an anti-crypto stance. I think that reduces Warren's power. I think it reduces Gensler's power if he's even still in office. And I certainly think that it will be an issue that comes up a lot over the next four months heading into the election.

And while I do think a Trump win would certainly be better for crypto markets, I'm not sure a Kamala Harris win will actually be as bad for them as some people are fearing. Yeah, to my mind, the fact that Nancy Pelosi and Chuck Schumer both voted for pro-crypto bills recently. That to my mind is a big signal because Nancy Pelosi, obviously, she's the major power player, even if she doesn't have a big title now. And Chuck Schumer is the House Majority Leader. And then one other thing I was going to say about that is that, oh, I did a recent episode. And Sheila Warren of the Crypto Council for Innovation and Justin Slaughter of Paradigm said that even if Kamala Harris wins, Gary Gensler is likely going to be out.

but they said the tea leaves on that, like you could really read based on what happens with Carolyn Crenshaw's renomination as commissioner to the SEC, which will happen. It's supposed to happen in September, but basically if they push it to after the election, then that means that Kamala Harris

probably wants to have a way in and to make room for her own commissioner and then therefore potential chair would be by not reconfirming her. So anyway, point is, their theory was that pretty much no matter who is elected that Gary Gensler will be out. The fact that we're even talking about this just shows how ridiculous this is. I mean, I've been in, you know, professionally investing now for over 25 years. I couldn't name any of the SEC chairmen over that time before Gensler.

It was, you know, it's kind of like a basketball referee or a baseball umpire. You never want to be the show. If at the end of the game, you're talking about the ref or the umpire, like something's wrong. You should not be talking about them. And the fact that, and this is not just pertains to crypto. I mean, you know, the equity market, some of the policies that Gensler and his team have come up have been so unnecessarily restrictive and confusing that the SEC has become a household name. I mean, I can go to dinner with people that aren't even in finance and they know Gary Gensler's name. I mean, that's crazy.

It is not the type of organization that. should be on the front page every day. So I think, again, regardless of who wins here, I think that's becoming pretty well known. I mean, I was fortunate to have dinner with Hester Purse, I don't know, six months ago. And she was embarrassed, flat out embarrassed by the reputation the SEC has now. So, you know, it's not where you want to be as a government organization. Yeah, yeah. I did actually also see Eleanor Territ of Fox News tweeted this earlier today.

I guess it was one of the chambers of Congress was sending some message to Gary Gensler about the budget. And they literally said something like, you know, basically you poorly allocated the funds that we had given you for your budget last year. And therefore you like gamble. You basically gambled with your employees' bonuses. And that's why they're not getting the bonus. And they approved like a lower budget than he requested, but they had given that as an example and using the word gamble, you know, you gambled your employees bonuses or whatever the phrasing was, was used.

We'll put that in the show notes so people can read the actual language since I don't remember it exactly. But yeah, I was like, ooh, that's spicy. But one other thing that I wanted to ask you about was, you know, here we have this historic year where now Bitcoin ETFs have launched. And even recently, Morgan Stanley is going to be, you know, soliciting their customers with the Bitcoin ETFs, which is huge for the industry. And yet it's in the same week where Bitcoin's kind of digital gold narrative is maybe being called into question where we're seeing that, you know, the price drops pretty badly at a time

like this. So, you know, what do you think of that narrative? or why do you think Bitcoin's price is so correlated? And do you think it'll ever kind of get out of it to be that digital gold narrative? Well, I mean, look, most of the time we talk about crypto as being an uncorrelated asset, right? And that's what you want to be. Uncorrelated doesn't mean that you're never correlated. It just means statistically your correlations are not a repeatable, right?

So sometimes you're negatively correlated, sometimes you're positively correlated. it, you know, you have different effects with the same information. So I think, you know, there have been times where Bitcoin has acted as a safe haven or a flight to quality asset. You know, we've seen certain, I believe it was beginning of 2021 or 22 when you had, I think it was it Lebanon strike where Bitcoin went up immediately as a result of that. You know, there have been times where it acts that way, but it doesn't always act that way. What I think Bitcoin always does Anytime there's a real government or banking-related issue, whether that's a loss of faith in the government, like what you saw with the Canadian truckers two years ago, or you see a banking crisis like March of 2023, anytime investors lose faith in their local banks or their local governments, Bitcoin has acted as a defensive hedge. When you're talking about more equity-related weakness or geopolitical risk, that's when Bitcoin has not had a very consistent response.

And I think that makes sense to me because there's no real reason why Bitcoin should act like gold other than the fact that people call it gold. And also going further on that, correlations tend to have more to do with who owns it than what the actual asset is. You know, you can go back to Arcago's capital a year and a half ago and look at the stocks that they owned. They owned a collection of stocks that had nothing to do with each other, you know, from like Baidu and Alibaba to Viacom. and they all were incredibly highly correlated. Why? Because one guy owned them all and was selling all at once. So as Bitcoin becomes more institutionally owned, both via the ETFs but also just, you know, now that it's a, what, 13, 14 year old asset and then, you know, the world sort of knows about it and it's a trillion dollar asset or close to it, the more institutional investors who own this, by definition, the correlation is going to go up with other assets that institutions own. You know, because if you're a forced seller, you need to sell, you're going to sell every, you own. So I think it's unlikely that Bitcoin really ever operates truly as, you know,

quote unquote, digital gold. I don't think that is, I don't think that's a, I don't think that matters. You know, again, I've been doing this for 25 years. I've probably had six conversations in my life about gold. Like, nobody cares about gold. Long short, equity managers don't care about gold. Credit investors don't care about gold. Mom and pops don't care about gold. The only people who care about gold is a bunch of macro investors who sell newsletter. and fear and doom. So I don't think you want to be digital gold. Nobody cares about gold other than central banks and these macro guys.

I think it's much better that every time there's a wake-up call that your government or your banks are not trustworthy, that Bitcoin is the solution. I remember very vividly in March of 23, we had small businesses that were friends or families of ARCA that were calling us saying, like, am I going to be able to get my money out of my bank and pay for payroll? I mean, there was real fear about what was happening with Silicon Valley Bank and signature and Silvergate.

And it reminded people that having a bearer asset matters. And I think those kind of wake up calls are much more important. Or, you know, if you're in Argentina or Turkey and you just constantly have currency debasement and you're thinking about how can I protect my assets, those are much more valid and important reasons to think about Bitcoin or another bearer asset than, you know, did it head? my portfolio in a 24-hour Japanese Nikai sell-off. Well, given what you just said, I was wondering what your thoughts were about these proposals to have a strategic Bitcoin reserve for the U.S. government. Well, I think the one thing Trump said in Bitcoin, Nashville last week, when he said maybe this is the way out of our trillions of dollars of debt problem was pretty interesting

because obviously there's other ways besides Bitcoin, if you're thinking about it that way, I mean, you know, equities have outperformed debt as well. If you invested all of the money in U.S. equities or in, you know, Apple or in the video, you would have been able to get out of the debt problem too. So it was a little confusing to me of whether or not he was suggesting that we just want the outperformance or if he was really viewing Bitcoin as, you know, an asset that really should be held on a central bank's balance sheet. So I think it's interesting. I don't know if you're going to see central banks out there buying Bitcoin in the same way that they buy gold.

I could see anytime Bitcoin is seized that it no longer gets sold or auctioned off and it just becomes part of the balance sheet. It's not something I have a strong opinion on. It certainly would be good for the price of Bitcoin if a new buyer emerged in terms of central banks and other governments. I just, truthfully, I don't know. I don't know enough about what drives those decisions and how they gets made. But I certainly would be rooting it on if it happens. And then last quick question is we saw. that this morning, Monday, six tradfai trading platforms were down.

City, Fidelity, E-Trade, Vanguard, TD Ameritrade, Dary Trade, Daryl Schwab. There might be others. Those were the ones that were widely reported. And meanwhile, DFI, kind of in contrast, seemed to be performing pretty, you know, well, holding it pretty well. And I wondered if you could just talk a little bit about that contrast and what you think that means for this future and even just in the context. of your remarks earlier about your surprise about the performance of Eith.

Yeah, I mean, it always takes a crisis for people to remember. The current financial system only allows you to transact when they want you to, not when you want to. You know, that's sort of the biggest takeaway over the last decade is assets that you hold in a bank or at a brokerage are not your assets. It's the bank or brokerage's liability, and it's up to them whether or not they ever give you your assets back. You know, that kind of stuff, especially in the United States,

doesn't come up a lot. It happens a lot more in other countries, again, where there's a lot less trust in local government and financial systems, which again is why I think Bitcoin is more important to be a hedge to government and bank mistrust than it is about capital markets. But, you know, what we're reminded in a crisis is the liquidity is not there when you need it most. And it's not a great feeling when you can't access your own assets to sell them or buy them largely because they're just not your assets, right? as soon as you put them on a centralized third party system. Obviously, crypto people will say that's the whole point of crypto rails. It doesn't require a third party. You can transact whenever you want.

And I think the takeaway for me is that crypto technology and rails work really well, whether or not you like to invest in crypto or not. Defi, Laran Protocol, self-custody. I mean, this is just a flat out better system when you actually need it. In my opinion, the biggest problem is that due to regulatory constraints, the only things you can trade on crypto rels is crypto. And most people just don't care about crypto yet. But like imagine a different scenario, right?

I think it was, you mentioned, I think it was like Charles Schwab, Fidelity, Vanguard, Ameritrade, and some others. They were all down at the same time during the peak volatility this morning. Imagine if you were like, oh, screw it, I'm going to go trade my Apple or Navidia stock on Uniswap because my Schwab or Ameritrade accounts frozen. I mean, imagine what kind of an onboarding event that would be for crypto if that was an option. So to me, it has nothing to do with the, I think the proof of the, I think the proof of is undeniable that this is a better system for owning and moving your assets. The problem is

the asset you can physically move on these systems right now are just not that interesting to most people. But if we can ever get real stocks and bonds and other assets to trade on crypto rails, I mean, it's going to blow people's mind just how much better it is. Yeah. Yeah, it is really a contrast to see. All right, Jeff. Well, this has been an amazing conversation. Where can people learn more about you and ARCA? Yeah. And again, I appreciate having me on. I know. know it's a crazy couple of days here, but I certainly can follow me on Twitter X, J. Dorman 81. You can go on our website, ar.ca, we put out weekly blogs and monthly market updates. And, you know, I shout out to the ARCA research and marketing team for some of just amazing educational crypto content that we've been putting out for six plus years.

So look forward to hearing from people and seeing where these markets go. And hopefully I'm right that crypto retraces by the time this podcast goes out. Yeah, I'm sure people would love to see that. Well, it's been a pleasure. Thanks again, Laura. Thanks so much for joining us today to learn more about Jeff, Arka, and the recent market meltdown. Check out the show notes for this episode. Unchained is produced by me, Laura Shin, with up from Matt Pilchard, Juan Aramanovich, Mechangavis, Pamma Jemdardtardt and Marka Curia. Thanks for listening. Unchained is now a part of the Coin Desk Podcast Network. For the latest in digital assets, check out markets daily five days a week with host Noel Atchison. Follow the Coin Desk Podcast Network for some of the best shows in crypto.