https://pomp.substack.com/p/the-sec-is-suing-binance-and-coinbase
To investors,
The Securities and Exchange Commission sued Binance yesterday. The regulatory organization announced this morning that they are suing Coinbase as well. These are two of the largest crypto exchanges in the world.
These actions by the SEC are a continuation of the increased regulatory scrutiny that has been underway in the United States over …
https://pomp.substack.com/p/are-tech-companies-accelerating-a
To investors,
Many people have thought the technology industry would be resilient in times of a recession. The idea is we could use 2020 as a guide for a future recessionary period — during the start of the pandemic, white-collar workers were forced to work from home but there was little disruption to their jobs and/or businesses when compared to other s…
https://pomp.substack.com/p/the-state-of-crypto-market-structure
To investors,
Today is a guest post from Will Clemente, co-founder of Reflexivity Research, on the current state of crypto market structure. You can subscribe to Reflexivity’s research by clicking here.
After a major first quarter we have seen a continued decline in trading volume across the board for major digital assets across all major centralized exchanges. Throughout the month of May, aggregated trading volumes declined from $23bn to $9bn to their lowest levels since 2020. This represents continued apathy and decline in speculative interest in crypto markets.
Looking at the makeup of overall trading volume by exchange, Binance’s market share has fallen to 56% despite a slight rebound over the last week. This is a 15% percent decline from its peak at the start of 2023. The biggest beneficiaries of this dynamic fall under the “other” category, which includes exchanges such as Huobi, Kraken, and Kucoin.
Offshore exchanges remain the dominant venues across the entire crypto landscape, making up a whopping 86% of all trading volume; this dynamic is likely to only accelerate with regulatory uncertainty in the United States. Even Coinbase, which historically has been recognized as the publicly traded highly regulatory compliant alternative option to other venues in crypto, announced the launch of its own offshore derivatives venue called Coinbase international exchange.
Harsh regulatory efforts and posturing from government officials in the US with the intention of establishing control over the industry are only going to have the opposite effect and drive talent/capital/innovation off-shore and on-chain; ultimately giving the government less control than what it would have if it encouraged activity to take place in the US; allowing it to at least retain some degree of oversight. For the foreseeable future it’s unclear why the dominance of trading volume in offshore venues won’t continue.
While USD denominated market depth has remained relatively stable, liquidity for both Bitcoin and Ethereum measured by coin denominated 2% market depth (coin denominated depth of bids and asks within 2% of current trading price) has remains roughly flat on the month; again, illustrating a period of apathy for the crypto market. This downtrend in liquidity that we’ve been tracking for the last few months was reflected in an announcement from Jane Street and Jump, in a statement from the two market makers, that they would be scaling back their crypto operations in the US.
Jane Street went a step further stating that the firm would be scaling back its crypto operations globally due to regulatory uncertainty that has made it difficult for the firm to operate in a compliant fashion. This decline in liquidity makes it more difficult more entities operating in digital asset markets to execute larger trades without incurring slippage (price impact). In other words, declining liquidity in the market translates to higher volatility.
In terms of trading pairs, TUSD has taken up an increasing amount of activity on centralized exchange, now 36% percent of all Bitcoin trading volume while Binance and Paxos’ BUSD pair has declined from 32% to 5% amidst regulatory uncertainty and the removal of zero-fee trading.
Stablecoins remain the dominant pair of choice for centralized exchange market participants, with stablecoins making up 82% percent of overall trading volumes, relative to fiat, for Bitcoin specifically and 76% percent of centralized exchange crypto trading volumes overall.
Of these stablecoins, Tether remains king with a whopping 76% of overall stablecoin market share on centralized exchanges.
That is it for today’s analysis. Hope everyone has a great day.
This was a guest post from Will Clemente, co-founder of Reflexivity Research, on the current state of crypto market structure. You can subscribe to Reflexivity’s research by clicking here.
-Pomp
https://pomp.substack.com/p/inflation-is-now-the-savior-for-us
To investors,
The conversation around the United States’ debt is complex and nuanced. Most headlines you read will merely cover “Will politicians reach a deal on the debt limit or not?!” This is obviously important, so we can avoid default, but it is not the only important aspect of the conversation.
Christopher Condon has a great piece in Bloomberg this …
https://pomp.substack.com/p/the-ai-hype-cycle-learned-from-bitcoin
To investors,
Artificial intelligence is now being talked about by the media as much as bitcoin was discussed during the all-time high run of 2021. This is noteworthy because the media’s coverage will only accelerate adoption, while also helping to solicit more investment dollars to the industry.
As Bay Area Times explained, coverage of new product releases like ChatGPT have not slowed down months after the initial take-off.
These hype cycles around new technologies, whether AI or bitcoin, always get a bad name from critics. But the hype cycles are essential in seeing the technology flourish. You need excitement to get people to leave their old jobs and come build products or companies in the new industry. You need excitement for investors to part with their hard-earned money and invest in the new industry. And you need excitement to break through the noise and capture the attention of potential new users.
Think of the hype cycle as an industry-funded marketing campaign. The more people who get excited about a new technology, the more entrepreneurs, capital, and users will show up to help make dreams become reality.
Now it should go without saying, but unsubstantiated hype can be a negative thing. There has to be substance underlying the excitement. Historically, these hype cycles have been related to some major breakthrough. Smart people are getting excited about something new — the timing may be off, but the breakthroughs usually end up creating something valuable.
The internet bubble birthed the internet. The mobile bubble birthed the iPhone. The crypto bubble birthed bitcoin. And my guess is that the artificial intelligence bubble is going to birth a lot of compelling products as well.
Remember, humans are bad at predicting the future. People get ahead of themselves in these hype cycles. As Bill Gates famously said, “most people overestimate what they can do in one year and underestimate what they can do in ten years.” If you look back through history, the hype ended up being real — it just happened on a much longer timeframe than initially thought.
This brings me to the current hype cycle of AI. There is plenty of craziness that can already be identified. For example, Nvidia has the highest forward P/E of semiconductor stocks in the U.S.
As this Twitter user pointed out, now would be a good time to remember the famous Scott McNealy (former CEO of Sun Microsystems) statement to Bloomberg just after the dot-com collapse:
“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate.
Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”
So what has happened in the past to stocks trading at more than 10x sales? It hasn’t gone very well. According to GMO, stocks trading in this range have suffered against the S&P 500 index.
The hype cycle is a necessary part of building out new technologies and industries. The capital shows up, but you need to be very cautious of how you choose to participate. Things will become overvalued incredibly quickly — don’t be the person buying at the top of a market.
I have no clue if the AI bubble is going to peak this week, next week, next month, or next year. Timing markets is a fools game. But I do think it is important to identify bubbles as they form. People will make a lot of money through the full hype cycle, and thankfully real products and services will be built, but you have to be careful that you don’t follow the herd into a losing proposition.
Contrary to popular belief, we need more hype cycles. That would be a sign that innovation and new technologies are coming to market. It also means that billions of dollars will trade hands, which will print massive winners and losers. Frankly, this is a story as old as time. Learn from history and try to avoid some of the mistakes that others already made.
Hope you all have a great day. I’ll talk to everyone tomorrow.
-Pomp
🚨 I am hosting a private, invite-only conference for 500+ founders later this year 🚨
It is completely free to founders. I want to invite a few people outside my immediate circle. If you’re a founder, apply here & our team will be in touch if accepted:
You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.
https://pomp.substack.com/p/elon-musk-and-the-intelligence-arms
To investors,
Elon Musk’s Neuralink received FDA approval yesterday to begin conducting human trials for their brain-computer interface. This is another data point that highlights the acceleration of technology and it’s potential impact on financial markets.
Let me explain.
A brain-computer interface is defined as “a direct communication pathway between t…
https://pomp.substack.com/p/nvidia-debt-ceiling-twitter-and-airships
To investors,
There a few topics I want to cover today, so I’ve written shorter commentary on each one.
The stock surged more than 25% in after-hours trading after new guidance was given by CEO Jensen Huang. This was breathtaking to watch because a move of this size means that the already large cap company saw another $150+ billion added in just a f…
https://pomp.substack.com/p/jpmorgan-says-consumers-are-not-in
To investors,
JPMorgan Chase published their investor presentations and it reveals interesting data related to the health of consumers in America. The bank is reporting that consumer deposits are down from the pandemic high, but remain significantly higher than pre-pandemic levels. One of the largest areas of deposit balance growth is for lower income cu…
https://pomp.substack.com/p/introducing-the-bay-area-times
To investors,
Today, we are publicly announcing the Bay Area Times — a new product that uses data and visuals to analyze what is happening across business, finance, and technology on a daily basis.
The product has been in beta testing with 20,000+ readers for the last few weeks and the feedback has been phenomenal. Now we are ready for prime time, so you can subscribe here completely free.
Why are we building Bay Area Times? Simple — it is the news product that we wish we received every morning.
Narratives dominate the headlines on other platforms. Writers spend paragraphs regurgitating the same points over and over again. These legacy products take too long to read, they bury the data deep in paragraphs that are too long, and it is hard to recall most of the information that you read.
But what if you just want cold, hard facts? What if you want to see the data visualized in a single chart? What if you don’t have 10 minutes to read each morning?
This is exactly what Bay Area Times was built for.
Each morning an email goes out with approximately five big stories of the day. You get a visual (ex: chart, graph, or infographic) to clearly communicate what is happening, along with a few bullet points that summarize the rest of the data or facts.
No hidden agenda. No twisted facts. No biased narrative.
If you sign up for Bay Area Times, you will get visuals, data, and facts about the top stories of the day that can be read in less than 5 minutes. Everything is completely free.
Subscribe here: https://www.bayareatimes.com/
I am very excited about this launch, so please send your feedback after you have received a few editions of the newsletter. Tell us what you like or don’t like, including where we can improve. Your feedback is invaluable when building something like this.
Lastly, if you are interested in advertising to 20,000+ people from some of the top companies in the world, apply as an advertiser here: Click here
Launching new things is always fun. This one feels like it could be very valuable to people. Hope you enjoy it. Have a great start to your week. I’ll talk to everyone tomorrow.
-Pomp
🚨 I am hosting a private, invite-only conference for 500+ founders later this year 🚨
It is completely free to founders. I want to invite a few people outside my immediate circle. If you’re a founder, apply here & our team will be in touch if accepted:
You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.
https://pomp.substack.com/p/is-bitcoin-the-largest-insurance
To investors,
The concept of an insurance policy is straightforward. A contract is created between a policyholder and an insurer. The contract states that the insurer is legally required to pay for losses outlined by the insurance policy when they occur.
In exchange for having their losses covered, the policyholder must agree to pay a premium to the insurer over time. Policyholders pay for the right to insurance and only use it when necessary.
These insurance policies can cover many different types of assets or risks. There is fire insurance, flood insurance, home insurance, medical insurance, and many more. The largest insurance companies will offer policies for any and all of these use cases.
But maybe the largest insurance company in the world does not actually look like an insurance company at all.
This was the idea proposed to me by two investors yesterday at breakfast. Their point was that bitcoin could be the largest insurance company in the world.
Let me explain.
Some people are buying bitcoin as insurance against currency debasement. Others are buying bitcoin as sovereign default insurance. Some are buying because they want insurance against undisciplined monetary and fiscal policy. Some are buying for insurance against seizure. And others are buying bitcoin for insurance against economic censorship.
Just as there are different insurance policies that serve different purposes, Bitcoin is different things to different people. And just as most policyholders don’t want to ever have to use their insurance, most bitcoiners realize that bitcoin’s success will likely come on the heels of major issues in the legacy financial world.
But how exactly is bitcoin insurance? First, a bitcoin holder pays a one-time premium (cost to purchase their bitcoin), rather than an on-going premium. If the bitcoin holder bought early, the premium is cheap. If they wait to buy much later, the premium will likely be much more expensive.
Second, if bitcoin is going to be the asset that investors seek safety in during times of economic uncertainty or chaos, then there is an inverse relationship to catastrophe in the legacy financial system. Bad things happen in the legacy system, bitcoin gains in value. We saw this when high inflation hit the United States. We saw this in countries where seizure of assets became prevalent. And most recently, we saw this when banks in the United States were failing and bitcoin gained in value.
When confidence in the legacy system is rocked, people want an alternative that is outside the system. There are very few options these days, especially given how digital and hyper-connected everything has become. Bitcoin serves as a “payout” when bad things happen in the old system. The decentralized, global nature of the asset increases the resilience and accessibility for billions of people.
Another point worth mentioning — rather than have to trust that an insurance company will honor an insurance policy in times of crisis, bitcoin provides a programmatic digital product. You don’t have to submit your claim. The insurance company can’t make a unilateral decision whether to uphold the policy or not. Bitcoin is not owned or controlled by any one person or organization. You don’t have to trust anyone. The asset and network can be audited by anyone, at any time, from anywhere in the world.
Don’t trust, verify.
This idea of bitcoin as a large insurance company is noteworthy because it opens up the possibility that open-source software could introduce a new type of insurance against events that were previously uninsured. No insurance company is going to write you a legitimate policy against high inflation. They won’t write you a policy against government seizure of your assets. The insurance companies historically have not covered hyperinflation or economic collapse.
These tail risks are too obscure and too hard to measure. They don’t fit into the insurance company model. But bitcoin was built in such a way, and has been adopted by people around the world for specific purposes, that now make it clear that bitcoin is serving as an insurance against catastrophe.
I hope we never have to see bitcoin succeed because of outright failure in the legacy system. That would bring a level of pain that most people could not endure. We are talking double-digit unemployment for many years, people going hungry, no heat or power for families with young kids, violence becomes prevalent, etc. Just study any nation who has gone through a similar event and you will understand immediately why we should avoid those events as much as possible.
However, on the off chance that any of these economic risks occur, I think it is prudent to have some insurance. Bitcoin provides that insurance in a unique way. Given that you also don’t have to pay a persistent premium, but rather only a one-time premium to acquire the asset, the risk-reward seems heavily skewed in favor of the bitcoin holder.
If this insurance thesis is correct, you also don’t have to hold a large amount of bitcoin for it to work. A mere 1-3% allocation in a portfolio should be highly effective at countering the negative side effects of these economic risks.
Bitcoin has become a $500+ billion insurance product that is used by hundreds of millions of people around the world. There was no CEO, marketing team, board of directors, or insurance sales departments. It is a great product that serves a real pain point, which benefits from word-of-mouth. We have learned over the last few decades that those are the hallmarks of technology products that eventually dominate markets for decades.
Let’s hope the insurance expires worthless, but I wouldn’t be willing to bet my financial future on it.
Hope you all have a great weekend. I’ll talk to everyone on Monday.
-Pomp
🚨 I am hosting a private, invite-only conference for 500+ founders later this year 🚨
It is completely free to founders. I want to invite a few people outside my immediate circle. If you’re a founder, apply here & our team will be in touch if accepted:
You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.
https://pomp.substack.com/p/the-uk-attacks-bitcoin-but-actually
Note: You all should have received my latest book summary (Excellent Advice for Living by Kevin Kelly) in your inbox this morning. It is under our new book brand — The Bookrat. If you don’t see it, please go to your spam folder and move it to your inbox. You can also reply to the email to solve the problem for the future too. Enjoy!
To investors,
British lawmakers from the U.K. Treasury Select Committee published a report yesterday claiming that bitcoin and cryptocurrencies have no intrinsic value. The report also claims that these tokens are similar to gambling and should be regulated in a similar manner.
There are a number of problems with this line of thinking.
First, every investment is a gamble. You can make money or you can lose money. This is true in stocks, real estate, bonds, commodities, currencies, and crypto. Investors are professional risk takers. Free markets should be determining the winners and losers. The stock market is a casino with a different name. If one financial asset is gambling, then all financial assets are gambling.
Rather than put cryptocurrencies in the same bucket of entertainment games based on odds, they should be regulated as a tradable asset where people take both sides of a trade. We have rules for securities. We have rules for commodities. We have rules for currencies. Decide which asset each crypto token is and then regulate it accordingly.
The next problem is that the Committee report claims that bitcoin and cryptocurrencies have no intrinsic value. This is a dumb argument. In fact, it is a VERY dumb argument.
Intrinsic value is a concept that humans made up in an attempt to wrap their heads around financial instruments. What is the intrinsic value of a business? If you ask two different people, you can get two different answers. What is the intrinsic value of a barrel of oil today vs a barrel of oil tomorrow? Ask on different days and you’ll get different answers.
Bitcoin and cryptocurrencies obviously have value. The assets are worth trillions of dollars. Hundreds of millions of people around the world, from politicians to investors to businesses to individual citizens, continue to acquire and hold these assets. We may debate what the value of the asset is today, along with the value in the future, but it is crazy to think people can argue these assets have no intrinsic value at all.
So what is their argument on this front? Bitcoin and other crypto assets are not backed by anything.
This argument is incorrect though. It highlights the lack of understanding from the Committee members. Let’s use bitcoin as an example. The decentralized, digital currency is backed by computing power. To put it more directly, bitcoin is backed by the strongest computing network in the world.
This report out of the UK is arguing that the strongest computer network in the world has no value. As I said, this is a VERY dumb argument.
Computing power may be the single most valuable commodity globally in the digital age. Whether you agree with that or not, I don’t know a single serious person who will argue computing power has no intrinsic value.
This brings me to my overarching point — these types of ill-informed, bombastic reports from government agencies are actually having the opposite impact of their intended outcome. When people see the government being so wildly wrong, they lose confidence in the government’s ability to evaluate future technologies.
Most people, especially in countries outside the United States, have learned that their government can’t be trusted to look out for their best interest. When the country bans something, the people become more interested in it. We saw this happen with bitcoin in countries like Nigeria and Pakistan. As soon as the government became openly abrasive to the asset, adoption skyrocketed.
You can call it the Streisand effect. You can call it common sense. Whatever the name, this phenomenon is only going to accelerate in the information age where the internet increases transparency and the speed of information transfer.
My guess is the U.K. Treasury Select Committee report is going to actually serve as a marketing campaign for bitcoin and cryptocurrencies. The mainstream media will write about the report, which drives awareness of these assets. More people adopt them and learn to hold them for the long-term. History will be unkind to people who publish these reports, but more importantly — these reports serve as one of the greatest marketing opportunities for digital assets.
We should thank those who have the courage to publish such ridiculous work.
Hope you all have a great day. I’ll talk to everyone tomorrow.
-Pomp
Note: You all should have received my latest book summary (Excellent Advice for Living by Kevin Kelly) in your inbox this morning. It is under our new book brand — The Bookrat. If you don’t see it, please go to your spam folder and move it to your inbox. You can also reply to the email to solve the problem for the future too. Enjoy!
You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.
https://pomp.substack.com/p/the-fed-will-claim-victory-over-inflation
To investors,
A key part of the Federal Reserve campaign against inflation is the ability to claim victory. Regardless of whether you agree it should work this way or not, much of monetary policy is driven by narratives. This is why “inflation is transitory” was such an important meme in 2020 and 2021. It was a narrative that allowed the Fed to defend th…
https://pomp.substack.com/p/the-fed-said-the-quiet-part-out-loud
To investors,
The economists and Federal Reserve officials are saying the quiet part out loud now. Atlanta Fed President Raphael Bostic said this morning that he believes the organization should continue hiking interest rates, even if this means that the United States economy is pushed into a recession.
The comments came on Squawk Box during a segment abo…
https://pomp.substack.com/p/stanley-druckenmillers-case-for-cutting
Note: I am traveling a bunch this week so there will be no audio recordings from me. Most of my writing is occurring on planes, so I appreciate you all understanding. We will be back with audio recordings from me next week.
To investors,
Stanley Druckenmiller recently gave a presentation at the 2023 Annual Meeting for the USC Marshall Student Investment F…
https://pomp.substack.com/p/does-the-fed-have-a-green-or-red
To investors,
The Bureau of Labor Statistics reported a 4.9% increase in inflation year-over-year. This is down 0.1% from the last report and is the first time CPI has been under 5% in nearly 2 years.
This should be celebrated, right?
Maybe. The data has a few nuances that are worth unpacking. Yes, the year-over-year inflation measurement is coming down, …
https://pomp.substack.com/p/warren-buffett-talks-us-dollar-and
To investors,
The annual trip to the Mecca of Capitalism happened over the weekend. Berkshire Hathaway shareholders traveled from around the world to Omaha to sit in a stadium and watch Warren Buffett and Charlie Munger answer questions. There is nothing like it in the business world.
But the spectacle was far less important than what was said by two of …
https://pomp.substack.com/p/are-bank-deposits-safe
To investors,
The recent banking crisis has scared Americans. Nearly 50% of the population are reported to be “very” or “moderately” worried about the safety of their bank deposits, according to a new Gallup poll.
The study was done right after Silvergate Bank, Silicon Valley Bank, and Signature Bank each wound down or were put into receivership. These re…
https://pomp.substack.com/p/bitcoin-transactions-are-increasing
To investors,
Today is a guest post from Will Clemente, co-founder of Reflexivity Research, on the explosion of bitcoin transactions in recent weeks. You can subscribe to Reflexivity’s research by clicking here.
https://pomp.substack.com/p/dissecting-bitcoins-4-year-cycle
To investors,
Today is a guest post from Will Clemente, co-founder of Reflexivity Research, on the 4-year cycle of bitcoin. This is an in-depth analysis that should shed light on one of the big questions in the bitcoin community. You can subscribe to Reflexivity’s research by clicking here.
If you’ve been in the digital asset space for any non-trivial period of time you have likely heard many crypto market participants and market commentators refer to the “4 year cycle”. When participants first meet each other one of the first questions that is often proposed is “How many cycles have you been around for?”
In this report we provide an overview of what the 4-year cycle means, but more interestingly the underlying behavioral dynamics that shape this cyclicality and whether the phenomenon roots from the Bitcoin supply halving, macroeconomic factors, or self-reinforced human psychology.
The Bitcoin halving refers to when the rate that new Bitcoin issuance comes into circulation cuts in half. Currently there are approximately 900 Bitcoin that are introduced into circulation every day. This number will cut in half when the next upcoming halving takes place in late Q1/early Q2 of next year to 450 Bitcoin introduced into circulation every day. The 3 halvings that have taken place to date in 2012, 2016, and 2020 are shown below by the vertical dotted lines in the chart below as well as the drop in issuance shown in the orange line.
In theory, when the halving takes place – even if the demand for Bitcoin stays the same – the rate of new supply issuance should cause a larg enough supply/demand imbalance that price should have an upwards drift in the period of time following the event, which can provide an initial impulse of momentum that kicks off a multi-year Bitcoin bull market. The chart below shows the decline in the 90-day change of issuance relative to the going rate of issuance.
It is worth noting that even if this is true, the impulse that this supply/demand imbalance creates should diminish over time as the declining rate of issuance relative to overall circulating supply diminishes.
After this initial impulse that sparks momentum in Bitcoin’s price, the momentum of the bull market continues and liquidity within the crypto market disperses from Bitcoin as the largest (arguably most boring) solidified “value” asset into Ethereum and eventually down the risk curve into longer tail assets; a market dynamic referred to as breadth. This liquidity dispersion takes place until there are no longer enough new crypto market inflows to support the amount of assets being lifted by correlation to majors as well as new projects being created that compete with the overall pool of crypto asset supply (which is arguably just beta to Bitcoin).
Eventually this unsustainable behavior implodes in on itself and this entire dynamic reverses; liquidity flows back from the longer tail assets into Bitcoin and recently Ethereum (which is undeniable by seeing how well ETH/BTC held up throughout this bear market) and allows the cycle of liquidity flow to start anew from a place of concentration in value. For individuals coming from traditional finance this is not a new concept by any means, as typically riskier assets underperform in the early stages of a bull market and by the end outperform as active managers rotate down the risk curve to get more beta relative to “value” assets.
There is also an argument to be made that Bitcoin-native behavioral dynamics and market psychology may be playing the largest contributing factor to crypto market cyclicality. To break this down we’ll take a look at Bitcoin’s economics measured by blockchain data. Ultimately Bitcoin’s price paired with the profitability of the market participants that are active on the network are arguably the biggest contributing factor to what fuels Bitcoin’s behavioral dynamics.
From a first principles thought process, when market participants are sitting on a large amount of unrealized profit there is a higher likelihood that they will look to sell on any drawdown in fear of losing those unrealized gains. Market participants who buy after an asset is substantially up in price in a short period of time are usually (yes, this is a generalized statement) less sophisticated and/or convinced in the asset’s long term value proposition.
These factors combined make the holder base more fragile than the bedrock holder base during the depths of a bear market. Now that we’ve reasoned through how profitability of market participants should affect market cyclicality, let’s take a look at some real underlying Bitcoin economic data to validate/invalidate this idea.
Below we are looking at several metrics that fall under the category of cost basis. We’ve talked about realized price in prior reports and why it serves as a proxy for the aggregated cost basis of the network, but as a refresher; realized price is calculated by taking the price that every coin in circulating supply last moved and multiplying each coin by the price (derived from the timestamp of the coin movement) that the coin last moved. We can then take this value (realized capitalization) and divide it by circulating supply to get realized price.
This realized price value can be applied to the heuristics that the data science team at Glassnode have done to identify long and short-term holders based on their statistical likelihood to spent coins from their wallets and get short and long term holder realized price respectively.
Below you can see aggregated realized price in orange, long term holder realized price in blue, and short-term holder realized price in pink. Whenever the market is below all three of these cost basis’ it indicates that the network, in aggregate, is underwater (in a state of unrealized losses) and is therefore likely to capitulate. Conversely, whenever the current marginal trading price for Bitcoin vastly overshoots these cost basis’ this indicates that the market is in a state of large unrealized gains and therefore is likely to realize some of those gains.
To measure the delta between the current marginal trading price and the aggregated cost basis of the network we can look at the chart below which is market price divided by realized price. This shows the phenomenon we just described in a very simple oscillator.
Another way to visualize this same dynamic is by looking at an on-chain metric called net unrealized profit/loss, which is calculated as (market cap – realized cap / market cap). This is done because by subtracting realized cap from market cap we can gauge whether the market is in a state of unrealized profit or less and then divide this value by market cap to see the value on a relative basis to historical readings. Very similar to MVRV, as you can see whenever the metric reaches high readings, identified as euphoria-greed in blue, this has marked the top of Bitcoin multi-year cycles. This is because market participants are sitting on a large amount of unrealized profit. (You can also look at realized profit & loss, as opposed to unrealized, as a gauge for capitulatory periods)
With this data backing up our hypothesis we can conclude that tops are marked by high amounts of unrealized profits paired with lack of new buyers paired with market dispersion from Bitcoin to ETH to alts very similar to traditional market cycles where capital flows from deep value down the risk curve until new inflows can no longer support dispersion and the entire market implodes in on itself.
Another dynamic to keep an eye on is the quality of the holder base of Bitcoin. One way to do this is by looking at on-chain entities by the amount of supply that they hold. Below we contrast the amount of supply held by on-chain entities with over 1,000 BTC and on-chain entities with between 0.1-1 BTC.
In 2017 there was clear distribution from “whales” to “fish” but over the last few years we have seen what appears to be accumulation from smaller entities while whales have been offloading inventory. It is worth noting that the signal of this data appears to have diminished with the rise of custodial solutions that hold assets on behalf of funds and high-net-worth individuals. There is not much to actionably conclude from this data outside of the fact that smaller entities continue to accumulate BTC throughout its entire lifespan which makes Bitcoin’s supply distribution more favorable as a byproduct.
We can also look at the “quality” of the market participants holding Bitcoin based on their statistical likelihood to spend their supply. This data science was done by the Glassnode team, who realized that the likelihood for BTC to be spent dropped off dramatically after being held in a wallet for 155 days (5 months). This threshold is used to deem an on-chain entity a short- or long-term holder. Below we can see supply held by long term holders in blue and supply held by short term holders in red.
In bear markets we see a rotation of supply from short term holders to long term holders, which reflects short term holders capitulating their supply as well as aging past the 155-day threshold into long term holders. Heading into the bear market we see long-term holders distributing their holdings back to short-term holders (new market participants). This relationship between short- and longterm holders is a simplified visual of the underlying current that drives Bitcoin’s cyclicality.
Another important factor to consider is the role of Bitcoin miners on the overall market. Historically miners have been pro-cyclical forces for BTC as they accumulate BTC when profitable in the bull and become forced sellers in the bear market. However, miners’ impact on the Bitcoin market overall has diminished over time. Below we can see thermocapitalization, created as a proxy for mining resources spent; which is calculated by taking aggregated coinbase transactions multiplied by the USD value of each transaction at the time they were mined, compared to realized capitalization. This metric shows a decline in overall market impact from miners.
There is another argument to be made that Bitcoin simply follows the broader cyclicality of global macroeconomic dynamics. While the intent of this report is to focus on crypto native data, we’ll look at two macro indicators to make a general point. Below we can have overlay of Bitcoin’s price with PMI, which is a survey-based indicator of business conditions, which includes individual measures of business output, new orders, employment, costs, selling prices, exports, purchasing activity, and more. As you can see Bitcoin moves with a high correlation to PMI but shows divergences during major declines (like the current one) which can likely be attributed to shifts in liquidity conditions to combat the declining economic conditions reflected by the declining PMI readings.
Bitcoin also has shown a clear inverse correlation to the year over year change in the US dollar index DXY, which measures the US dollar relative to other fiat currencies. Declining dollar strength has historically been bullish for Bitcoin and increasing dollar strength has historically been bearish for Bitcoin.
These factors surely play a large role in Bitcoin’s price action and have been eerily closely tied into the timing of the Bitcoin 4-year cycle.
In conclusion, the factors that drive Bitcoin’s cyclicality are far more nuanced than one may think at first glance. The underlying shifts in the macroeconomic landscape that have coincided with Bitcoin’s halving make it difficult to differentiate which of the two is the larger driver and compartmentalize correlation from causation. However, with the halvings having a diminishing effect it is likely that the shifts in the global macroeconomic landscape play the largest role and will continue to play an increasingly large role in Bitcoin’s price action as it becomes a more solidified asset and the set of market participants shift.
Today is a guest post from Will Clemente, co-founder of Reflexivity Research, on the 4-year cycle of bitcoin. This is an in-depth analysis that should shed light on one of the big questions in the bitcoin community.
Subscribe to Reflexivity Research
Disclaimer: You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.
https://pomp.substack.com/p/first-republic-bank-and-stanley-druckenmiller
To investors,
There are two topics I want to cover this morning — First Republic Bank and Stanley Druckenmiller.
First Republic Bank was seized by regulators this morning and many of the assets have been sold to JP Morgan. This is the second largest bank failure in US history. Three of the four largest bank failures in history have happ…
https://pomp.substack.com/p/venture-capital-investments-in-bitcoin
Note: I have a busy morning so there is no audio recording today. We will be back to regular programming on Monday.
To investors,
The team at Trammell Venture Partners released a white paper on the state of venture capital investments in bitcoin-native companies. I found the information interesting, so I’ve pulled out the most noteworthy insights.
First, …
https://pomp.substack.com/p/narrative-violation-bitcoin-mining
To investors,
There is something very interesting happening in Texas. An immense amount of capital has been allocated to oil, gas, and renewable energy, which has led to a surplus of energy approximately one out of every seven days of the year. This means that so much energy is being produced that the citizens and corporations are not able to consume it …
https://pomp.substack.com/p/the-banking-crisis-is-not-over-yet
Note: A book summary went out this morning on The Dhandho Investor by Mohnish Pabrai. The sender is “The Bookrat,” so if you did not receive it yet please check your spam folder. Move the email to your inbox or respond to the email to make sure it doesn’t go to spam in the future. Thank you and enjoy.
To investors,
The second and third largest bank failures in US history happened earlier this year. As more large banks came under pressure around the world, there was concern that the contagion would spread out of control.
The Federal Reserve and US Treasury, along with their counterparts in other countries, stepped in to backstop customer deposits. This action was seen by many to not only be necessary, but a proactive approach to calming fears and reassuring citizens that the banking system was strong.
The government did not save equity or debt investors in these banks. This is exactly how capitalism should work. The risk-takers were wiped out for making a bad bet. The average citizen was protected and all is well in the world, right?
Not so fast.
There were a number of banks that did not require the government to save them and their depositors, but remain in a really bad situation. Take First Republic Bank (FRB) as an example. The stock price plummeted and customers withdrew billions of dollars as they watched Silicon Valley Bank fail. The largest banks in the country stepped in to contribute ~ $30 billion in deposits to FRB in an attempt to strengthen the prospects of survival.
Crisis averted for the time being. But we are right back where we started in recent days. The bank’s stock is down more than 90% year-to-date and it fell ~50% just yesterday after a disappointing report, which highlighted a 40% drop in customer deposits in Q1. Simply, First Republic Bank is not out of the woods and it is on the brink of collapse.
If First Republic Bank was to fail, it would be one of the five largest bank failures in US history. That would mean that three of the five largest bank failures in history have all happened in the last four months. Insane!
The potential collapse of First Republic Bank is important to pay attention to because it highlights the ongoing problem for financial institutions around the world. They are still holding hundreds of billions of dollars in debt that is underwater. The mark-to-market losses would render many of the organizations insolvent.
The only potential path out of this situation is for the government to step in and save these financial institutions. They can do it in a number of ways — they can try to manipulate the accounting rules as they have done in the past, they can print a significant amount of money, or they can let the banks fail while saving the depositors. I don’t think they will pursue the first strategy, so my expectation is for the government to print more money over the next 12 months.
We are not only facing a private sector bank crisis though. There are a number of central banks that are under immense pressure as well. Let’s use Argentina as the example — inflation is over 100% in the country in the last 12 months and the central bank just raised interest rates to 81%. Think about how crazy that is. Anyone holding pesos has lost 50% of their purchasing power in the last year. The definition of destroying a currency and your citizen’s savings.
Whether we are talking about central banks or the private banking sector, the pain is only just beginning it appears. Jason Karaian and Stacy Cowley wrote in the New York Times:
On Friday, Moody’s downgraded the ratings of 11 regional banks, citing “a deterioration in the operating environment and funding conditions.”
In calls with investors about their latest financial results last week, regional bank leaders tried to cast the crisis as a moment that had passed. The banks also distanced themselves from rivals still caught in the storm, like First Republic, which reported on Monday that it had lost $102 billion in customer deposits.
The leadership of the banks continue to say everything is fine. Moody’s is downgrading many of them. First Republic Bank is on the brink of failure. And it feels like the average citizen in America is asleep at the wheel. They believe the banking crisis has been thwarted. We have all moved on.
That is a dangerous situation. The banking crisis is still underway. It doesn’t mean that catastrophic failure is inevitable. In fact, I would argue that the banking sector will survive this test and thrive on the other side. The government and central bank are heavily incentivized to protect depositors and prevent a full-on bank run of the system.
They don’t have very many tools to accomplish that mission though. So turn on the money printer and watch it go BRRRR! Markets need liquidity. Everyone knows the Fed was going to create tighter financial conditions until something breaks. It looks like we are watching many of the largest banks around the world buckle under the pressure. The question is — has there been enough pain? Or will the Fed seek more before they waive the white flag?
Your guess is as good as mine. Hope you all have a great day. I’ll talk to everyone tomorrow.
-Pomp
You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.
https://pomp.substack.com/p/is-crypto-dead-in-america
Note: Tomorrow you will receive the next installment of our book summaries, which is now called The Bookrat. Many of you reported the email went to spam last week, so please search “Bookrat” in your spam folder and move it to your inbox. You can also respond to the email and that will solve the problem in the future as well. Thank you.
To investors,
Social Capital’s Chamath Palihapitiya recently said on the All-In Podcast that “crypto is dead in America.” He was referring to the recent increase in regulatory scrutiny, including more enforcement actions from the SEC.
There is a lot of truth to what he is saying. It is hard to deny that regulatory pressure has drastically ramped up. It started with the collapse of Three Arrows Capital and Terra/Luna, continued with the unraveling of the alleged fraud of FTX, and hit a climax with the second and third largest bank failures in US history earlier this year. Whether you believe crypto is the culprit or not, the door has opened for regulators to apply more pressure to the industry and they are taking advantage of the opportunity.
Before we continue, it is important to call out the difference between bitcoin and the rest of the crypto industry. Bitcoin is the only digital asset that has been labeled a commodity by every US regulatory organization. They all agree that bitcoin does not meet the security standard and therefore is not subject to those rules and regulations. The rest of the crypto industry, from Ethereum down to the smallest asset, is still widely debated — are they securities? Are they commodities? Are they currencies? How should they be regulated? Who has jurisdiction? What is the proper framework for entrepreneurs who want to participate in the industry?
There are more questions than answers.
Palihapitiya has a good point that “the United States authorities have firmly pointed their guns at crypto.” The critics of the crypto industry believe this is a positive development. Their argument is that Gensler and the SEC should have acted long ago, because it is obvious that crypto assets are securities and industry players have been skirting the rules for more than half a decade.
The proponents of the crypto industry vehemently disagree. Some will argue that the introduction of decentralization means these assets don’t meet the securities standard, while others will argue that these new assets need entirely new regulatory frameworks. As an example, Coinbase announced last night that they are suing the SEC over the organization’s refusal to answer a rule-making petition that was filed last summer.
There is nuance to this debate that usually is lost though.
Most people will focus on the technical rules and who wins in court. They will look at the data, they will read through the various public filings, and they will scrutinize the SEC’s actions. This is the quantifiable approach to measuring impact of crypto regulation in the US.
However, it appears that Palihapitiya is referring to the qualitative impact, which is more important in my opinion. Regardless of whether the SEC ends up winning their various enforcement actions, or if there are new rules passed or not, the posture of the US government and their regulators has become abrasive. We have even seen US politicians suggest banning this new technology. The abrasive stance deters entrepreneurs from building their companies in the United States or serving customers with US citizenship.
We have seen a number of companies move off-shore in the last few years. Hundreds of founders have moved to places like Dubai, Singapore, or various islands with more friendly regulation to start their next business. And Coinbase has even alluded to the fact that they could move their business to a new jurisdiction if the lack of clarity continues in the US market.
This is probably what Palihapitiya means when he said “crypto is dead in America.” It is no longer clear that the US is the best place to start a company or project in this new industry. In fact, many people would argue that it is better to start those businesses elsewhere in the world.
The reason this is important is that the crypto industry is not going to die. If the US continues to be abrasive, the industry will shift to locations outside the country. I have long been a proponent of founders starting, building, scaling, and exiting their companies in America. The rule of law, access to capital, and dominant culture have been tailwinds for entrepreneurs. But the market is shifting under our feet and there are numerous data points that tell us people are changing their minds.
Americans have to remember that we live in a global world. Facebook only had ~ 15% of their users in the US when I worked at the company in 2014/2015. I am sure that number is much lower now. Bitcoin is similar — majority of mining hash rate is outside the US and there are hundreds of millions of people who participate in the crypto industry from international markets. In some ways, the global nature of these assets is what makes them attractive.
If that doesn’t convince you, understand that our country’s adversaries see the US’ abrasive stance as an opportunity. Bloomberg reported that China’s state banks have been opening their doors to crypto companies:
“Chinese banks have been directly reaching out to crypto businesses over the past few months, adding to signs that the city’s push to become a major digital asset center has backing from Beijing, even though trading of crypto has been banned on the mainland for well over a year.”
At the same time that the US is ramping up regulatory pressure and pushing crypto companies outside our borders, the Chinese are opening up their banking system to those same companies? That seems more than a coincidence.
Chamath Palihapitiya nailed it when he said “crypto is dead in America.” That does not mean it has to stay that way though. It would only take a few small decisions from our politicians and regulators to return to embracing new technology, which would provide the foundation for the US to re-take the leadership role on a global stage.
I remain optimistic about the United States’ position over the long run. It just may be a bumpy ride along the way.
Hope you all have a great day. I’ll talk to everyone tomorrow.
-Pomp
You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.
https://pomp.substack.com/p/myth-busting-in-the-mortgage-market
To investors,
There is significant movement in markets during times of financial chaos and uncertainty. One area where there seems to be numerous changes occurring at the moment is in residential mortgages. Over the last few weeks, two different stories went viral on the internet:
The introduction of a 40-year mortgage product
High credit score borrowers p…
https://pomp.substack.com/p/bitcoin-adoption-hits-an-all-time
To investors,
Bitcoin is up 70% in USD price to start the year. This appreciation can be attributed to a number of different drivers. Here are a few that I have identified:
Bitcoin is used as a hedge against potential US default related to debt limit crisis
Bitcoin is used as a hedge against a worsening of the banking crisis
Bitcoin is used as a way to fron…
https://pomp.substack.com/p/the-incoming-debt-crisis-for-average
To investors,
The economic situation for millions of Americans has been worsening for over a year as the Federal Reserve tightened financial conditions. This story has been shared across Twitter and the mainstream media by different market participants, but critics have argued that various data points (strong employment, falling inflation, etc) disproved…
https://pomp.substack.com/p/gary-gensler-testifies-before-the
READER’S NOTE: Many of you have asked me when you will receive more book summaries from the books I am reading each week. I am splitting the content into two separate emails. You will continue to receive my commentary on finance and economics here in The Pomp Letter. You will receive the book summaries once a week through a separate email we are launching today called The BookRat.
Separating the content into two dedicated emails is much clearer for readers. You are auto-subscribed to both emails if you are reading this note. If you only want finance and economics content, you can unsubscribe from The BookRat later today when you receive the first email. If you only want book summary content, you can unsubscribe from The Pomp Letter below. Hopefully this will help clear up the confusion and empower each of you to choose what content and information you receive in your inbox.
To investors,
SEC Chairman Gary Gensler testified in front of the House Financial Services Committee for four hours yesterday. His message was consistent — many crypto companies and projects are violating regulatory rules and need to come into compliance.
This is a position that Gensler and his team at the SEC has continued to repeat in various interviews, speeches, and materials on their website. Many of the Republicans on the Committee took issue with this position. To say the questions and testimony got heated at moments would be an understatement.
For example, Representative Patrick McHenry persistently asked Gary Gensler to explain whether Ethereum, the second largest digital asset, was a security or a commodity. Gensler would not directly answer. This could be because Gensler does not know how to categorize it, does not want to categorize it, or believes it is valuable to refrain from answering.
Either way, the fact that the Chairman of the SEC did not answer with “yes” or “no” highlights the frustration that many people in the industry have. The actual answer is almost less important than an agreement from regulators on a single answer. If the conclusion is “yes, Ethereum is a security,” then market participants understand how to proceed. If the conclusion is “no, Ethereum is not a security,” then market participants understand how to proceed. But the lack of clarity is tough for everyone.
Another interesting moment is when Rep Bryan Steil asked Gensler whether he owned any bitcoin or cryptocurrencies. Gensler said “no.” Steil went a step further and asked Gensler whether he has ever owned digital assets, including during the time he was teaching crypto courses at MIT. Gensler said no to this as well.
This answer highlights the challenge of regulating innovation. It is hard to understand something without using it. The idea that we have regulators who are actively making rules for something that they have never used seems confusing. Additionally, to have professors at universities teaching courses about technologies they have never used highlights the absurdity of academia.
One of the most explosive parts of the testimony was when Rep Tom Emmer pressed Gensler on the fact that China’s CCP is planning to open their banking apparatus to US-based crypto firms in an effort to capitalize on our country’s hostile posture towards the industry. Gensler continued to stick to his talking points that various crypto companies are operating outside the rules and should come into compliance.
Regardless of whether you agree with Gensler or not, this exchange highlights the fact that bitcoin and cryptocurrencies are going to thrive globally with no regard for US securities law. The United States has a choice to make — do we want this innovation to happen in the US or elsewhere? The rules we create and apply to the industry will determine that answer.
Lastly, Rep Warren Davidson revealed that he is putting forward legislation to remove the Chairman of the SEC and restructure the entire organization. The new structure would create the role of Executive Director who reported directly to the board. Davidson’s argument is that the current structure, along with Gensler’s body of work, has created more harm than good.
It remains to be seen whether there will be support for Davidson’s proposed legislation. A complete restructuring of an integral organization like the SEC would be difficult and controversial. But there have been much bigger, more complex things that have occurred so never say never.
I want to leave you with one more thought this morning — SEC Chairman Gary Gensler was grilled for four hours yesterday. Most of the viral video clips and various media coverage was focused on the questions coming from our public officials, rather than on specific answers from Gensler. In some way, that is a win for Gensler and the SEC. They didn’t necessarily make any mistakes during the testimony.
Gensler stuck to his view that the existing securities law covers these new technologies. He believes majority of the crypto companies and projects are violating regulations and they need to come into compliance. There are millions of people who disagree with him, but ultimately it may not matter — Gary Gensler and the SEC are the ruling body. They have the ability to create enforcement actions and impose their view of the world on the market.
Many people throughout the crypto market continue to call for “clarity.” I am quick to remind them that clarity simply means you will know what the rules are, but it does not mean you will get the rules that you want. That is an important distinction.
Hope everyone has a great day. I’ll talk to you tomorrow.
-Pomp
My team and I have helped approximately 2,000 people get a new job in the bitcoin and crypto industry. A big part of our success has been a training program we run, which teaches people the fundamentals of the industry and technology. If you are interested in transitioning into this new sector, I recommend you check out the training program for our April cohort.
You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.
https://pomp.substack.com/p/white-collar-workers-are-under-fire
To investors,
The rise of automation has long been viewed as a disrupter of blue collar workers. Critics warned robots, machines, and self-driving cars would displace hundreds of thousands, if not millions, of workers who were the most vulnerable in our society.
That sounds horrific, but is it true?
The recent developments in artificial intelligence sugges…
https://pomp.substack.com/p/compete-or-die
Note; I am traveling today so this letter is shorter than normal and there is no audio recording from me. I will be back to normal programming on Monday.
To investors,
Barry Diller recently gave an interview to Lydia Moynihan from the NY Post. He talked about his concerns related to artificial intelligence and the potential risk to the media industry.
Ther…
