#1091 David Puell On If The ETH Merge Will Affect Bitcoin

David Puell runs On-Chain Research at ARK Invest. In this conversation, we discuss Bitcoin's recent performance, how the macro economy is affecting Bitcoin, long-term vs. short-term holders, Ethereum's merger, and what risks are associated with this move. ======================= Amberdata provides the critical data infrastructure enabling financial institutions to participate in the digital asset class. We deliver comprehensive data and insights into blockchain networks, crypto markets, and decentralized finance. Download our Digital Asset Data Guide at https://www.amberdata.io/pomp ======================= If you’re trying to grow and preserve your crypto-wealth, optimizing your taxes is just as lucrative as trying to find the next hidden gem. Alto IRA can help you invest in crypto in tax-advantaged ways to help you preserve your hard earned money. Alto CryptoIRA lets you invest in more than 200 different coins and tokens with all the same tax advantages of an IRA. They make it easy to fund your Alternative IRA or CryptoIRA via your 401(k) or IRA rollover or by contributing directly from your bank account. There are no setup or account fees, and it’s all you need to do to invest in crypto tax free. Let me repeat that again:You can invest in crypto tax free. So, ready to take your investments to the next level? Diversify like the pros and trade without tax headaches. Open an Alto CryptoIRA to invest in crypto tax-free. Just go to https://altoira.com/pomp ======================= The number one name in NFT domains and the world’s most powerful wallet are teaming up to bring something new to the crypto and Web3 world: That’s right, Unstoppable Domains and Blockchain.com partnered to create NFT domain names ending in . Blockchain. It’s the perfect ending to show that you’re a believer in a decentralized future. The Blockchain.com community can get one, for free by signing up for the waitlist here. Free NFT domains provide all the benefits of premium Unstoppable Domains, including fee-free, lifelong ownership. Don’t have a Blockchain.com wallet? No worries, these new domains are available to everyone for as low as $5. Either sign up for a free blockchain.wallet or visit Unstoppabledomains.com to buy your domain today. ==================

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. David Puel works on on-chain research at Arc Invest. In this conversation, we review their Bitcoin monthly report. We also talk about the BTC ETH trading pair, and we look at the merge. David is one of the best on-chain analysts in the world, and I really enjoyed talking to him. Before we get into this episode though, I first want to talk about our sponsors. This episode is brought to you by Amber Data. If you're a financial institution entering the digital asset class, you'll need access to granular on-chain and market data from multiple venues to power research, trading, risk management, and compliance. Amber Data delivers comprehensive data and insights

• 0:45Anthony Pompliano?

  into blockchain networks, crypto markets, and decentralized finance, empowering financial institutions to apply traditional finance methods to digital assets. Amber Data eliminates the infrastructure setup, integrated challenges, and maintenance headaches to access digital assets data, reducing cost and time to market to enter the digital asset class. Learn more and download their digital asset data guide at www.amberdata.io/pomp. Again, that's amberdata.io/pomp. Go check them out today. This episode is brought to you by Alto IRA. They can help you invest in Bitcoin and crypto in a tax-advantaged way. That helps you preserve your hard-earned money. Alto's crypto IRA lets you invest in Bitcoin and over 200 other different coins and tokens,

• 1:28Anthony Pompliano?

  and it has all the same tax advantages of your traditional IRA. There's no setup or account fees, and it's all you need to do: invest in crypto tax-free. Let me repeat that again: you can invest in Bitcoin and cryptocurrencies tax-free. So, are you ready to take your investments to the next level? Diversify like the pros and trade without tax headaches. Open an Alto crypto IRA to invest in Bitcoin and crypto tax-free. Go to altoira.com/pomp. That's A-L-T-O-I-R-A dot com slash pomp. Start investing today. This episode is brought to you by Unstoppable Domains. They've partnered with blockchain.com to create NFT domain names ending in .blockchain. It's the perfect ending to show that you're a believer in a Decentralized future.

• 2:11Anthony Pompliano?

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• 2:42Speaker 01

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 3:06Anthony Pompliano?

  All right, guys. Bang, bang. I've got David here. David, you guys recently put out at ARC a brand new monthly update for Bitcoin. And you also talked a little bit about the merge. And I thought a great place that we could start was some of the on-chain analytics, which you're very, very familiar with. And when we go ahead and we take a look at these on-chain analytics, you can see that the 200-week moving average continues to serve as kind of this great point of support for Bitcoin's price. Talk a little bit as to why this is so important and why you guys continue to evaluate this.

• 3:38Speaker 02

  Well, you can look at it on several lenses. And it's in essence a four-year trend, you know, related to the halving cycle, which is hypothetically a very important time horizon for Bitcoin and therefore all crypto. Historically, that, you know, the first instance of the 200-week moving average was around 2015, I believe. And it has marked reliably bottoms for all the cycles in Bitcoin so far. And including, you know, major crashes like the COVID meltdown in 2020. So it's a very important, all the technical metric, a very important metric for us to keep just track of a general

• 4:24Speaker 02

  status of the overall market structure and primary trend.

• 4:28Anthony Pompliano?

  And then when we look at something like the Bitcoin investor cost basis, one of the things that's fascinating to me is the investor cost basis was actually higher a couple of months ago, but it's trended down as the price has come down and Bitcoin still sits above that current investor cost basis. Talk a little bit about the importance of that serving as support and also that it is a moving target, right? It doesn't just kind of always go up. In these situations, it does go down and why that's important as well.

• 4:54Speaker 02

  Right. So the investor cost basis is calculated as follows, right? You take realized gap, which is the general cost basis of the market, meaning you aggregate the all coins at the point where each last moved or was last bought, right? And then from that you subtract thermal cap or thermal price, which is in essence the cumulative sum of minor revenue through time. So what you're basically doing is capturing the actual delta in all moved coins and subtracting minor activity out of your question. And what you're left

• 5:34Speaker 02

  with is actual investor cost basis, which if you see the graph there is reliable for marking bottoms throughout the history of Bitcoin. Now importantly, we have touched that threshold twice in the last few months. It's currently at 19,000 and change. So it's very important to us from a first principles and also battle tested backward looking basis to determine a potential bottom for the cycle, given that investors would like to offend that level severely, given it's important.

• 6:18Anthony Pompliano?

  Got it. And then if we look at the long term versus the short term cost basis here, those seem to be crossing over. And I know that you guys call it in the report that that tends to mark a cyclical bottom?

• 6:29Speaker 02

  Yeah. So sometimes you want to look for specificity in terms of timing on when to, let's say, look for the bottom or whatever approximation to that. So I'll first go through explaining a little bit of what determines a short term holder or the short term holder cost basis and the long term holder equivalent of that. Long-term holders or the coins of that cohort are basically the Bitcoins that haven't moved in 155 days or more.

• 7:07Speaker 02

  And conversely, short-term holders are coins or supply that has been moved in the last 155 days. Now, this number is not arbitrary. It's actually quite important, given the history of Bitcoin. There's some statistical analysis that has been done on the metric that determine that that 155 threshold, and it varies from analyst to analyst, sometimes it's on 40. I've seen iterations on 120, but overall, that six to five to six month time horizon is very important. Because historically, the probability of a single coin moving after that 155 day threshold

• 7:50Speaker 02

  drops severely to, let's say, less than 3% overall. So dormancy of coins in Bitcoin have a Lindy effect. And that Lindy effect goes exponential after that 155 day horizon. So what we do here is determine, okay, we have our respective supply cohorts, long-term holder, short-term holder, and then we assign a cost basis to each. And what we found, going back to the three last major cycles, so Bitcoin is that whenever

• 8:27Speaker 02

  the short-term holder cost basis, which is usually higher than the long-term holder cost basis, because it's packed with speculators and that sort of market actor.

• 8:39Speaker 02

  When that short-term holder cost basis goes below the long-term holder one, it marks a very reliable bottom cyclically. Now, our assumption from first principles is that this happens because

• 8:56Speaker 02

  The market has reached an equilibrium between speculators and actual long-term holder market participants and also the cost base and the supply starts to shift from

• 9:11Speaker 02

  short-term holder activity and holding into the long-term holder bracket. As you can see in the chart, when you have that crossover event, it's very reliable not only for suggesting a general area of bottom, but also like precisely picking out timing and environments where you can, you know, upgrade your bullish conviction. Now, this goes, we're matching this chart to to the following one, which would be the long-term holder of supply. And we're already seeing this take effect from another perspective. So what you're seeing here is the long-term holder supply,

• 9:52Speaker 02

  which is about, it's about 70% of total outstanding supply today.

• 10:01Speaker 02

  As of the publication of the Bitcoin Monthly, it hadn't reached all-time highs. It's now a brand-new all-time highs, which increases the conviction overall. You know, being, you know, the supply getting squeezed, getting illiquid, and becoming even more inelastic. Now, going back to the crossover event, the publication of the Bitcoin Monthly a few days ago, that number, the delta between short-term holder and long-term holder was about $2,500. Now it's about $900. So it's, you know, coming up fast.

• 10:43Anthony Pompliano?

  When you think about this long-term holder supply, we continue to see it reach close to, if not all-time highs. We're closing in on 14 million Bitcoin being held by long-term holders. Obviously, only 21 million ever, there's about 19 million or so that are out into circulation. Is there a point where there becomes concern about Bitcoin being too illiquid? Like, just nobody will spend it and everyone's just holding it long-term? And so like, the number could get too high? Or is it just classic number-go-up technology? And the more people are holding, the less liquid the market, the more increase in demand it leads to a price increase in the future?

• 11:19Speaker 02

  There is some truth to that latter statement, but...

• 11:24Speaker 02

  Regardless of anything, we expect a general equilibrium in the market between several factors. One is issuance being less and less over time. We'll know that part. So therefore, the asymptotic curve in total circular in supply over time, we've seen that chart, very familiar with that. But most importantly, other factors are, you know, show some interesting signals. So for instance, there's less issuance coming into the system, but there's less coins being lost because they're more valuable over time, right? So that increases a little bit the liquidity

• 12:08Speaker 02

  of Bitcoin overall. And on top of that, both illiquid and long-term holder supplies are increasingly...

• 12:22Speaker 02

  So basically, you're having less issuance over time. In addition, you're having less lost coins, so that increases a little bit the overall number of coins that could be traded at a given time. But on top of that, given that Bitcoin is more valuable, illiquid and long-term supply are also being increased over time, given that Bitcoin has more value historically. So the market is actually noticing that. They're losing less coins, but they're saving them instead, which is a very important observation that I think most people are not aware of.

• 13:01Anthony Pompliano?

  And then if we go and we look at the ETH BTC trading pair, you guys explicitly call this out as having outperformed Bitcoin. Talk a little bit about the trading pairs in general. Why is this one so important? And then what is the significance of it having outperformed something like Bitcoin?

• 13:18Speaker 02

  Yeah, so let's talk about the merge. Despite that, the reports call the Bitcoin monthly, right? The impact of Ethereum in the overall crypto market and therefore relative price action to Bitcoin is pretty much uncontested right now. And what we've seen, as you see in the chart there, is starting in more or less 2021, a trading, a trading range has been established in the ETH BTC pair and hasn't not left that trading pair so far. Now, the upper bound of that trading pair is very near

• 13:57Speaker 02

  the all-time highs seen in the latest 2020, 2018, I believe. So we're, we're watching that break, breakup, breakup in, in case it happens. In terms of the mergers and narrative and also a fundamental event for the history of Ethereum. If, of course, it, it, it imposes tail risk in the whole system, but expecting success on, on the transition from proof of work to proof of stake, we, we expect that narrative to be very in favor of Ethereum and therefore overall crypto sentiment and the technology, the blockchain technologies as a whole. So we're keeping an eye on that.

• 14:43Speaker 02

  There, there's a lot of talk of, you know, the merge being a sell the news or in this case, sell the event. Event. So we're keeping a close eye on that. Watching how price actually behaves relative to such an important occurrence.

• 15:00Anthony Pompliano?

  When you begin to look at how derivative traders are handling the merge, it's always fascinating to see like, what is the market doing? We know the merge is coming. We know that people are talking about it. We know that it is going to create change, whether you think it's a good change, a bad change, whether it's going to prove the point of the critics or the proponents, like change is coming. How are traders actually playing this?

• 15:23Speaker 02

  So you can see Ethereum is the most hedged asset in the crypto market right now. And that's

• 15:32Speaker 02

  Um, unquestioned and also not surprising. Uh, you can see it both in the futures market and the, and the options market. So in terms of the futures market, you have backwardation, which is extremely uncommon for Ethereum, uh, and Bitcoin as well. Um, most of this is, um, the assumption is especially large, large traders are, um, uh, hedging their position, um, and, you know, selling contracts and, and buying spot there for, um, producing backwardation in the asset, a major backwardation. Uh, in terms of odd options, you know, open interest in that market cohort is at all time highs, even valued in Ethereum, um, to forget about dollar valuation.

• 16:14Speaker 02

  So in terms of Ethereum, you see the, the, the green line and the chart there, it has been extremely consistent, right? Um, you, you pretty much see it go up and then slightly down as expirations amount over time since 2020. But since January 2022, you, you see a, a, a steep increase in Ethereum's open interest, you know, as the merge gets priced into, um, the, the market structure and the general sentiment in the options market.

• 16:45Anthony Pompliano?

  And if we stay on this topic for a second, obviously the merge is, uh, uh, something that the proponents would look at as a positive catalyst, uh, but there's been some negative catalysts as well. Uh, I had somebody on the, uh, podcast, uh, who is, uh, an attorney. He was talking a lot about first amendment, uh, and things around tornado cash. And that brings us to, uh, kind of these OFAC sanctions and, and some of the, uh, uh, tools that are being used to address whether it's in the DeFi world, um, but even a, a concern that maybe it will come for privacy, uh, maybe it will come for even in the Bitcoin community. Like, how do you all think of these OFAC sanctions and, and their efficacy, uh, in tamping down maybe some of the excitement or use of, uh, of these technologies?

• 17:28Speaker 02

  Certainly a, a concern. I think fundamental privacy and therefore responsibility. Is, uh, I believe one of the major concerns regarding all crypto and of course it applies more to Ethereum, given that, let's say, an OFAC sanction can apply to, uh, stake, major staking pools in the system that have to comply with those sanctions. Uh, but it still applies to Bitcoin in the sense that UTXOs can get blacklisted and therefore you can see a goldification of it, uh, where, you know, certain coins that haven't been involved with nefarious activity could be deemed untradable, especially under

• 18:10Speaker 02

  US regulation and therefore Bitcoin uses fungibility, right? So those coins or ETH or whatever, uh, lose value, right? So instead of trading on market value, you can see them trading at, you know, a 10% discount or whatever the market assigns to that. So we're keeping a close, uh, we're keeping a close eye on that. Um, we, we are especially as the merge because the transition to proof of state does increase, um, that risk, especially for Ethereum, regardless of being a risk for all crypto.

• 18:44Anthony Pompliano?

  And as we look at this, the piece to me that becomes the most interesting is you specifically called out centralization and the ability to resist some of this is a test for centralization. Uh, how do you guys think about, is there a line in the sand, hey, you have to be this decentralized? Uh, is there a way to measure centralization versus decentralization? Uh, or is it more so, uh, you try to evaluate it given the information you have, but there's no right answer?

• 19:12Speaker 02

  Um, there's great nuance on that because you have several dimensions of decentralization that you have to consider, right? You have ownership is one, which I think it's overstated, meaning what if a single entity owns a lot of Bitcoin or ETH or whatever and then dumps on the market? Still at a protocol level, it has no effect, right? It only has effect on, on price activity and, and the market as a whole. On a protocol level or a game theoretical economic level, it's more concerning. So you have to look, but ultimately I think. Uh, so far, uh, we have some research on that coming up, uh, in, in, in few months.

• 19:51Speaker 02

  But ultimately, I, I, I believe that the cluster on a node is the most basic and yet importer, important or fundamental metric to determine this integration. This, this argument call comes from Post, uh, stores. And, um, I believe it's, um, crucial to determine the, um, the, you know, the possibility of, of a network getting attacked and a protocol level. Why? Because the cheaper the node, um, the, the easier to combat, uh, an attacker with a lot of capital, right? Or hashing power or staking power in the case of Ethereum soon.

• 20:32Speaker 02

  Um, so we have research on that, uh, coming up in the, uh, in, in the next few months. So, um, we'll let you guys know, um, as that publication approaches.

• 20:44Anthony Pompliano?

  Awesome. The last thing that you touched on in the report, uh, which is kind of the talk of all of financial markets is, uh, the macro environment and inflation continues to, uh, kind of accelerate. Um, the Fed seems to be relatively ineffective in getting inflation down, uh, although they are creating tighter financial conditions. What is your read or, or why include this in the report? Is it just that the macro environment is kind of the most important thing right now? Or there are other considerations as to, uh, how maybe the macro environment and inflation interact with Bitcoin or cryptocurrencies?

• 21:16Speaker 02

  Yeah, it's important to have the, the, the macro session. Like you, you can argue, you know, high conviction that the macro, uh, as an overall, um, signal has become extremely, if not the most valuable, uh, source of information for determining, uh, Bitcoin and crypto price action as well. Uh, this since COVID, the COVID meltdown, March 2020. Um, this was a period where most of the price discovery of the asset or crypto asset, especially Bitcoin, Ethereum, and therefore through correlation algorithmic, uh, trading and all that crypto as well. This was the moment where institutions, especially US institutions, starting to participate

• 22:01Speaker 02

  and partake in, you know, huge amount of the price action of Bitcoin on a day-to-day basis. This hasn't stopped. That's why you've seen, you know, the correlation, it pretty much tells you what's the, how much of the, you know, the change of one asset, it's being impacted or inferred from another asset. And you've seen this with Nasdaq and S and P being highly correlated and rise versus Bitcoin and Ethereum in the last since COVID. So we're keeping an eye on that. In the general context, the narrative is pretty much the same.

• 22:37Anthony Pompliano?

  As you guys look at the home inventories, you've called out that it is indicating a recession. Talk a little bit about the idea of a recession. Obviously, we have some folks, whether it's at the central bank or in politics, that say, we're not in a recession, look at the labor market, look at other, you know, data points. But then folks from the finance market, they seem to be much more convinced that yes, this is a recessionary period and there could be more pain ahead. How do you kind of just think through this?

• 23:09Speaker 02

  Well, that's the, you know, we entitled it, we named it the Fed is between the rock of inflation and hard place of recession, right? There seems to be no, on a monetary policy level, there seems to be no way out of either inflating prices and crashing the market and, you know, stagnating growth severely in the economy. So, sorry about that. So.

• 23:46Speaker 02

  It pretty much determines Powell's decision, who, you know, seems to be evoking Volcker severely in the last few months. So seems to be very much with a high intent of tampering inflation, even at the risk of having negative growth and therefore a very severe recession. We believe this is the most bearish case for Bitcoin at this point. Despite, you've seen the on-chain metrics and a few technicals, we are severely oversold on a cyclical level.

• 24:26Speaker 02

  Despite that, the correlation between equities and crypto is so severe that we stay cautious on what the macro and therefore, you know, CPI prints and Fed meetings determine in the months going forward.

• 24:43Anthony Pompliano?

  And as you think about Bitcoin's performance so far, you know, is it holding up compared to the macro environment? Or do you feel like, you know, it's kind of suffered at the hands of the Fed, just like every other asset? And if the Fed continues for another 12 months, we should expect more pain in the Bitcoin market? Or how do you kind of think about that relationship moving forward?

• 25:04Speaker 02

  One scenario is just chop until, let's say, next year. Pretty much looking for peak inflation, right? Statistically, equities bottom exactly four months before peak inflation, right? So that's a major event we're looking into. But it's still up in the air when that happens. A lot of macro implications going into that and how the CPI is calculated. There's a lot of data on that, of course. And on top of that, how, you know, how Powell determines risk on and risk off environments going forward.

• 25:42Speaker 02

  Now, interestingly, specifically for Bitcoin, an interesting data point that we found on a four-year basis, if you take a tagger off that, meaning a confident annual growth rate on a four-year time horizon, for the first time Bitcoin after being between, let's say, 100

• 26:07Speaker 02

  And 200 and change percent range for about six years on that Gagger. That dropped this year for the first time to between 30 and 100%. So this was expected to some extent, meaning Bitcoin, even the price is an escrow. So you're going to have diminishing returns, so you're going to increase it at an administrative. It seems to be, but for the first time, we're noticing this year in terms of overall performance, metrics, CAGRs, chart ratios, et cetera.

• 26:43Speaker 02

  You know, Bitcoins growth still increasing, but at an administrative rate. So I just thought that was interesting overall.

• 26:53Anthony Pompliano?

  Yeah, it's absolutely fascinating. When you guys put these out, where can people find the monthly reports that you're going to continue to do each month?

• 27:01Speaker 02

  Yeah, you can look for them in art-invest.com. We have a dedicated crypto section where you can like pretty much download and subscribe to the Bitcoin monthly. We have upcoming activity in that section in the next few months as well. So check in from time to time.

• 27:27Anthony Pompliano?

  And then where can people find you on Twitter if they want to follow up with some of the stuff that you said here? Or get more information that you continue to put out?

• 27:34Speaker 02

  Yeah, my handle is @deepwellarc. Yeah, @deepwellarc.

• 27:40Anthony Pompliano?

  Awesome. Well, David, listen, thank you so much for jumping on real quick. These reports are, you know, they're very fast to read through, but they're incredibly high signal. So I appreciate you and the Arc team continuing to put them together. I enjoy reading them. I know many other people do as well. They just give a great kind of understanding of, hey, here's what's going on in the moment over last month. And they're kind of these great checking points. So if anyone hasn't gone and downloaded them, I suggest you do that. Follow David on Twitter and then we'll talk again next month.

• 28:09Speaker 02

  Perfect. Thanks for having me.

• 28:12Anthony Pompliano?

  Thanks so much for listening to today's episode. I really hope you enjoyed this one. Make sure you're subscribed on Apple, Spotify, or your favorite podcast player. And if you're looking to transition into a brand new job in the Bitcoin or crypto industry, we've got you covered. Head over to thecryptoacademy.io. My team and I have been working with the top HR teams in the industry to develop an intensive three-week training program with over 50 live events. We teach you exactly what you need to know to break into the industry, including live interview prep and resume review. Our students have been hired at over 75 of the world's best Bitcoin and crypto companies. Go to thecryptoacademy.io to learn more. Again, that's thecryptoacademy.io. If you enjoyed today's episode, make sure you share it with your friends and I'll see you all for the next episode.