#868 Bitcoin Holding Steady Through Macro Uncertainty w/ Dylan LeClair

Dylan LeClair is the Senior Market Analyst at UTXO Management, a digital asset fund investing in the analog to digital transformation of money and the emergent financial system. In this conversation, we discuss bitcoin, on-chain metrics, market structure, and what to expect from the rest of the bitcoin bull market. Dylan joins us every Tuesday on "The Best Business Show." To see the video with the corresponding charts that Dylan references throughout the interview, go to "The Best Business Show: LIVE" YouTube Channel ======================= Since 2018 Copper has been at the forefront of institutional digital asset development. From award winning custody solutions, to creating the first truly off-exchange settlement function, Copper pioneers technology, products, and services, in lock-step with a rapidly changing world. No other infrastructure provider covers as many assets, across as many exchanges, with the speed and security that Copper can offer. To learn how Copper helps the world’s largest institutional investors secure their digital assets, head over to copper.co Copper - the unfair advantage. ======================= Compass Mining is the world's first online marketplace for bitcoin mining hardware and hosting. Compass was founded with the goal of making it easy for everyone to mine bitcoin. Visit http://compassmining.io to start mining bitcoin today! ======================= Bullish is a powerful new digital asset exchange built for institutions that delivers the innovations of DeFi in a regulated environment. The Bullish Hybrid Order Book pairs the high-performance of a traditional Central Limit Order Book with automated market making. Powered by deep Bullish Liquidity Pools, backed by the multi-billion dollar Bullish Treasury. So, you can trade with certainty and at scale across variable market conditions. Learn more at Bullish.com or follow @Bullish on Twitter. Because the future belongs to the bullish. *Not investment advice. Digital assets and cryptocurrencies are high risk products. Consult your professional advisor before dealing in them. Bullish’s services are available in select locations only and not to U. S persons. Visit https://bullish.com/legal for important information and risk warnings =======================

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. Dylan Leclerc is the Senior Market Analyst at UTXO Management. He also writes a newsletter with Bitcoin Magazine. In this conversation, we talk about Bitcoin, on-chain metrics, we talk about Bitcoin's price, the market structure, and what to expect in the coming weeks. I really enjoyed this conversation with Dylan, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. Today's episode is brought to you by Copper. Since 2018, Copper has been at the forefront of institutional digital asset development. From award-winning custody solutions, to creating the first truly off-exchange settlement function, Copper pioneers technology,

• 0:47Anthony Pompliano?

  products, and services in lockstep with a rapidly changing world. No other infrastructure provider covers as many assets across as many exchanges with the speed and security that Copper can offer. To learn how Copper helps the world's largest institutional investors secure their digital assets, head over to copper.co. Again, Copper, the unfair advantage. Check them out at copper.co today. Next up is Compass Mining. Compass Mining is the world's largest marketplace for mining hardware and hosting. With Compass, everyone can mine Bitcoin. Their team makes it easy to start mining wherever you want, at home or in one of their 23 hosting facilities around the world. Through the Compass Marketplace, retail

• 1:29Anthony Pompliano?

  miners can access mining hardware with similar prices and purchase plans as the world's largest mining companies. Compass miners own their machines, they choose whatever mining pool they want, and they mine directly to their own wallets. Miners who don't want to host their machines can order ASICs directly to their doorstep. Simple and low-cost hosting agreements, coupled with best-in-class customer service, are the reasons why Compass is the simplest and most popular way to mine Bitcoin. Start mining your own Bitcoin today by visiting compassmining.io. Again, compassmining.io. Go check them out and let me know what you think. This episode is brought to you by Bullish. Bullish is a powerful new digital Asset exchange built for institutions that delivers the innovations of DeFi in a regulated

• 2:14Anthony Pompliano?

  environment. The bullish hybrid order book pairs the high performance of a traditional central limit order book with the automated market making powered by deep bullish liquidity pools backed by the multi-billion dollar bullish treasury. So you can trade with certainty and at scale across variable market conditions. You can learn more at bullish.com or follow bullish on Twitter because the future belongs to the bullish. Now, this is not investment advice. Digital assets and cryptocurrencies are high risk products. Consult your professional advisor before dealing in them. Bullish's services are available in select locations only and not to you as persons. Visit bullish.com/ legal for important information and risk warnings. Go check them out at bullish.com or follow at bullish on Twitter. All right, let's get into this episode. I hope you guys enjoy this one.

• 2:59Speaker 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.

• 3:22Anthony Pompliano?

  Dylan Leclerc, ladies and gentlemen. Dylan, what's going on, man?

• 3:25Speaker 02

  Hey, guys.

• 3:26Anthony Pompliano?

  Uh, let's talk treasury yields. The world has gone mad. Everyone is freaking out. We've got the Russia-Ukraine conflict. We've got all kinds of chaos in various asset classes and treasury yields. They just look like they're going to the moon. Like, they may beat Elon Musk to Mars. What's going on here?

• 3:44Speaker 02

  Yeah, so I mean, we've been talking a lot about bonds lately, and people have been asking me, you know, why are we focusing so much on treasury yields, bond markets, you know, if you're more of a Bitcoin analyst, and the reality is that, you know, these credit markets are really driving the performance of every single asset class right now. So, I mean, everyone knows the story, right? Record-high inflation, 40, near 50-year highs, producer price index just came in at 10%, highest reading ever month, year over year. So, right, something's broken, and credit markets are telling you. And so fixed income is selling off in a big way. And what that means is that the yields and fixed Income in the price are inverse. So when fixed income investors are selling their bonds, the yields are going up. So here we have the treasury market, which is the risk free,

• 4:29Speaker 02

  still the risk free asset in the, you know, bond market, the global bond market, and yields are soaring, right? Especially off of the 2020, 2021 lows. And so what does that mean? It means higher discount rates across the entire economic system. So whether you're you're valuing an equity or whether you're trying to, you know, get corporate financing, higher discount rates, you know, can give you some trouble. And this is because of this inflationary environment. So we have this historically over indebted economy with with yields rising in a in a big, big way. And so, you know, there's I think there we're going to see some volatility in the coming, you know, months, maybe a year.

• 5:07Anthony Pompliano?

  I tend to think that's exactly what this is telling us. If we look at the 10 year treasury yield, the recent spike is obviously running counter cyclical, if you will, or or counter to the long term trend, which since the early 80s has just been down into the right. You've got this great chart here showing us this. What's going on? And why is this so important to understand why this is going up against the trend?

• 5:32Speaker 02

  Yeah. So I mean, since 1980, 81, really, we've been in the secular everything, everything bull run. But really, what's driving this is is the bond market, right? So lower discount rates, lower yields means prices, everything goes to the moon. And so basically, a lot of those, you know, there's a few key drivers here, debt demographics. But really, what we see here is kind of a bunch of short term debt cycles formulating a long term debt cycle. So every every time there's, you know, a boom in the economy, everyone kind of levers up, takes on credit, malinvestment occurs, and then somewhere kind of in this eight to 10 year cycle, and this is more of just kind of an archetype debt cycle, there's there's somewhat of a of a crash, there's a credit crunch, a liquidity crunch,

• 6:17Speaker 02

  and some of that bad investment, you know, gets gets liquidated, or there's a recession, right? But what happens after that is that the Fed, this kind of Keynesian economic system, they come in and they they lower discount rates, they they lower bond And they kind of re-stimulate this economy. And so now, you know, following O A, we hit that zero lower bound on the Fed funds rate. And so they did all sorts of things. They did a quantitative easing. They did anything to stimulate the economy. And now, following COVID, which was kind of this black swan economic event, they pumped a bunch more money in the system. Inflation's soaring, but they don't really have any tools left in the toolbox. And so now, even though the Fed hasn't raised rates and, you know, they'll do it probably twenty five basis points in the coming, coming day here.

• 6:58Speaker 02

  Uh, it really, the treasury market's taking, taking it like doing their work for them. And then the yields are selling off in a big, big way. And so, you know, we have this kind of forty year trend in the, in the making here. Uh, and, and, you know, if yields get any higher, it's gonna, it's gonna spell some trouble for the broader economy.

• 7:14Anthony Pompliano?

  Got it. And so if we start to then break this down by the various types of bonds, uh, you've got corporate junk bonds, the VIX, S and P five hundred. Looking at these, there's obviously relationships, whether it's a positive or negative correlation between these. What are you seeing here?

• 7:27Speaker 02

  Yeah, so, um, we have, we have the higher yield bonds and then we have, um, like we talked about the kind of the inverse, uh, is those yields, right? So you can see every time these kind of, uh, the bond market rolls over specifically, you know, corporate bonds. And it should be noted that now we're in a, we're in a time in twenty twenty two, um, compared to, say, the previous couple of decades, where more of the corporate bond market than ever, due to just kind of the, the amount of debt they all have on their balance sheet, are in this kind of junk rating, triple B rating. Um, so, and the VIX, for those that don't know, is the S and P five hundred, uh, equity volatility index. So the higher VIX means, uh, it means trouble for equities. Um, so you can see this pretty interesting correlation as bonds sell off and as yields soar, volatility spikes and, and equities get killed.

• 8:12Speaker 02

  Um, and so now, you know, if you're just looking at the chart, looking at corporate bonds, they're really rolling over. You see those yields, uh, those junk bond yields really bending upwards. Uh, so that means higher financing costs means for this, you know, historically over indebted corporates, they have to roll that debt over. And it's coming at a, you know, much higher rate. And so, and the, the crazy thing is, uh, you know, a junk bond, right? That means you're, you're a poor credit, means that you could default on your debt, but yields are only six percent. We have CPI. That's going to come in here at eight percent probably with this next CPI reading. So even before default risk, this isn't, this isn't like a sovereign, this isn't the United States government. So they, they can't, they can nominally default. So even before default risk, you know, there's a negative real yield.

• 8:56Speaker 02

  So yields have a long way to go and the debt, debt markets are still very, very mispriced. Um, so what that's telling everybody is that, you know, there, unless the Fed comes in, and I think ultimately the end game is some form of yield curve control. Um, there is a lot more pain, uh, to, to come in these, in these debt markets and expect volatility.

• 9:15Anthony Pompliano?

  Expect volatility is a great way to put it. Uh, you've got a chart here of the Vanguard Total Bond Market ETF. And this thing just seems to be in a free fall. What is that showing you?

• 9:24Speaker 02

  Yeah. So just kind of another one of these, uh, things to watch. Uh, BND is the ticker. Uh, it just takes basically all, all bond market and just kind of compiles it into one ETF, gets you exposure and you can, you get a kind of a, a coupon dividend payment. If you hold this ETF, uh, but really just looking at the chart, um, especially since COVID, you see that kind of rapid fall. And then Fed comes in, saves the day, uh, and a quick rebound, but that's, this is falling off a cliff. So in terms of just like the overall market deleveraging that we're starting to see, um, and we're going to get to Bitcoin in a second. But just talking about the kind of the global liquidity environment that the kind of across asset classes, uh, performance, uh, deleveraging is kind of in the making here.

• 10:04Speaker 02

  And so, uh, it'll be really interesting to see what that pain point is for markets, for the Fed, for the broader economy, because it is coming. Um, liquidity like, uh, conditions are tightening, financial conditions are materially tightening. Um, and it's because of this record high inflation environment where fixed income, um, kind of paradoxically, high inflation is not good for asset prices. Because these fixed income instruments really, really sell off and it, and the second and third order effects of that, uh, are, are large.

• 10:31Anthony Pompliano?

  Absolutely. We've, uh, got the Bitcoin, uh, kind of data as we've looked at this and you've got the futures three month annualized rolling basis. Uh, and this just appears to keep going down over time, uh, over the last, you know, call it six to eight months or so. What, what is that showing you? And why do you think this is so important?

• 10:49Speaker 02

  Yeah. So I kind of have three prongs to my market analysis, especially with Bitcoin. Uh, you know, we, we, the first part, um, and what's driving really everything right now is the macro backdrop. Um, and so we have kind of this long view, this, this, uh, thesis that the, the global fiat currency environment, uh, is, is so over indebted that the end game is. Essentially, you know, perpetual inflation, perpetual monetary expansion. That's the macro environment. And we're, you know, kind of in this secular or this, you know, little intermediate term kind of risk off environment. So the macro is the first prong. Second prong is is kind of the supply side dynamics on chain. We can look at all this really cool stuff. We have this secular adoption of Bitcoin, the asset itself.

• 11:32Speaker 02

  And the third, and it's really important for price action is derivatives. Right? And so you can see here during kind of the two bull runs we saw in 2020, 2021, we saw this kind of derivative market speculation really, really pick up. And so this annualized rolling basis, essentially what it is, is you can sell futures contracts for Bitcoin and you can short this and you can long the spot instrument and you can capture kind of this risk free neutral yield. So in April, you could get like a 45% annualized return by just selling three month futures, long the spot, capturing the difference. This this happens in other commodity markets as well. You see like oil will trade, you know, ahead of the current spot price or below the spot price, which is called backwardation. Ahead is called contango.

• 12:14Speaker 02

  So really, right now, these these contango yields are almost nothing. It's like 3% annualized. So it's trading like in the three month futures, trading like barely 1% over the spot price. So all of this kind of derivative speculation native to the Bitcoin, to the crypto markets, what this is telling you is it's gone. It's basically all gone. It's completely unwound since November. And so, you know, there's there's not really kind of that that chance for a huge, huge deleveraging event, you know, liquidity event in the in the legacy markets aside, that speculation and that, you know, kind of open interest that leads to these really huge, long liquidation cascades. It's it's it's looking pretty healthy in that regard.

• 12:53Anthony Pompliano?

  Makes sense. And then we've got realized price and MVRV. And one of the things that I love looking at is just that realized price seems to be

• 13:00Speaker 02

  Pretty strong floor. What's this showing you? Yeah, realized price, that's just kind of this average Bitcoin cost basis for every UTXO, for every, you know, technically that Bitcoin, that individual Bitcoin on the network. This is just that average cost basis. So right now it's about 24,000. And you know, that essentially has served as like kind of the ultimate floor generational buying opportunity. If it dips below that, you know, people ask me, how low can Bitcoin go? I don't know, but I guess my kind of unchanged framework, historical framework is that that 24,000, $25,000 threshold is like, you know, hand over fist buying opportunity. Don't know if we'll get it, but you know, just looking at that realized price trend,

• 13:41Speaker 02

  that's I think the most kind of pure form of looking at Bitcoin's monetization process. Got it. That makes sense. Joe, what questions you got?

• 13:48Speaker 03

  Dylan, good morning. Thanks for joining us. There was news this morning that Saudi Arabia is in talks with China to start pricing and selling oil in the yuan. What would this mean if this was to go through for markets globally?

• 14:01Speaker 02

  Yeah, I mean, ton of, ton of implications there. And I think your next guest will dig into that a lot, Jason Lowry. Huge geopolitical implications. Petro-dollar system has been in place since 1973. Basically just, you know, kind of drove a lot of demand for treasuries and afforded the United States this exorbitant privilege of being the world reserve currency and kind of giving like that international, that foreign demand for dollars. So it allowed us to have basically a current account deficit as well as a budget deficit. So our biggest export in the US is dollars. It's not oil, it's treasuries. And that's been the case for the last four decades, five decades really.

• 14:45Speaker 02

  And so we're seeing a shift here. You know, the implications of the Ukraine-Russia war and, you know, talks heating up about basically energy exporters pricing their oil or their energy in anything but dollars. I mean, I don't think that the system is necessarily over today. There's, there's going to be some, some time for that transition to occur. But definitely really, really big kind of geopolitical Implications recently.

• 15:11Anthony Pompliano?

  Gotcha. John, what you got for us?

• 15:13Speaker 04

  Dylan, lots going on in the market right now, but clearly interest rate hikes are one thing that people are talking about. What is the ripple effect across different asset classes with this potential rate hike gonna happen tomorrow?

• 15:24Speaker 02

  Yeah, I think for the most part, I mean, I'm not sure there there could be a knee jerk reaction at hikes a little more than expected, or maybe they don't hike at all. I think the consensus is just one rate hike 25 basis points. But I think more broadly, it's that you see kind of the treasury market is really telling the Fed what it's gonna do. It's already it's already tightening for the Fed. So a 25 basis point hike is more so just kind of the Fed signaling that it's doing something. But really, I think everybody knows and, you know, I'm watching these credit markets. I know for damn sure that the Fed and and everybody is watching these things as well and watching financial conditions tighten. And so I think they're really gonna move slow with this. They don't want to break things.

• 16:04Speaker 02

  And even at, you know, 100 basis points, 200 basis points, like a 2% Fed funds, real interest rates are still deeply negative. And so we'll see. We'll see what happens. I think that first that first hike is more just signaling than anything. But I'm really interested to see how far they get with this hike cycle because I think it's it's not gonna last too long.

• 16:22Speaker 04

  Yeah, I saw Goldman came out this morning and said they're looking at seven rate hikes of 25 basis points.

• 16:29Speaker 02

  We'll see if they get there.

• 16:32Anthony Pompliano?

  Dylan, when you start to think over the next, you know, two to three months, what are the things that you're explicitly looking at? Is there something that every morning you're waking up and you're checking from a data point? Is there a specific event outside of the interest rate decisions that you're looking at? Like, put us in kind of the tactical seat as to what you're thinking about over the next, you know, 60 to 90 days.

• 16:51Speaker 02

  Yeah. So, I mean, obviously, the Bitcoin market's been quite boring, just kind of chopping around in this sort of range. It seems more like recently, it's just kind of been crypto market traders, you know, PvP. There's just it's just zero sum kind of liquidity games, trading games, Bitcoins chopping around. If you're trying to actively trade this, you're getting you're getting chopped up and probably losing capital. So what what really I'm looking at is more so, you know, given that I think the macro environment is a driver at this point, I'm looking for. Somewhat of a kind of volatility spike like leverage sort of capitulation in equity markets. And I think that's coming. I think we're in the process of a sort of deleveraging event. And I think ultimately what leads the Fed to kind of this this end game yield curve control,

• 17:37Speaker 02

  you know, implementation is is a really just a huge capitulation event in equities. And that sounds pretty, pretty dark, but I just just looking at kind of just even the charts itself of all this this credit market, you see just this deleveraging occur. And so ultimately, I mean, I'm I'm happy to buy Bitcoin in this range, really cheap, nearly 50% off the highs. And I think long term, it's a fantastic stacking opportunity. But I think really like the generational bottom comes in Bitcoin. When we see this, you know, broad based capitulation volatility spike in the legacy markets, you know, something like like we've seen in previous sort of recessions, which I, you know, I ultimately believe we are we are headed for a recession.

• 18:18Anthony Pompliano?

  Got it. And when you start to think about Bitcoin's role in that recession, I guess my last question is just like, how do you see it performing? Should we expect it to sell off if there's some sort of liquidity crisis? And then recover similar to what we saw in the recession of 2020? Or do you expect something else?

• 18:33Speaker 02

  Yeah, I mean, so I think what people have to understand is that, you know, BTC is, you know, ultimately the denominator, you know, the second, the second input in that trading pair is USD. And during a recession, you know, during a credit contraction, the United States dollar is ultimately increasing in value. And so while fiat are basically, you know, programmed, politically programmed to debase over time, what we see during credit contractions is is that temporarily reverses. And usually it's actually in a really sharp manner, a violent manner, if you want to think of it, where kind of every asset sells off in tandem because of this broad based deleveraging event. So, you know, I don't know, like, I don't have a specific price target or, you know, timeframe for when this all occurs.

• 19:18Speaker 02

  But I think ultimately the response is going to be the same Keynesian response we've seen. And really the only politically acceptable response, which is more stimulus, more monetary debasement and credit creation. And so I think we're, you know, somewhat close to the the end game here in the fiat world. And that sounds somewhat crazy, but I think the kind of The tail risks of fiat, kind of fiat currency system of deflationary depression, deleveraging event and hyperinflation. Unfortunately, this, this sounds quite crazy, but I think those tail events aren't really all that, all that kind of improbable or as tail, as kind of tailed distribution as you would expect. I think the Fed is really, really

• 20:02Speaker 02

  trapped where ultimately they have to let this thing, this entire system completely unwind, or implement yield curve control into inflationary impulse in a commodity shortage. And that would, the kind of the implications there would be massive. And so, you know, short to medium term, low cautious with the Bitcoin price, but long-term, I've never been more bullish. And I think really it's, it's kind of the only escape out of this fiat currency trap, if you want to think of it like that.

• 20:30Anthony Pompliano?

  Yeah, I tend to think that you are more right than wrong, my friend. Where can we send people to find you on the internet or sign up for the newsletter?

• 20:37Speaker 02

  Yeah, so you can find me on Twitter. Just the newsletter's in the, just in my, in my bio there, the subscribe link. I post a lot of my thoughts on Twitter, just kind of, you know, in public, fully transparent, not right about everything, definitely not, but I think, you know, like to, like to document my thoughts on markets and, you know, you can find me on the Bird app.

• 20:59Anthony Pompliano?

  All right. See you later, buddy.

• 21:01Speaker 02

  Peace.

• 21:02Anthony Pompliano?

  Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you subscribe on Apple, Spotify, or your favorite podcast player. And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered. Head over to pompscryptocourse.com. We've developed a curriculum with the top teams across the industry. It's a three-week intensive training program with over 50 events packed into that three-week time period. Go to pompscryptocourse.com to learn more and I'll meet you guys for the next episode.