#542 Will Clemente on The Science Behind A Price Drawdown

Will Clemente is a Finance Major at East Carolina University. He has quickly become one of my favorite writers on all things bitcoin, including deep dives on various on-chain analytics. In this conversation, we discuss leverage, bitcoin price, short liquidations, market cycles, and the science behind the recent bitcoin price drawdown. ======================= Remote makes it easy for companies of all sizes to employ global full-time employees and contractors. We take care of international payroll, benefits, taxes and local compliance, so you can focus on growing your business. Learn more about Remote and their new Remote for Startups program at http://www.remote.com. ======================= BlockFi provides financial products for crypto investors. Products include high-yield interest accounts, USD loans, and no fee trading. To start earning today visit: http://www.blockfi.com/Pomp ======================= Choice is a new self-directed IRA product that I'm really excited about. If you are listening to this, you are likely part of the 7.1 million bitcoin owners who have retirement accounts with dollars in them, but not bitcoin. I was in that situation too. Now you can actually buy real Bitcoin in your retirement account. I'm talking about owning your private keys and using tax-advantaged dollars to do it too. Absolute game changer. https://www.retirewithchoice.com/pomp =======================

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. Let's kick this thing off. Will Clemente is a finance major at East Carolina University. He has quickly become one of my favorite writers on all things Bitcoin, including deep dives on various on-chain analytics. In this conversation, we discuss leverage, Bitcoin price, short liquidations, market cycles, and the science behind the recent Bitcoin price drawdown. I really enjoyed this conversation with Will, and I think you will as well. Before we get into the episode, though, I want to quickly talk about our sponsors. First up is Remote.com. In 2021, every business is a global business. But how do you pay your global team and comply with

• 0:46Anthony Pompliano?

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• 1:30Anthony Pompliano?

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• 2:10Anthony Pompliano?

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• 2:23Anthony Pompliano?

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• 3:06Anthony Pompliano?

  Head on over to retirewithchoice.com/pomp. Again, that's retirewithchoice.com/pomp and sign up for an account today. And one more thing, you know how I feel about this, but if you have a pro that manages your money, don't take any BS. Choice has tools for them, too. Take back control today and visit retirewithchoice.com/pomp. Retirewithchoice.com/pomp. All right, let's get into this episode with Will. I hope you enjoy this one.

• 3:33Speaker 01

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 4:05Anthony Pompliano?

  All right, guys. Bang, bang. I've got Will back here with me. Thanks for jumping on real quick. And let's just start off with the price of Bitcoin went down. Eh, maybe not a lot, but it went down over the last couple of days and into the weekend before it came roaring back. What drove the sell-off in price?

• 4:26Speaker 02

  Yeah, sure. So there's been a lot of speculation on Twitter about what the catalyst was. Um, but I think, you know, it it really comes down to the fact that there was a lot of leverage. Um, futures, open interest was like off the charts. And so it basically means there's a lot of, there's a lot of greed in the Bitcoin markets. Everyone was super over leveraged. Every time price went up, you know, everybody hopped in on their 10x long, 100x long on Bitmex and wanted to, you know, ride this thing as they thought it was going to explode. And so what happens is when there's that much leverage in the system, it makes, it makes it very fragile, right? And you can kind of analogize it to like, if you think about Jenga, where you're stacking the Jenga blocks higher and higher, it just, the higher you go, the less of a push it takes to push the price back down.

• 5:11Speaker 02

  And so there's been a lot of speculation. I know Willie Wu had talked about, um, the hash rate had something to do with it, the power outage in China. Um, and then speculators had kind of, um, freaked out and and tried to, you know, sell off to, um, avoid a further sell off, which kind of became like a self, uh, fulfilling thing, right? So that could be true. Um, just by looking at the data, we did see a giant inflow of about 9,000 Bitcoins onto Binance. Um, and Binance is is primarily used in Asia, which would kind of line up with that theory that somebody had some kind of insider information about what was going on with the power outage and they were trying to avoid, um, you know, the sell off that they figured would come.

• 5:55Speaker 02

  But it really comes down to the fact, regardless of what the catalyst is, it comes down to the fact that there was a lot of leverage. And so, um, when you have the market that highly leveraged, it's very prone to these kind of events, right? And so throughout the last week, we've seen that leverage just get completely flushed out. Uh, when you look at, when you look at the funding rates, which is how, you know, on these trading platforms in Bitcoin, we have something called the perpetual swap. So it's basically this contract, this futures contract that doesn't expire, that's pegged to the Bitcoin price. And the way it's pegged to the price is through funding rates, right? So when, when the majority of the market goes short, uh, the funding rates go negative, right? And then it becomes profitable to take the other side of the trade to go long. Same the other way around, right?

• 6:40Speaker 02

  When, when everybody wants to go long, funding rates go up. You, and the, the people that are long are actually paying people to go short to keep the price on the perpetual swap peg to the, to, to the market, uh, spot price, right? And so for, for weeks now, we had incredibly high funding rates. Meaning, you know, there was huge leverage and it was incentivizing more whales to come in and take the other side of the trade and go short. So it kind of was something where it wasn't definite when it was going to happen, but we were definitely prone to something like this and, and it's not very surprising to see.

• 7:13Anthony Pompliano?

  Yeah. And so obviously a lot of the leverage, especially the levered longs, that's basically just people saying, hey, I think the price is going to go up a lot. There's a lot of, uh, kind of excitement and, and bullish sentiment. And so people end up adding that leverage in. How exactly does the leverage get washed out? Is that simply just the price begins to dump and then there's a bunch of liquidations on the way down and that then further accelerates, uh, the sell off or, or is it something else?

• 7:37Speaker 02

  Yeah, exactly. So I'm going back to the, the Jenga example. If you think about, you know, when the blocks at the top begin to fall, it causes the other ones under them and it becomes this huge cascade, right? And so it's the same kind of thing. We saw, um, what happened with those nine thousand Bitcoins that got sent into Binance. It actually sent the price down to, um, the, the market's liquidation price, the majority of the market's liquidation price. Um, which, which is basically the point where, where traders that are taking a long position, when they hit that liquidation price, they're forced sell, um, by the exchange. To cover their losses, right? And so that, that selling pressure, um, which was presumed to be caused by those nine thousand Bitcoins sent on to Binance.

• 8:19Speaker 02

  Was enough to push down the price to trigger a lot of liquidations. Um, which causes, you know, uh, the traders to have to sell to cover their losses, which sends the. Sends the price even further down, which triggers more liquidations, right? And it becomes this self fulfilling thing on the way down. And so that's what, that's what really um drove that initial huge crash. We saw like fifteen or twenty percent in an hour, something crazy like that. Um, it was, it was just basically a cascade of those liquidations. We saw, I think, according to the data I'm looking at on Glassnode, we saw about one point eight four billion dollars of liquidations within like an hour or two. Yeah, so I think that was the largest since, and it might actually be larger than March of last year

• 9:02Speaker 02

  during the, during the fifty percent drawdown of, of March last year.

• 9:06Anthony Pompliano?

  And, and that's pretty crazy, right? When you think about, there's either potentially uh more or actually more liquidations uh happened uh in a one hour period over the weekend than in a day in twenty twenty when the price dropped fifty percent, right? And that's just a function of there's way more leverage in the system right now than there was in March twenty twenty, right?

• 9:27Speaker 02

  Yeah, absolutely. You know, we have a lot of really bullish sentiment in the market um and that, I, I, that obviously got wiped out in the last week. But, you know, for, for a while, we had everybody thinking we're going straight to a hundred thousand. Um, and then it became profitable to take the other side of the trade once, once that uh the funding rates really spiked. So it was something that, you know, it was bound to happen eventually. But, you know, I think this is something where you can see some silver lining here in the sense that no one got bailed out, right? Um, in the traditional legacy system, when, when everybody has to capitulate, everybody gets wiped out, leveraged. Um, you, you see, you know, there's backstops. The Fed comes in and bails everybody out in this, in this free and open market, right?

• 10:09Speaker 02

  Completely decentralized, everything settles instantly, uh twenty four seven, right? Liquidity goes twenty four seven. So when everybody got wiped out, there was no backstop. There was nobody to bail anybody out. It's a tru-, it's a true free and open market, which is completely contrary into what we have today. And you play stupid games and, and you win stupid prizes, right?

• 10:31Anthony Pompliano?

  When you saw the price dropping, it didn't seem to go below anywhere like forty seven, forty eight thousand. And there was a couple of times where it kind of drops, you know, to fifty one, came back to fifty two, fifty three, then it dropped to fifty, came back to like fifty one, fifty two, dropped to forty seven, forty eight, forty nine, came back to fifty, but it just felt like there was like almost like this floor, kind of in that forty seven to fifty range. Is that something structurally in the market? Is that something to do with kind of leverage? Or is that just people stepping in and buying at that price?

• 11:02Speaker 02

  Yeah, sure. So one of the, one of the main things I personally look at, because I'm, I'm a big proponent of the on-chain data, I look at the on-chain volume. So you see, there's different support zones based on the amount of coins that were moved at, at different price levels. So we saw one huge zone of coins that were moved was, was at fifty three K. And so that kind of served as a little bit of support for a few days there, and then that broke. And there wasn't much volume up until behind forty seven K, which was the next like major support zone in, in terms of on-chain volume. And so that, that served twice as a, as a strong support zone. And then in addition, Charles Edwards hash ribbons is, is another thing to look at.

• 11:47Speaker 02

  You saw briefly it, it went flash to buy zone, which means that, you know, the miners capitulated and it became really attractive to buy. And in to off that note with miners, you also saw during this event miners continue to accumulate. So there's a glass node metric called miner net position. And you saw throughout the dip miners actually ramped up their accumulation, which, which was really good to see because obviously miners have more skin in the game than anybody else. And they're more bullish on the asset than anybody else because they've invested their entire operational, you know, expenses into, into Bitcoin. And Bitcoin went wrong, you know, everything that they have would be deemed basically like a paperweight. So it's good to see them. They were actually accumulating through this whole dip.

• 12:32Speaker 02

  And then as well, you saw the coins that were being sold were relatively young coins. So Glassnode has a metric called dormancy. And the way you can think of this is if a coin has been moved into a wallet and it's sitting there for one day, it has one day of coin day, right? And that's an on-chain metric term. And so let's say a coin is in a wallet for 10 days and then the coin is sold. Then there's 10 coin days destroyed. And so dormancy takes a ratio of the coin days destroyed through the market, right? And so you saw dormancy actually went down throughout this sell-off. Meaning that the older coins, AKA, you know, the long-term holders were not selling during this dip.

• 13:16Speaker 02

  It was primarily driven by newcomers into the market that probably got spooked out that hadn't been through any of these huge corrections that we know are, you know, very well just part of the way Bitcoin operates.

• 13:27Anthony Pompliano?

  So my read of the situation is that even though there was kind of this washout of the leverage, a lot of the data that you're looking at, a lot of the data points you're talking about, suggests that the bull thesis is still very much intact, that the bull market is still intact. Is that your read as well?

• 13:42Speaker 02

  Yeah, absolutely. When you look at, you know, some of the long-term indicators, right? You see that, you know, the bull market is still very well, very far from being overheated. And none of the major indicators, the macro indicators of the cycle are anywhere near being overheated or showing any signs of a top. So, you know, this is just another short-term correction that Bitcoin has on the way up. In the last, you know, cycle on the way up in 2017, we saw multiple corrections over 30%. And this is just how the market works, right? You wash out the weak hands, the people that don't have conviction, and then the people with conviction come in and scoop those coins up.

• 14:21Anthony Pompliano?

  Yeah, and they definitely scoop them up pretty hard. What we've seen over the last 24 hours is, I think, what makes people so excited about Bitcoin. We've seen about a, you know, 14, 15% upward move in price. And it was so violent that it just wrecked a bunch of shorts. I think at one point last night, you tweeted saying that there was over $88 million worth of shorts in just a one or two-hour span, right? That were all liquidated. So talk a little bit about kind of the shorts. Are they using leverage? And then liquidations as the price moves back up after a drawdown like this?

• 14:59Speaker 02

  Yeah, absolutely. So it's the same thing about what we talked about when we came down, right? Everybody goes long, everybody goes leveraged long because the price goes high. Market psychology says, okay, we're going higher. So I'm going to go leverage long because we're going higher. And then on the way down, we're going down, you know, we have some pretty violent drawdowns. Everybody gets really bearish. Market, you know, the market psychology flips. Everybody says, oh, price is going down, so it's going to go way further down. So I'm going to go leverage and take a leveraged short position. And so the further down we go, the more, the more shorts pile in. And that was evident when you see the funding rates, more people were taking the short side of the trade. And so it just takes, similar to, it just takes

• 15:41Speaker 02

  a little push to liquidate people on the way up. It just takes a little push to liquidate people on the way down. So last night, people have been in the Bitcoin space know that whenever we have these drawdowns, you can really tell there's a bottom because we see the huge violent just spike up in like an hour or two, right? And that's evident because you see some buyer step in, some huge whale come in and say, okay, I'll take those cheap coins. They step in with a huge buy and then it initiates a chain of short liquidations on the way back up when the market gets over leveraged in the short position. And so that's exactly what we saw last night. Like you said, in two hours, we saw eighty eight, over eighty eight million dollars of short liquidations, which is, which is pretty unprecedented.

• 16:27Anthony Pompliano?

  Yeah. And what I'm looking at right now is the Bitcoin price as of this recording is about fifty three thousand eight hundred dollars. It's up about eight percent in the last twenty four hours. We're seeing a Bitcoin market cap of a trillion dollars. And what to me is fascinating is you still have over a million active addresses. The mining reward is still forty eight point eight million dollars in twenty four hour period. GBTC is down, you know, eleven percent on that discount. And from the all time high, we're down about seventeen and a half percent. And so people look at that and they're like, wait a second. This looks pretty bullish, even though we're down that seventeen and a half percent from

• 17:09Anthony Pompliano?

  the all time high. Is this something where we should expect, based on a lot of these fundamentals, for price just to rocket right back up to the all time high? Or how do you see this kind of coming out of one of these bottomings and a lot of the shorts actually getting liquidated?

• 17:25Speaker 02

  Yeah, it's a great question. So one thing I'm seeing is I keep a close eye on stablecoin flows. So basically, you can track the stablecoins that are flowing onto different exchanges. And this morning, we did see a huge batch of it was over $400 million of Tether, which was moved on to exchanges, which is, you know, an indication of someone moving stablecoins onto an exchange to buy. And we've seen price go up throughout the day. And so we haven't seen that many short liquidations, which is kind of an indication that the rally throughout the last couple of hours has been driven by spot buying rather than just any kind of short liquidations, which is a good sign. And we're also seeing this, you know, you had mentioned where we are right now in price. We're right above that $1 trillion threshold.

• 18:10Speaker 02

  And that's really deemed a really strong point of support for Bitcoin. Obviously, we dipped down over the last week, but I think it's over 14 or 15% of Bitcoin's supply has moved over that $1 trillion market cap threshold, which really shows a strong validation from the market of Bitcoin as a macro asset, right?

• 18:32Anthony Pompliano?

  For sure. As we move forward in the coming weeks, what are some of the data points that you're going to be looking at or things that you want to see from a milestone basis?

• 18:40Speaker 02

  Sure. So I think one thing to look at is the funding rates. I know we touched on this a few times, but that can really be a good judge of the sentiment of different market participants. In addition, just keeping a close eye, one thing I'm looking at is the entity net growth. So that basically is measuring the amount of new users on the blockchain. This isn't taking into account new users on exchanges, but generally just Glassnode has different clustering algorithms that they put together, addresses and identify them as different entities. So one entity can be a person, right? Like you or I, who has their own hardware wallet, or it can be a corporate treasury, or it can be an investment fund, right?

• 19:21Speaker 02

  And so we're seeing this kind of like, Willie Wu calls it a hockey stick curve of adoption. We're seeing this huge parabolic increase in entity growth on chain, which we've seen each cycle we have. This huge spike in that which is which is really good for the growth of of the network and the adoption of the network. And we're kind of in that phase. And and so that's also indicative of retail coming on the network as well. Which which means we're probably somewhere midway through the cycle. We see retail come in usually about midway. But yeah, I mean, just keeping a close eye on some of these, the broader indicators. It's it's really hard to predict these these moves on the way up because they have a lot to do with market psychology.

• 20:06Speaker 02

  But the the moves on the way down, you can generally time the bottoms pretty quickly. I know like one indicator I use is Soper, which we put in the newsletter last week on Friday, which I highly recommend everybody to check out when it comes out. And and so Soper measures the amount of profit taking in aggregate for the network. And so whenever you see Soper dip below one, that means that the market is taking losses in aggregate. At you know, if it's at one, it means the the market is neutral. Above one means that people are in profit in aggregate, but when we go under that one threshold, that means that the market's in the loss. And so we did see, we saw Soper go below one back in January, which was like one of the largest corrections of this cycle so far.

• 20:51Speaker 02

  And then for the second time, we saw that happen like two days ago. And then we saw we saw a violent uptick in that, which to me indicated that whoever was going to capitulate on their holdings had already done so. And that was that was a huge bottom indicator. So yeah, just just keeping an eye on some of these overheated metrics and especially in regarding the leverage, because that can, as we touched on, be a be a huge catalyst for for some of these huge drawdowns that we see. But but as far as like the overheated in the short term, it's it's hard to predict because there is that huge aspect of of psychology that comes into play. And you know, the FOMO kicks in, a lot of the people that were betting on the price going down to forty K.

• 21:34Speaker 02

  You know, we see this huge spike up today and they're like, oh, maybe I'm wrong. The market's telling me I'm wrong. I better get in before we go up to sixty K and and the sentiment can change on a dime. And so I think that's what we'll probably see over the next couple of days. I'll be keeping a close eye on these short liquidations for sure.

• 21:51Anthony Pompliano?

  That is, it's a fantastic view of the world and I tend to think that you frame it best, right? It's like a lot of these data points can give you really interesting kind of guardrails or directional information, but probably are not things that folks who want to kind of time the market or trade off of or anything like that. It more so just helps you understand what's happening and why it could be happening. So I think it's important. I wish that somebody could figure out the laser eye metric, which would just be like, what percentage of Twitter users has laser eyes? And is there any correlation to price there as well? Because it seems like

• 22:26Speaker 02

  You gotta get the last note on that one.

• 22:29Anthony Pompliano?

  Absolutely. All right, man. Listen, this is fantastic. I really appreciate you kind of jumping on real quick and helping to explain what happened. But for those that are listening, basically, the summary is very simple. Folks got overly bullish, lots of leverage in the system. Somebody came in, dumped about 9,000 Bitcoin. Price starts to trickle down. As that happens, those long levered positions get liquidated, which accelerates a further and further downward spiral. And as that occurs, sentiment shifts, people become bearish, they start to then put on levered shorts. Obviously, at some point, you kind of exhaust that drawdown, and then it violently rips up and it basically liquidates the shorts. So lesson for each of

• 23:11Anthony Pompliano?

  you at home, using leverage, probably not the best idea, especially if you are an inexperienced trader, or somebody who simply just wants Bitcoin exposure. Just Bitcoin and chill, you'll probably be much, much better off, much less of a stressful situation as well. So Will, listen, thank you so much for taking the time to do this. And people will be hearing much more from you over time, whether it's in the newsletter, future podcast episodes. And where can we send them to follow you on Twitter?

• 23:42Speaker 02

  Yeah, sure. So I'm on Twitter at W Clemente, I, I, I, because I am the third in my family. And then as well, I'm putting out, you know, a newsletter for you on every Friday, which is kind of an on-chain update. I highly suggest checking those out because, you know, the on-chain metrics are very unique to Bitcoin, where we're able to track the capital flows through the, through the network completely transparently. You could basically think of it as, you know, if you were in the, in the traditional financial system, able to see every time someone was, was trading cash with each other, that, that's the way it is. You know, we can see everything, all the movements of coins on-chain. And so you can get a really, like you said, good outlook of kind of the macro,

• 24:24Speaker 02

  where we are in the broader cycle and, you know, the behavior of different kind of entities. So that, that's what that, that's what that on-chain update is on every Friday, and that'll be posted on Palm's Twitter.

• 24:36Anthony Pompliano?

  Awesome, man. Well, listen, thank you so much for doing this, and we'll do it again in the future.

• 24:40Speaker 02

  Absolutely. Thanks for having me on, Paul.