#878 Is a Bitcoin Supply Squeeze Underway? 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 ======================= Bitcoin 2022 is the LARGEST Bitcoin event in the world that takes place April 6th - 9th in Miami Beach, Florida. All four days will be jammed-packed with exclusive content, exciting announcements and an incredible lineup of bitcoin speakers, artists and leaders. Day 1 is INDUSTRY DAY for enterprising bitcoiners who are looking to build a business or career within the ecosystem. Days 2 and 3 are general conference days featuring speakers like El Salvador President Nayib Bukele, CEOs like Michael Saylor, Elizabeth Stark, Jack Mallers, Adam Back and hundreds more. The conference caps off on the fourth day with the world's first and largest Bitcoin Music Festival - Sound Money Fest headlined by rapper and fellow bitcoiner Logic, featuring artists K. Flay, MØ, Royal & the Serpent, Apashe, Asadi and more. Stay tuned for the upcoming lineup announcement! Last year’s conference SOLD OUT and this year’s is on pace to be 3x larger so make sure you grab your tickets before it's too late. Visit http://b.tc/conference to learn more. Ticket prices increase on JAN 14th, use promo code POMP for 10% off and I will see you in Miami!ire ecosystem bringing utility to #NFTs. ======================= Brave Wallet is the first secure crypto wallet built natively in a web3 crypto browser. No extension required. Store, manage, and grow your portfolio, get NFT & multi-chain support, and more. Download the Brave privacy browser at brave.com/Pomp, and click the wallet icon to get started. =======================

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. This episode is brought to you by FTX US. FTX.us is the safe, regulated way to buy and sell Bitcoin and other digital assets. You can trade crypto with up to 85% lower fees than

• 0:44Anthony Pompliano?

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• 1:26Anthony Pompliano?

  your crypto wallet. Most wallets are browser extensions, a Web2 technology. That means the same old risks, app spoofing, phishing scams, and theft. Brave Wallet is different. Brave Wallet is the first secure wallet built natively in a Web3 crypto browser. No extension required. With Brave Wallet, you can buy, store, send, and swap assets, manage NFTs, even connect other wallets and dApps, all from the security of the best privacy browser on the market. Whether you're new to crypto or a seasoned pro, it's time to ditch those risky extensions. It's time to switch to Brave Wallet. Download Brave at brave.com/pomp and click the wallet icon to get started. Again, go download Brave at brave.com/pomp and click the wallet icon to get started.

• 2:10Anthony Pompliano?

  Is sponsored by the Bitcoin 2022 conference. Bitcoin 2022 is the largest Bitcoin event in the world that takes place April 6th through the 9th in Miami Beach, Florida. All four days will be jam packed with exclusive content, exciting announcements, and an incredible lineup of Bitcoin speakers, artists, and leaders. Day one is Industry Day for enterprising Bitcoiners who are looking to build a business or career within the ecosystem. Days two and three are General Conference Days, featuring speakers like El Salvador President Nayib Bukele, CEOs like Michael Saylor, Elizabeth Stark, Jack Mahlers, Adam Back, and hundreds more. The conference caps off on the fourth day with the world's first and largest Bitcoin music festival, Sound Money Fest, headlined by rapper and fellow Bitcoiner Logic, featuring

• 2:52Anthony Pompliano?

  artists K. Flay, Mo, Royal, and The Serpent, Apache, Asadi, and more. Stay tuned for the upcoming lineup announcement. Last year's conference sold out, and this year's is on pace to be three times larger, so make sure you grab your tickets before it's too late. Visit b.tc/conference to learn more. Again, that's b.tc/conference to learn more. Ticket prices increase on January 14th. Use promo code POMP for 10% off, and I will see you in Miami. All right, let's get into this episode. I hope you guys enjoy this one.

• 3:24Speaker 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.

• 3:47Anthony Pompliano?

  All right, ladies and gentlemen, our friend Dylan Leclerc, he's back. Dylan, what's up, buddy?

• 3:51Speaker 02

  Hey, guys. How are you doing today?

• 3:53Anthony Pompliano?

  We're doing fantastic. How are you?

• 3:55Speaker 02

  Never been better.

• 3:56Anthony Pompliano?

  All right, Bitcoin's price climbing up. How are you feeling market sentiment wise right now as it feels like there's chaos across the world? Feels like Bitcoin may be the signal in the noise. What do you think?

• 4:08Speaker 02

  Yeah, I mean, I don't think too much has changed since our last convo. Still kind of the similar backdrop. I mean, there's three things that I look at, like from a market standpoint, there's the macro, which is the big driver. Right now, but from the Bitcoin standpoint, there's the kind of the supply dynamics, which we can see with the on-chain stuff. And then there's the derivative stuff, which is kind of the speculate, like the speculation, the leverage in the system. And so really, you know, from those two fronts, the on-chain supply side dynamics and the derivatives, the markets look really, really healthy. And so, you know, bullish for a long time. It's just this macro backdrop, the uncertainty. And the kind of liquidity tied to the legacy system is really what's making the difference right now.

• 4:47Anthony Pompliano?

  I, I think that's a great way to kind of frame it. Let's start with the charts you have. Bitcoin balance on exchanges just continues to fall off a cliff. What's your read on this? Obviously, that seems to be pretty bullish, but how are you viewing this?

• 5:00Speaker 02

  Yeah. So I mean, obviously a really good trend to see from just, from just an adoption standpoint and, you know, the not your keys, not your coins. Concept is really taking hold. I think a lot of the, a lot of the stuff that's happened geopolitically in 2022 has been a big advertisement for self-sovereignty and, and holding your own money. You know, obviously not everyone is a nation invading another nation or, you know, living, living under a dictatorship or whatever, where, you know, you're at, you're gonna have your money seized, but just the principles of being able to control your own money is something that doesn't really exist within many other things or really at all in the sense that, you know, Bitcoins, Bitcoins network is completely censorship resistant.

• 5:42Speaker 02

  And so this is a really good trend to see, and I kind of expect this to continue to just kind of chipping away at new lows. I think we're at almost four-year lows here.

• 5:51Anthony Pompliano?

  Absolutely. And I think it only is going to continue. Talk to me about the Bitcoin long-term holder relative supply as you look at this.

• 5:58Speaker 02

  Yep. So this is just, we can kind of see, we can quantify long-term and short-term holders. And if we remove the exchange balances from this metric, what we can see from the circulating supply, rather, we can see relative as a percentage, long-term or short-term holder supply. And so when we kind of see exchange balances falling at the same time as this long-term holder supply is, is kind of in this like supply squeeze threshold, right? It's near that, it's above 80% if I'm, if I'm seeing it right here. I should, I should know this off the top of my head. But this is kind of at the level where you start to see if there's any really marginal like, you know, amount of inflows into the market. And obviously, at a higher market cap, it takes more, more money to really move up the price in a significant way. But what we're seeing here is

• 6:43Speaker 02

  the circulating supply, rather that free float supply that's available to be purchased is just really, really low. So when the inflows come back into the market, and this has kind of been, I've been repeating myself here for a couple of months, and price has just been ranging around. But at the same time, under the surface, the amount of Bitcoin that's able to be purchased, you know, the hot, the stackers, the hodlers under the surface, continue to just buy. And so, you know, when the big Wall Street funds, when, when anybody that doesn't have exposure and is somehow sitting at zero, wants to come in and secure their slice, well, they're gonna have to bid up the price in a pretty big way.

• 7:15Anthony Pompliano?

  That's the beauty of this whole game, my friend, is that the Bitcoiners are not selling their Bitcoin for $42,750. When you look at the illiquid supply shock ratio, this thing has just been taking off. What's this telling you?

• 7:28Speaker 02

  Yeah, so looking at long-term holder supply, that just measures the days, or how long a coin's been held. The liquid supply, we can do a pretty cool thing where we can, with like wallet heuristics, we can basically quantify how likely an entity is, is to spend their Bitcoin. And so, a liquid supply is quantified as the least likely cohort to spend. So this is basically just taking a ratio of illiquid coins to liquid or highly liquid coins. And so we can kind of see, and there's this trend shift that I didn't capture in the, in the image, but historically, this, this ratio was trending down the whole time. As supply issuance continued to basically increase that circulating supply faster than, you know, coins would be quantified as illiquid.

• 8:10Speaker 02

  But in 2020, whether it was COVID or the halving, or I think a combination of both, we started to see that illiquid supply outpaced the new issuance, or that the new coins coming into circulation. And so this ratio has been bending upwards as a result. And there's a pretty, pretty nice correlation to price, which, you know, correlation causation, who knows. But what this is telling you is that free float, quantified by the likelihood of, of these entities to ever spend their coins again, is, is really just bending upwards. And so, just kind of another cool way to look at and visualize the supply side dynamics.

• 8:45Anthony Pompliano?

  When you start to look at the futures market, you talked a little bit earlier about like open interest and everything. You've got this chart here as a percent of market cap. What is this showing?

• 8:52Speaker 02

  Yeah, so 2021, we saw, you know, kind of exaggerated tops, exaggerated bottoms. And really, it was, it was, a lot of it was driven, or maybe exacerbated by the derivative market. And so this is just the open interest as a percent of market cap. And you could see kind of at the top of the range, you got like, the open interest was 2% of that market cap. And so those were near the tops. And then, you know, at the bottoms, or, you know, like, say, in July, we saw open interest really, really increase at the same time as there was a really strong short bias. So derivatives, they're not something that, you know, maybe the super long-term investor really even has to care about. But when you're looking at these shorter-term price moves and why these, you know, sudden volatility events occur, it's, it's most always kind of driven by the derivative market and the

• 9:37Speaker 02

  positioning of those participants.

• 9:39Anthony Pompliano?

  Yeah, it's fascinating to kind of see how, compared to the historical numbers, where we are there. When you look at the perpetual futures funding rate, I know this is another thing that you've looked at in the past. What's this showing?

• 9:51Speaker 02

  Yeah, it's just kind of a, kind of a dead zone in terms of, you know, speculation, which is a good thing, right? You can see in, in early 2021, market participants were paying an outrageous amount to go leverage along Bitcoin. So at certain points, at, say, at 0.1%, they're paying, I believe it's, it's somewhere around like 100% annualized. And it wasn't obviously a super long period of time, but at 0.1%, that's a periodic funding rate that occurs every three times a day. So you just do run the numbers there. It's around 100% annualized, they're paying to leverage long Bitcoin. Right now, it's around, it's around 5%. And so it's really just, that's kind of a neutral market rate. And oftentimes, for the last couple of months, that's been somewhat negative. And you see,

• 10:33Speaker 02

  say, at the bottom in July of 2021, you saw that that funding rate was negative, meaning that, that shorts were paying longs to enter positions. So you can kind of see there's like this, you know, it's very volatile, but it's kind of like a cost of capital for margin in the, in the Bitcoin derivatives market. And this often has a pretty strong correlation with, with price because it's traders, it's sentiment, and oftentimes Bitcoin is reflexive in the way it trades.

• 10:57Anthony Pompliano?

  Stablecoin ratios, what are you seeing here with the stablecoins, given the current market conditions and Bitcoin kind of grinding up here over the last couple of weeks?

• 11:05Speaker 02

  Yeah, so there's a couple of cool things that I'm seeing here is, one, the amount of stablecoins in the market continues to increase. So the stablecoin supply ratio, when it's trending down, it means that the amount of stablecoins relative to Bitcoin market cap is increasing. Okay, so that's one. And two, there's kind of these ball hanger bands in this chart, and just a cool way of kind of just showing the relative change in the trend. And so these ball hanger bands, when it's at the top of the band, it's saying, hey, maybe Bitcoin's a little pricey relative to the, you know, kind of dry powder on the crypto sidelines. And when it's at the bottom of these ball hanger bands, it's saying, hey, there's a lot of dry powder relative to the Bitcoin market cap. So, you know, two trends is that, one, the amount of stablecoins, and we're seeing

• 11:47Speaker 02

  stuff like algorithmic stablecoins, you have custodial centralized stablecoins like USDC, USDT, and I think that continues to grow. But two is that kind of just recently, we're at the lower range here where there's saying, hey, despite Bitcoin maybe pumping a little bit off the lows off, what is it, 32 last month in February, there's still a ton of dry powder on the sidelines that, you know, could FOMO and really pump this price up.

• 12:12Anthony Pompliano?

  Yeah, it's a huge, huge piece of the market. And then, of course, I can't let you not show the chart of the 10-year Treasury yield. I feel like every week, we just keep looking at this thing. And we've got the 10-year Treasury yield, and then we've got the 10-year, 2-year yield curve, which is just bending downward aggressively. What's going on here?

• 12:30Speaker 02

  Yeah, I never thought, I never thought I'd be looking at bonds as much as I have been recently. But yeah, it's a big story. So I think Raoul Powell calls this the chart of truth. Basically, this 30, 40-year trend of bond yields, debt demographics, all pushing these yields lower for longer. But we still have kind of been in this range, this trend. And so now, I think we really might see a test of this trend, right? We have inflation coming in at multi-decade highs. CPI probably hits double digits here in the coming month or months. And then this yield curve, right? Why does the yield curve matter? Well, it matters because in the current legacy system... In the financial system creditors, banks, they borrow short to lend long.

• 13:13Speaker 02

  So when yields, when the kind of the yield curve inverts, when short dated yields have or short dated bonds rather have higher yields than the long dated bonds. Well, there's liquidity issues and it kind of predates really every recession. So we've seen multiple kind of yields, yields flip, whether it's 30s and 5s or 10s and 2s haven't flipped quite yet, but it's flattening in a really aggressive way because of this inflationary print, these prints that we're seeing. And so I think really this is one of the things I'm watching. And I think honestly, because of what we're seeing in energy prices, because of what we're seeing in credit markets, Bitcoin could relatively outperform for a little bit, but I think the generational bottom comes when we see kind of the panic and volatility and liquidity event

• 13:58Speaker 02

  that'll come in the legacy system where, you know, Powell inevitably, I'm sorry, stumbled my words, Powell will inevitably be forced to pivot and that's when it gets kind of crazy.

• 14:08Anthony Pompliano?

  Joe, John, what questions you guys got? Dylan, what's going on, man? Good. My question is just around Tara and Tara's Luna buying Bitcoin, right? So they come out and said they're going to buy 10 billions, $10 billion of Bitcoin, I believe. I think they've already done 100 and something, 125 million or something like that. What impact do you think this has, if any?

• 14:28Speaker 02

  Yeah, it's a very interesting dynamic. I've been, I've been kind of looking into how it works and it's an interesting idea. I don't know how sustainable it is. A lot of the stablecoin growth with U S T is basically incentivized by the 20% yield that this protocol spits off, the anchor protocol. And so I think total stablecoin supply for U S T is around 15 billion. And then they're taking that, that U S T, selling it for Heather, and then they're going and buying Bitcoin. So obviously a pretty, I mean, it would be a pretty big driver. There's not a lot of liquidity, a lot of sell side liquidity. So, you know, 3 billion, Do Kwon, the kind of the founder of this protocol is saying, you know, they hope to make it 10 billion eventually.

• 15:10Speaker 02

  That would make an impact, but it's just a matter of, you know, do they have to unwind that eventually? And, and to be honest, I don't know the answer there, but it's definitely a very strong narrative. And, you know, maybe we see this as kind of the start of a new catalyst, but I, I don't have a definitive answer there.

• 15:27Anthony Pompliano?

  John, what do you got? Dylan, you started this conversation off by talking about how not much has changed in the last week. So when weeks like this go by, how do you rank things on a important scale? So for hash rate, for Bitcoin on exchanges, for whales buying, like, how do you rate all this stuff?

• 15:45Speaker 02

  Yeah, so, I mean, I think definitely a lot has changed, but more so kind of speaking about how I like my framework for thinking about the Bitcoin market. I put out kind of a detailed thread on my thoughts in December and just with some on-chain stuff in the macro backdrop saying, you know, I think that the driver is going to be really the Fed being, and I didn't see their Ukraine-Russia conflict coming up and the, you know, the second order effects with commodity markets, obviously, but just with how inflation was running and what the bond market was kind of saying. It was, I think we're in kind of an accumulation phase and Bitcoin most likely just probably chops around for a little bit. I mean, this is nothing out of the ordinary for Bitcoin with, you know, we have these accumulation markets.

• 16:27Speaker 02

  Everyone kind of forgets about it, the speculators and, and kind of the visitors in the market just completely leave and forget about it. And meanwhile, the people that have conviction under the surface just increase their stack, they build, and the infrastructure kind of in the system is stronger and more resilient than ever. And so I think that's where we are, the, the, really the driver of since, since 2020, as Bitcoins become this macro asset, has been this excess liquidity, real yields lower than they've ever been. And now the bond market's starting to say, hey, this inflation's not transitory and something's wrong. And so, you know, the money is no longer free, although it kind of still, still feels like it for a lot of participants. And I think the event that comes where people realize that maybe, hey, this fiat money,

• 17:12Speaker 02

  while still being really cheap, isn't entirely free and everyone kind of panic sells. And then comes to realize, wait, the system isn't sustainable at all. And the Fed comes in and interjects again, which who knows when that timeline comes? It could be this quarter, it could be this year, it could be maybe 2023. And that's, that's what I think Bitcoin really outperforms. I've kind of feel like a broken record there in terms of, you know, price action itself. But, you know, Bitcoin is in a position stronger than ever to kind of come out as a winner in this environment.

• 17:43Anthony Pompliano?

  Dylan, when you start to think about the price grinding up here, Bitcoin's up like approximately 25% since the start of the Russia-Ukraine conflict. Also, we're starting to see more and more folks realize that, hey, the lack of censorship, the lack of Caesarship, etc., is pretty important. We see the stable coins, we see Bitcoin coming off of the exchanges. Is this leading us to a potential massive kind of price squeeze upwards where we'll see some pretty large volatility, if there's any sort of catalyst to the situation that's been laid out here?

• 18:20Speaker 02

  Yeah, so I mean, everything I kind of view with this market is probabilistic. So like, there's definitely a probability that kind of we see a recession, we see all of this stuff in legacy markets, we see bonds selling off, equities stalling, and Bitcoin could break all-time highs. I mean, that's not my base case, but it's certainly not out of the question, just with all of the kind of the catalyst that we're seeing and the new proponents of Bitcoin, whether they like it or not, realizing that there's no other alternative. So while I still think we're going to see somewhat of a consolidation, and I think that denominator of BTC USD is kind of is leading the charge right now, where, you know, periods of time we see BTC the numerator is really that narrative and

• 19:04Speaker 02

  that adoption is driving the price action, I think the dollar strength, even though the dollar is politically programmed to debase, it is the world reserve currency, and it is, I've heard people refer to it as the cleanest of all the dirty shirts. So it is still the strongest fiat currency, and I expect the dollar to outperform a lot of these other fiats. And so what that means is financial conditions will probably materially continue to tighten. And so for that reason, I'm just cautiously optimistic about the price. Would it surprise me to see all-time highs this quarter? Absolutely not. And that's why I've continued to say I own more Bitcoin than ever. But at the same time, you know, if we continue to just chop around and, you know, agonize Bitcoin Twitter, crypto Twitter,

• 19:48Speaker 02

  it wouldn't surprise me either. So just cautiously optimistic here, but excited to see how it all plays out with the legacy system and these credit markets that continue to sell off.

• 19:58Anthony Pompliano?

  I couldn't say it better. I feel like we're watching this all unfold in slow motion. It's like the same story over and over and over again. You watch the supply, circulating supply become more and more illiquid. You start to see all the stablecoin movements. You start to see the macro environment, all this stuff. Bam, catalyst, lights on fire, takes off. And all these Wall Street losers are sitting there scratching their head, asking themselves, like, why'd that happen? And it's literally the same thing over and over and over again. I say Wall Street losers, I'm joking. But the idea being that they're evaluating these assets based on old models, old frameworks, and they're not using the data points that are now available that previously weren't,

• 20:40Anthony Pompliano?

  like the on-chain metrics and data like that, that tells a completely different story than what you would use from a valuation framework or something like that.

• 20:48Speaker 02

  Yeah, they're not going to understand why Bitcoin 10x is right after the Fed kind of flips and turns on the spigots again. But we're going to know why, because there's just not all that much supply to bid, right? So when everybody runs back into the trade, right? Because I think there's definitely a good chance that the whole Kiwi forever, yield curve control, like Fed liquidity everywhere kind of event, I think that'll happen again. It's a matter of when. And they're going to say, oh, what happened last time? Oh, Bitcoin outperformed everything? Oh, Bitcoin's an order of magnitude higher than it was trading last liquidity crisis? Oh, maybe I need some. And so while we're just saying, in our echo chamber, saying, orange coin, good every

• 21:32Speaker 02

  day, these guys don't care anymore. And it's just kind of funny to see.

• 21:36Anthony Pompliano?

  I love it. All right, where can we send people to find you on the internet or subscribe to the newsletter?

• 21:41Speaker 02

  Yeah, you can just find me on Twitter, like always, right? The Deep Dive with Bitcoin Magazine. Getting a rebrand there soon, so to be announced, but it's pretty fresh. But we kind of cover these sort of metrics every day. So you can find me there.

• 21:57Anthony Pompliano?

  You're killing it, my friend. Keep up the great work. We'll talk to you again next Tuesday. And hopefully between now and then the trends continue because looking pretty, pretty bullish right now.

• 22:06Speaker 02

  Love it. Thanks, guys.

• 22:07Anthony Pompliano?

  Later, buddy. 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.