On this special episode of The Breakdown, NLW looks at what we learned over the summer and what the fall holds for different parts of the crypto industry and surrounding spaces, including:
- The macroeconomic landscape
- Regulatory battles
- Layer 1 battles
- CBDCs and stablecoins
“The Breakdown” is written, produced by and features NLW, with editing and executive producing by Adam B. Levine. Our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: Evgen Zaitsev/iStock/Getty Images Plus, modified by CoinDesk.
What’s going on guys, it is Friday, September 3, and today I wanted to do something that I’ve been thinking about for a while, and I feel like this is the perfect time. Labor Day weekend is, at least in the U.S., the historic end of summer. It’s when the last hurrahs, the last barbecues happen, and we transition into our pumpkin spice latte season, our spooky season, Halloween season, the fall, the holidays, the leaves, etc. At moments of change, seasonal change or market change. It’s worth asking what came before and what comes next to explore what we learned, and to think about what we might come to see or expect to see going forward. Today, what I want to do is rip through a few different categories in the Bitcoin, crypto and macro space, and ask kind of where we are, what we learned over the summer, and what we might expect or what the key questions at least are for the fall to come. Now, on most shows at this point, I work off a pretty in depth outline. But for this one, I just had this idea and I really just wanted to let it rip. So, if it sounds different or more freeform than normal, that’s why.
I think the right place to start is the macro: what is the dominant macro context that’s going to shape the fall for the Bitcoin industry in particular? To understand that, I think we have to first ask what was the story of the summer and I think the summer story in macro was, in fact, a transition. At the beginning of the summer, inflation numbers were heating up, consumer demand, consumer spending were surging, the Delta variant wasn’t yet a huge problem and the general belief, the operating framework, for many in the market was that the Fed’s hand was going to be forced around tapering dovish monetary policy support for the markets. That would mean an earlier than expected reduction of bond purchases and eventually an earlier than expected increase in interest rates.
The way the market started to price this in was by selling off on tech and the high risk things that had been some of the biggest beneficiaries of that low interest rate environment. That spilled over into bitcoin and crypto as well, which are obviously even farther out on the risk spectrum than things like ARK ETFs. However, over the course of the summer, the biggest thing that changed was the rise of the Delta variant. It has created new questions about the return of economic strength, limited lockdowns, more mask mandates, just general disruptions to the way that people lived. And so what started as a recovery summer then turned into a “maybe we’re going to have to deal with this forever” sort of environment.
When it comes to the monetary policy discussion, this was really summed up by Powell at Jackson Hole. The annual Jackson Hole symposium put on by the Kansas City Fed is where the Fed likes to signal big shifts or changes, and up until a few weeks before this year’s August event, markets were expecting Powell to confirm that it was time to start tapering, or at least time to start thinking about tapering. As it got closer, though, as the Kansas City Fed had to move the event from in-person to virtual, that shifted and instead what we got was a confirmation that dovishness is going to remain intact for some time. So, what that means going towards the fall is that we’re likely to see this low interest rate party and all of the attendant consequences for risk assets continue at least through the end of the year. If that changes, it could have a pretty dramatic impact, though on bitcoin in the crypto scene as a whole.
Still, I think it’s worth even zooming out even farther here by bringing in Travis Kling, he shared a chart of the increase in central bank balance sheets and wrote this: “At risk of sounding hyperbolic, this is the only chart that matters. Most everything else flows from this, not least of which is crypto and bitcoin specifically. You can think about what your expectations for crypto would have been three years ago, if you knew the above chart was going to be flat for three years. And you can think about what your expectations for crypto would have been if you knew that chart was going to do what it just did, go from $20 trillion to $30 trillion. Those would be two different sets of expectations. I would argue total crypto market cap going up $1.7 trillion while central bank balance sheets went up $10 trillion does not strike me as overvalued. The bitcoin market cap went from $125 billion to $900 billion in three years, while central bank balance sheets increased $10 trillion. That really doesn’t strike me as overvalued. If you think that chart above has been so important these last few years, you’d find it worthwhile to think about the outlook for central bank balance sheet expansion. Expansion is set to continue for a while longer, but at a slower pace than what we just witnessed. They might even try and turn it off altogether, for a bit. That might give some investors pause about the outlook for crypto and other risk assets in a vacuum. But at this stage, it matters what fiscal policy is doing along with monetary policy. Monetary policy is set to pick up meaningfully, even by conservative estimates. So, when you look out over the next three years, in the three years after that, and after that, in the context of the three years we just had, it’s reasonable to believe crypto and risk assets broadly will have similar tailwinds to the tailwinds they’ve had. It’s true that central banks may very well taper asset purchases all the way to zero, they may even get a few rate hikes in from zero or negative interest rates currently, but both of those will be short lived. A couple quarters or a year or maybe 18 months, then the cuts will come and then more QE, and that QE will be bigger than ever and more exotic than ever. By the time we get to the 2024 bitcoin halving, there’s a good chance that printing presses will be brought faster than ever.”
Next up on our official “Breakdown” fall preview, let’s talk about regulation. The obvious next thing here will be Congress’s passing or not the infrastructure bill, and it looks like that’s going to happen. The vote is slated for the end of this month, the end of September. Behind the scenes, as we’ve learned over the last few days, the Treasury Department is trying to write even more rules into the crypto tax reporting requirements than we had previously been fighting against. It feels to me, watching that happen, that they believe this is their one shot to ram things through without the sort of fight that they now know we’re capable of. Of course, many of our allies in Congress and the Senate are dead set on trying to find other ways, other legislative means to try to challenge those broad definitions of a broker, to challenge the unconstitutionality, even of some of the requests for information, the onus of reporting that they want to put on different actors in this ecosystem. We’re starting the fall effectively, I believe, with both a recent win and a recent loss. The win is that we showed we have power and we started to learn how to organize better. The loss is that ultimately, it didn’t change the actual infrastructure bill, which could cause serious headaches going forward.
On top of the infrastructure bill, specifically, we may see more discussion around Don Beyer’s comprehensive crypto legislation that was introduced during the whole hullabaloo around the infrastructure bill, and so we really haven’t had a chance to dig in yet. The notable thing to me was the amount of power it gave the Treasury Department over stablecoin issuance, stablecoin approval, stablecoin vetoes. Candidly, I will be shocked if we don’t find out that Treasury had its hands all over that bill, as Congressman Tom Emmer speculated in an interview with CoinDesk, a few weeks ago. I think it’s telling in terms of showing their concerns around stablecoins, and it is likely stablecoins that will be a big part of the regulatory discussion this fall.
On top of these things, to other aspects of the regulatory sphere that I’m watching: one, I think exchanges are going to continue to try to race for transparency, for inclusion, for basically being good actors in the system. That’s clearly already happening and I don’t see any likelihood of that changing. I think this is an immensely positive thing. Basically trying to self-regulate ourselves faster than we have onerous regulations coming from outside, be good stewards, be good actors and actually build relationships with these regulators. I am pro all of this when it comes to these institutions that have set out to be a new generation of centralized financial services. That’s different from the question of DeFi, which is the second thing that I think I’m watching this fall, which is questions of DeFi. One of the things that the infrastructure bill process revealed was just how much Treasury in particular is scared of DeFi, doesn’t like DeFi, doesn’t like the idea of a system that they can’t control and surveil.
Just today, before I started recording the show, we found out that Uniswap is being investigated by federal regulators. It feels to me clear that there are going to be immense, immense battles around a centralized financial infrastructure, what rights we have to exchange peer-to-peer, what reporting requirements those protocols have, can you actually force reporting requirements on a protocol, can you make protocol development illegal? There are finance issues here, there are securities issues, there are speech issues, there are code issues, it’s going to be complex, it’s going to be messy, and the sides are starting to take shape. I think if anything gives me hope, from a regulatory standpoint, it’s that it has not calcified into a partisan issue. On both sides of the infrastructure bill were Democrats and Republicans vehemently fighting with each other, against themselves to push through what they believed was the correct policy. That gives us incredible hope that we can actually have substantive issues rather than crypto just falling into the same patterns of everything else that seems to happen in the U.S. political system.
Let’s talk bitcoin for a minute. From a macro perspective, I think all eyes are going to be on El Salvador. You can already see it happening this week. We’ve seen protests in El Salvador, which I think the best characterization that I’ve seen so far is that they’re a little bit less about bitcoin, and a little bit more about Nayib Bukele in general. That doesn’t mean we shouldn’t take them seriously. I think it would be to our detriment as a Bitcoiner community to not listen to dissenting voices in a place that’s going to be the world’s greatest experiment in bitcoin adoption, bitcoin adoption mandated from the top. El Salvador’s laws are set to go into effect next week. So, we’ll see a lot more about how they will enforce them, what they will do to support the community transitioning to bitcoin, and so on and so forth. I think more eyes from other governments will be on that experiment than we might think. And it’ll be important to see how it plays out. It’ll also be important to see how much the narrative around it as good or bad gets put on Bitcoin versus the government of El Salvador itself.
Another thing I’m watching this fall with Bitcoin is continued institutional involvement. And in many ways, I think I’m transitioning my view from not just the announcement of these new bitcoin trading capacities or bitcoin offerings, but to what extent they actually come to market. We’ve had now a full year of announcements about institutional investors and funds getting into bitcoin starting to allocate. And I think that we’ll start to see this fall the products of some of those early announcements on a retail side. Related to that, one of the things that companies like “Breakdown” sponsor NYDIG have been doing is trying to make it easier for banks and credit unions to allow their customers to hold, buy and sell bitcoin directly from within their accounts. Will those partnerships actually go online? And will that have an effect of enabling more people to come in?
Second, on the retail front, I think we have to keep an eye on price FOMO. At the end of the day, the thing that drives the most new people to bitcoin is when bitcoin’s number is going up and capturing everyone’s attention. And GPU technology from an adoption standpoint, is the true technology of this entire space. And I’m wondering what the mixture of things like account integrations of being able to buy and sell bitcoin from your local federal credit union with any potential price FOMO, if Bitcoin does make a run of it.
Now, let’s talk NFTs from the standpoint of retail adoption, from consumer adoption and from energy and media attention in the crypto space itself. I think it’s pretty clear at this point that NFTs are set to dominate the fall. One of the things that I believe is happening now is the start of some amount of segmentation in our understanding of NFTs such that we can perhaps start to understand what’s trending, what’s finding product market fit and what’s likely to stick around versus lumping all NFTs together. I think there are at least three verticals that matter right now and have a potential impact. There is the art and generative AI type vertical that is the CryptoPunks, that is Fidenza, is that is Art Blocks, that is Bored Apes. This is what has been driving the last couple months of insane NFT activity is getting into those things. Steph Curry buying an Ape, Visa buying a Punk etc, etc, etc. That’s clearly an important thing. Although at this point, I’m not sure that it’s actually going to attract retail, it feels almost entirely a flex game inside the crypto industry which doesn’t make it less sustainable to me. In fact, it means it’s potentially less likely to crater around the problems that happen when you invite the whole world in.
Another vertical is sports and collectibles. Obviously, NBA Top Shot was one of the breakouts of last fall, it was the thing that really got people paying attention to NFTs again. When basketball season comes back online, when other leagues announce their own approaches, will this actually be a thing that translates or will NBA Top Shot have been a flash in the pan? Based on how many people who weren’t crypto people who got in, I think you can have at least reasonable optimism that there is a there there with sports and collectible NFTs but, I still think it’s not proven enough for us to be sure.
The new one that is capturing everyone’s attention right now is gaming. Or maybe, we might call it the metaverse. What’s been happening with loot this week shows that there are totally new unexplored possibilities around when you put digitally scarce, unique objects into an ecosystem, into a thriving community and say “go create.” It deserves a show of its own, but I’m nearly positive that this fall we’re going to see a ton of experiments around that space. So, what are my questions here? Well, one is: will these insane prices sustain? I think that has a lot to do with the crypto markets as a whole. These prices are being driven right now not by a flood of new retail users getting into NFTs but by people within crypto, particularly DeFi, shifting their attention to NFTs. Relatedly, will those prices, will these incredibly high price floors actually create blockers to new people coming in? Will NFTs, either on the art side or the gaming side or the sports collectible side, via mainstreaming force? Will the people who onboard into crypto this fall mostly be coming through NFTs? What impact will NFTs have on DeFi? It feels to me like right now a lot of the DeFi energy is shifting into NFTs, or maybe looking for overlaps with NFTs, will that continue and what will it mean? And finally, what impact will NFTs have on Layer 1 battles? ETH’s gas fees are so high right now because of the activity around NFTs. We’re clearly seeing that’s a boon to Solana, which is much faster and cheaper, but if you ask the Ethereum community, not sufficiently decentralized. It feels pretty clear that the NFT cycle is going to have a deterministic impact on how we think about Layer One.
Finally, let’s close with a quick thought on CBDCs. I’ve thought for a while that China would, before the end of 2021, try to have their full-scale CBDC launch. They’ve certainly been doing enough trials and testing that doesn’t seem unreasonable. But I’m now wondering if this fall we’ll see something that’s more like an announcement for and a target date for a full rollout, or the beginning of a rollout, that starts early 2022. Europe started the year with a lot more discussion of CBDCs than we’ve seen. However, the whole point for them was starting a review period, a discussion period and a research period. So they’re kind of just in the thick of things right now. I think there’s nothing that I’ve seen that makes me think any less that they’re headed in that direction. But it’s not something that we’ve seen, for example, Christine Lagarde talk about as frequently.
And then, of course, there’s the U.S. CBDCs are a frequent topic of conversation, more connected to the stablecoin discussion recently. And I think in many ways, what I expect out of the U.S. is exactly that, that the stablecoin discussion, the CBDC discussion and the regulation of crypto discussion are going to actually get smushed into one real thing. That’s sort of the genesis for my belief, my prediction that we’ll see at least some number of politicians in D.C. advocate for the U.S. to integrate the existing USD stablecoin system as the basis for a digital dollar so that we do an end run around China effectively.
But at the end of the day, this is all speculation. Hopefully, though, it’s been a fun way to look at what we’ve gone through, what we’ve learned over the last couple months and what might be coming down next. From my standpoint, I’ve had a great summer hanging out with you, but fall is my favorite season. My birthday is Tuesday, September 7, and it’s always New Year’s for me. So Happy New Year. Happy fall. Thanks for listening. And until tomorrow, guys, be safe and take care of each other, peace!