WBD605 Audio Transcription
Bear Market Analysis with Dylan LeClair
Release date: Friday 13th January
Note: the following is a transcription of my interview with Dylan LeClair. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
Dylan LeClair is a Bitcoin and macro analyst working for Bitcoin Magazine. In this interview, we discuss the carnage in crypto in 2022 that’s bleeding into 2023. We talk about the clear signs of Ponzi schemes, the lost fortunes of crypto billionaires, and how Bitcoin regains its footing in the market.
“Even if bitcoin has all of this native adoption and organic use, the real driver of all of this, globally, is the 100 trillion dollars of a forced buying of dollars; because you’re short dollars, it’s dollar liabilities.”
— Dylan LeClair
Interview Transcription
Peter McCormack: I feel like Jordan Peterson's going off the edge a bit. It's not that I disagree with him.
Danny Knowles: No, I know what you mean though, but that thing in Canada in wild.
Peter McCormack: Yeah, it's fucking mad.
Danny Knowles: Re-education camp.
Dylan LeClair: He's just like a boomer that discovered social media; he replies to guys with like three followers and an egg profile picture.
Peter McCormack: I used to do that.
Danny Knowles: Yeah.
Peter McCormack: Danny was like, "Why are replying to these fucking idiots?"
Danny Knowles: And it wasn't like once, it was for years.
Peter McCormack: Yeah, and every one of them, and I was like, "Why am I trying to prove every person wrong? Just accept people are going to lie and bullshit about you". What it is is you put something out there and you get all those replies and you know they're wrong and you think, "I'm going to correct you, I'm going show you", and then they argue back, and then you've got 84 arguments going on for a day.
Dylan LeClair: Yeah, and then you just draw attention to the person that called you whatever it is.
Peter McCormack: Yeah, and they've won because really that's what they need.
Dylan LeClair: Yeah.
Peter McCormack: How much have you experienced over this last -- because, what are you now, like 200,000, 300,000 followers?
Dylan LeClair: I don't know, half the people are --
Peter McCormack: Everyone knows.
Danny Knowles: 290,000.
Peter McCormack: So, you must have gone through that experience.
Dylan LeClair: Yeah, I think being somewhat of an internet native and the back and forth and the people saying bad things, good things, it's part of it all.
Peter McCormack: Yeah.
Dylan LeClair: I've actually gotten really familiar with the mute button, not even block; mute is powerful.
Peter McCormack: I prefer a block.
Dylan LeClair: Yeah.
Peter McCormack: So they know.
Dylan LeClair: I kind of like just letting people just toil away, just like never being noticed, but also they can just shit talk you and say bad things and replies every time and you're just blissfully unaware, I don't know, then you never give them satisfaction.
Peter McCormack: I think what it is, I get it and I've got a lot of people muted, but when I've got somebody's who's just a massive dick I'm like, "I don't want other people seeing your shit".
Dylan LeClair: Yeah.
Peter McCormack: I'd rather cultivate a community of decent people. Anyway, Dylan LeClair, how are you, brother?
Dylan LeClair: Never been better.
Peter McCormack: Yeah?
Dylan LeClair: Excited, yeah.
Peter McCormack: How's your first bear market?
Dylan LeClair: It's great, honestly, it's great; I've learned to actually love it, the chaos. Everybody loves the bull market, the up only, we're going to make it, all that, but I don't know, the bear is something with like filtering out all the noise, all of the speculation, all of the NFTs and all the garbage and then being like, "Yeah, I'm still here; I'm here for the reason I was here one year ago, two years ago, three years ago, four years ago". I'm here for the reason that I was in high school pitching my friends at parties about this orange coin thing; that's the same reason I'm talking to you today, so it's been great.
Peter McCormack: So, you've got more conviction now?
Dylan LeClair: Yeah, I have more conviction than ever, and the exchange rate's just a thing, and it's kind of satisfying seeing -- because I remember when Bitcoin was traded at $17,000 in 2020 and everybody was euphoric and the chart looked great and it was on CNBC every single day in the news cycle, and now Bitcoin's $17,000-whatever today, and it's dead and the thesis is broken and all of these things and it's just kind of funny how human psychology works.
Peter McCormack: When we made the show with Harry before this, we looked up -- so, I launched a podcast, I think it was 23 November 2017, the price on 17 December, so just less than a month after I launched the podcast, was what?
Dylan LeClair: $20,000.
Danny Knowles: $20,000 pretty much, yeah.
Peter McCormack: Yeah.
Dylan LeClair: That was the top.
Peter McCormack: Then here we are, five years later…
Dylan LeClair: What Bitcoin did, go sideways.
Peter McCormack: Yeah, we realised it's been a stablecoin for the whole time! Do you think we've bottomed?
Dylan LeClair: I think the worst of the price-based capitulation is done; I think we have a painful sideways existence for some time. I don't know exactly, but for the most part, the exciting part of the bear market in terms of the volatility, the deleveraging, whatever it may be, there's potentially another catalyst or two, like Bitcoin, crypto native-wise, but for the most part, we've just washed the dead bodies to the shore.
Peter McCormack: Yeah.
Dylan LeClair: Like Peter Rizzo, and I've told this story a few times, he had the funniest analogy ever. I think we were on a call or we were somewhere where we just hanging out and he was like, "This is what you don't understand", he was like, "Here's the analogy; you're in an alley and you're in a dark alley and no one can see you and two guys come and they jump you and they're just kicking the shit out of you and beating you up, and you're just fight or flight mode, just trying to protect yourself, trying not to die.
"These guys rob you, they take your money and they're just stomping you on the ground. And once it's over, and once the guys left and they leave you in the alley, which is the last 12 months, you've got another 2 to 3 to 4 hours of just huddled; your body's in shock, you don't know what's going on until you realise that no one's coming to get you and you've got to crawl and pick yourself up and get out of the alley and get some help and recover". So, I think we've still got to crawl out of the alley here, but that's fine because we didn't die!
Peter McCormack: Yeah, and they might be just about to come back in the alley and just punch us a couple more times.
Dylan LeClair: Yeah, a couple of more gut punches maybe, but we'll see.
Peter McCormack: "We didn't get that fucker enough!" Do you remember with Rizzo, were you there, it might have just been Jeremy, when he said he's a cycle maximalist?
Danny Knowles: Yeah, I was there, yeah.
Peter McCormack: I was like, "No, Rizzo, this time it's different, this time it's different, Rizzo. We're going to have a supercycle; it's not going to come down as much". He was like, "I'm a cycle maximalist; it's going to be the same shit over and over".
Dylan LeClair: Yeah, he was pretty right too.
Peter McCormack: Yeah.
Dylan LeClair: It was some time in 2021, he was like, "Listen, man, this is what's going to happen, and I don't need any data, I don't care about inflation or anything else". He was like, "In 12 months' time, we're going to be 70% lower. I don't know the exact timeframe, but everybody thinks this time's different and it's a supercycle", and he used to work with Dan Held and all that, and he was like, "And the supercycle thesis is hilarious because everybody's going to lever up and everybody's going to get absolutely rekt, and then it's going to go down 70% and we're going to do the whole same thing over again", and Rizzo was right, so I've got to hand it to him.
Peter McCormack: Yeah, props, Rizzo, Rizzo was right, but it's going to be different this time.
Dylan LeClair: Yeah, the next one is a supercycle.
Peter McCormack: The next one is a supercycle.
Dylan LeClair: Yeah.
Peter McCormack: We're going to get out of it. Yeah, so it's interesting, you've become a leading analyst; really interesting following your Twitter over the last year, it's brilliant, congratulations.
Dylan LeClair: Thank you.
Peter McCormack: I don't know how you do it, you seem to be fast on everything that's happening, you've got really good intuition. It's been a real pleasure to watch what you've done. But over this year, did you have suspicions of what was coming; did you see much of what was coming? I'm really talking about this leverage contagion that's happened.
Dylan LeClair: Yeah, I will say in 2021, the double bubble kind of threw a wrench through some of the analysis. I was surprised that we broke a new all-time high in the fall, and from there the Fed was still printing, and I didn't signal the top, I didn't nail that there. But when we were on $40,000, maybe $35,000, whatever, I was actually in Europe boarding, I was in Prague going to Madrid as this whole LUNA/UST thing was popping off.
I hadn't really dug too much into LUNA, I don't really care, I'm not buying the newest Ponzi on the crypto block, but I just started to examine the mechanics of it just to understand because there's a lot of Bitcoin buying; they bought 80,000 Bitcoin or whatever it was. I started digging into the mechanics and I see, as I'm in this airport, I see the UST peg break, and there's like $20 billion of stablecoins in this synthetic AlgoStable or whatever, and I see that peg start to go to the 98 cent bound, or whatever it may be. That was like the point where, once it reached 98 cents, they start to liquidate the Bitcoin.
So, yeah, I started to see the crypto market start to tank, and I was like, "Well, hey guys, first off, get out of the UST", and second off, I started to look at the mechanics in real time. I'm on crappy Wi-Fi on my phone in this airport, I was like, "I think LUNA's probably programmatically going to zero, they're just hyperinflating the supply of it".
I talked to a couple of buddies after the fact LUNA unwound to zero, but Bitcoin was still like $30,000, I think it went to $25,000 or something and recovered a bit, and I talked to some buddies and some friends of friends, and I was like, "Oh wow, wait", I just kind of realised there were $10 billion, $20 billion of stablecoin promises that just evaporated. I didn't live through a financial crisis but I have read about a bunch of history in great financial crises and other historical case studies, and it was like, "This seems like a contagion event".
So, I've always had a distrust for yield products, but that was the first time that I said, okay, if you look at the yield products in crypto and how they generated the yield, it was futures arbitrage, GBTC arbitrage, and then both of those disappeared in the earliest phase of the bull market. The last one that everyone kind of ponied onto was UST, so when that blew up, it was like, "Okay, there's some big-time contagion".
So, Celsius, go down the list, I think I was able to spot a lot of those and really turned pretty bearish on Bitcoin, crypto, not on a long-term thesis but just near term, medium term, just given the fact that there's no lender of last resort in this ecosystem and the fact that there's all this bad debt out there, and the counterparty risk just kind of ravaged the whole thing. So, yeah, I didn't know that FTX was going to implode in June, but obviously the signs were there.
Peter McCormack: I don't think many people spotted that.
Dylan LeClair: No.
Peter McCormack: I think they did a good job of gaslighting everyone. I remember when we were in Miami and we're driving around, we saw the massive Tom Brady or Gisele adverts and they were doing their TV spots. It felt like every crypto trader on Twitter, the ones I do follow, they were all using FTX. I just assumed they were the next Binance, they just managed to somehow build a massive customer base and had some unique products and were doing all right; I had no idea what was going on in the background. I know a couple of people had spotted it, but I think they caught everyone off guard.
Dylan LeClair: Yeah, funnily enough, over the summer, and none of the outward-facing influencers or whatever, but it was literally like some anon crypto, literally like a camel and a couple of others, like a cat and a few other anonymous crypto guys that I interact with, were just constantly shitposting about how SBF was a fraud and about how FTX was a domino and all of this. I just kept it in the back of my mind because these guys are very, very smart traders, yeah, they're just fantastic traders; they're not degens, they're actually very objective, bull and bear.
So, I was DMing one of them, because Voyager came out and they went bankrupt and Voyager, they released their loan book, and they were like, "Oh yeah, one of our debtors, Alameda Research, owes us $370 million". I DMed this guy and I go, "Why does Sam have his hand in every bucket shop in this space?" and he goes, "You're starting to realise?" And he sent me a document, a screenshot of a document and it was from 2019 and it was the Alameda Research pitch deck and it was 15% fixed-rate loans, "We have one investment product", and it was slides and it showed their performance and it was just up only with no volatility. Maybe, Danny, if you want to show this, or if you look at what Madoff's --
Peter McCormack: I was about to say that, I was just about to say the last two nights, we've been watching the new Netflix series about Madoff. Well, I say that, I fell asleep, but Danny's been watching it; has it been any good?
Danny Knowles: Well, it's pretty good so far, yeah.
Peter McCormack: Yeah, I've watched about the first five minutes.
Dylan LeClair: But if you look at Madoff's return, his returns over the years, it was up only with no downside volatility. So, he outperformed S&P every time, but he did it with no volatility to the downside. I took that deck and I sent it around a couple of times, and I said, "No idea if this is real, but I suspect it's fake, because if they actually did this --", because there was an Alameda pitch deck from the 2018/19 bear market, and it shows the price of Bitcoin and ETH just tanking. It went down, Bitcoin went down 80% on a ton of volatility, like there were huge bear market rallies and all this, as you probably remember, and Alameda's performance was up only.
I sent it around to a couple of buddies, and I was like, "No idea if this is real", and I didn't want to post it to Twitter because these guys were like the titans of the bear market, they were bailing everybody out and I wasn't willing to stake my reputation on some anon tip, but I said, "If this is true, these guys are running a Ponzi".
I'm pretty bearish on almost all the crypto coins or whatever, but fast forward two months, and the CoinDesk Alameda balance sheet gets leaked. It was like, "Oh, these guys, Alameda Research, the titan hedge fund of the crypto industry, has $14 billion of assets against $8 billion in liabilities, and the assets are their own exchange token, like $7 billion or $8 billion of it, and a bunch of other Solana ecosystem coins with no liquidity, none of these things have liquidity, but especially FTT. It's their own exchange token, which they're the primary market maker of, and they're collateralised against it, collateralised loans".
So, at that point, I was certain that FTX, or at least Alameda was functionally insolvent. The question was whether FTX and Alameda had a relationship, which we all know how that ended. But the sad thing is this whole thing convolutes Bitcoin, or FTX collapses because someone's running a fraudulent scam, and all of a sudden your friend is like, "Hey dude, what's happening with Bitcoin?" It's this realisation.
There were obviously people who knew that there was leverage and speculation and whatever, but freedom money enabled, or is enabling, has enabled, somewhat of a golden age of fraud in the form of blockchains and tokens and the whole ecosystem.
Peter McCormack: Yeah. Do you think, if there'd been no Alameda, FTX had just been its own entity, do you think it would have survived?
Dylan LeClair: Well, here's the interesting thing and, Danny, you might be able to pull this up, is in 2019, Su Zhu, former Head or Co-founder of Three Arrows Capital that went bust in the whole LUNA Ponzi, and these guys were also one of the best performers, titans of the industry during the bull market, alleged billionaires, etc; but Su Zhu published those two slides I'm referring two of the Alameda pitch deck.
He published them with like a thinking emoji or a suspicious emoji, and then quote retweeted that a couple of months later and he goes, "These are the guys that are spinning up a BitMEX competitor with a new ICO basically because they ran out of money". If you look up maybe "Su Zhu BitMEX" you'll find that quote tweet. But it was basically, whatever Ponzi they were running to get those Bernie Madoff-style returns, well they ran out of greater fools so what did they do? They launched FTT from nothing, they spun it up from nothing, and then launched FTX.
Then from there, 2020 and the whole DeFi explosion, they basically copy and pasted Solana -- there it is, right. So, "These guys are now trying to watch a BitMEX competitor and do an ICO for it", and the ICO was FTT. So, these guys were comingling, maybe not comingling funds, but the FTX product --
Danny Knowles: "No downside" in bold.
Dylan LeClair: Yeah.
Peter McCormack: So, these are the packages, "We offer one investment product, 15% annualised fixed-rate loans, no lockup. We can accept both fiat and crypto and can pay interest denominated in either. We can take on another $200 million of capital and achieve returns that beat traditional and crypto markets. For investors with specific risk profiles, we are happy to discuss custom packages. For investments of $50 million or more, we are willing to discuss higher rates of return. These loans have no downside".
Dylan LeClair: "No downside" in bold.
Peter McCormack: Yeah, "No downside" in bold. "We guarantee full payment, the principal and interest, enforceable under US law and established by all parties' legal counsel". How is that enforceable because clearly it isn't?
Danny Knowles: It was a lie.
Peter McCormack: Okay, "We're extremely confident we'll pay the full amount. In the unlikely case where we lose more than 2% over a month, we will give all investors the opportunity to recall their funds, and we still guarantee full repayment". Can you imagine the conversation when they said, "Let's put this shit together?"
Dylan LeClair: Yeah, so I saw this in the summer, and immediately was like, "No, that's a hit job, a reputational hit job". I'll post anything and everything. I've made a lot of friends, Peter, in the crypto industry, I've made a certain amount of enemies just off of my willingness to just call BS on things, whether it's crypto scams or calling out like Celsius and Alex Mashinsky or whatever. I don't really necessarily care about what people think, I'll stand up for what's right, but I didn't post anything about it because I was like, "Well, this is obviously fake, I mean come on"; I didn't see that Su Zhu tweet.
It was so obviously a Ponzi, like, "No risk, no downside"; these things don't exist in capital markets, it's not a thing. So, the fact that they were able to do this, raise potentially at least tens of millions, maybe hundreds of millions of dollars, and then, once they ran out of money, launch an ICO, launch an exchange, and continue the scam for three more years, I think that says something about the crypto ecosystem in general. Maybe that's over, maybe that era is done, like the scamming, ICO perpetual motion machine hot ball of money, but maybe it's not.
The whole thing with Bitcoin being cross-collateralised with all this garbage, that's the one thing where I think it would be best if we could leave it behind. Unfortunately, Bitcoin is freedom money and people can use it how they wish, so…
Peter McCormack: So, we lived through 2017, the ICO bubble; I definitely bought a few ICOs, wasn't very successful with them, certainly towards the end I wasn't. I remember putting two Bitcoin into some ICO that was like linked in on the blockchain and it pretty much died before it happened, and by the time it launched, my tokens were worth, I don't know, maybe $100, and that, to me, I thought the end of it, but they've just been repackaged. The thing is, these platforms, like Ethereum, they're designed to allow people to do this. So, if you ask me, "Do we think it's done?" I don't think it's done.
Dylan LeClair: Yeah, Ethereum's entire purpose is to create these things.
Peter McCormack: Yeah.
Dylan LeClair: Like ICOs or dApps or DeFi, I think some of this stuff's cool, like Ethereum can do a ton of things that Bitcoin cannot and will never ever be able to do by design, and people that say like, "Oh, but Bitcoin DeFi is coming", well, it's not, in the way that Ethereum has DeFi, it's not. First off, DeFi isn't decentralised finance, it's not decentralised; it is financed potentially, but you're using centralised stablecoins. We can go down the rabbit hole of Ethereum, the OFAC compliance stuff, I'm sure you've talked about that ad nauseum, but Bitcoin will never be that, and that's a good thing.
Ethereum's entire shtick is creating tokens, swapping tokens, leveraging tokens, and ultimately, what's the value of these tokens; who's the marginal buyer of insert blank altcoin here? There are none. At some points in the bull market, it's like assign a narrative or whatever, but like all things, these things return to their terminal value, which is zero, or trending forever lower. Look at any altcoin, most every altcoin, and if it looks good, just give it some time. Look at any altcoin in Bitcoin terms, it's just making lower highs.
Peter McCormack: Yeah, there's something outperforming Bitcoin at the moment.
Dylan LeClair: What's that?
Peter McCormack: Monero.
Dylan LeClair: Yeah, okay.
Peter McCormack: But that's an interesting enough thing, like I don't care when people say, "It's a shitcoin, shut up", there's something interesting enough in Monero and I understand why people use it, I understand why it's built a community. The only way I see this going away, Dylan, is with massive SEC enforcement on exchanges.
I know things like maybe Binance, in jurisdictions outside the US, people will do it, but if you're going to have a free market, you're going to have a free market for scammers as well; it's just always going to be that way. All the crypto degens, when it picks up, they all come flying back in, they'll all start trading this shit again, Multicoin Capital will probably invest in a bunch of them. The thing I'd be saying is, do you think Multicoin Capital are going to get out of tokens?
Dylan LeClair: Well, yeah, Multicoin Capital's down 90% this year.
Peter McCormack: But they're above their benchmark.
Dylan LeClair: Yeah, their benchmark is Solana, which is down 95%, so they're beating something. No, the thing with crypto, and to an extent, this is true of Bitcoin as well, this is true of the finance up-only boom that happened post 2020, people believed, regardless of whether it was like Tesla or the SPACs, or literally pick any, like ARK Invest, like why did Bitcoin go up? It went up.
Well, there is attributed thesis to it, which I believe still to be true, and maybe we're the idiots at the table, but if you look at it, why anything went up, it went up because it had marginal flows and there was an inelasticity to its supply relative to the demand. So the altcoin, XYZ went up 10,000% relative to Bitcoin's 300% or 500% because there was really no one selling or transacting these tokens, and a small amount of flows pushed the exchange rate up a billion percent.
So, it's the same reason why any of these financial assets outperform, it's just because they had marginal flows, but when you try to sell the thing -- like Alameda's tokens had spun up; one of the things it created it was called Maps.
Peter McCormack: Yeah, I read about it.
Dylan LeClair: It was a DeFi wallet integrated with a map, like a literal Apple Maps, Google Maps, it was a DeFi wallet with its own token of course, because of course you need a token, on a Maps platform, and the fully diluted value of this thing was like $10 billion, so all the tokens times its price. Really? And Sam was saying all these things. It was the same everywhere, the same with Multicoin Capital or Solana, Solana was a $100 billion asset; think about $100 billion.
So, will Multicoin exit their bags? Well, who are they selling to; who's the marginal buyer of Solana for $100 million or whatever it is? And that's why FTX left, because they were collateralised against something, they tried to sell it, and there were no buyers. You couldn't even sell $1 billion of Bitcoin right now without some pretty serious slippage, and likewise, if you try to buy $1 billion of Bitcoin, it would be quite a move.
Peter McCormack: But that is still quite impressive for Bitcoin.
Dylan LeClair: There will be buyers.
Peter McCormack: Yeah, there will be buyers, there'll be $1 billion liquidity.
Dylan LeClair: Yeah.
Peter McCormack: Some of these things, there just wouldn't be.
Dylan LeClair: No.
Peter McCormack: You would run out of buyers.
Dylan LeClair: Yeah, the reason that Bitcoin never dies is because they are marginal stackers and hodlers of last resort. And some people, like the legacy macro guys or whatever, make fun of the stupid hodlers or whatever, but there's a reason why Bitcoin's crashed 85% four or five times and it never dies; and it's always a bubble, it's either a bubble or it's dead. The Bitcoin chart, in linear terms, always looks like a euphoric bubble or a tragic burst, there's no in between ever.
Peter McCormack: Yeah, I romanticise the thesis that this is by design, this is how Bitcoin grows, that it latches onto those human emotions of fear and greed and it just takes us through these cycles. And then maybe this was in Satoshi's design with the halving, maybe that's within his design, that he understood, because he seems to understand a lot. He understood human emotions, human trading emotions, and maybe he knew that there was no way this thing could just have gradual constant growth, it had to have these cycles, and we do these step changes. And with each step change, we bring in like 10X more people, and we lose some, but this is the only way it could grow, maybe; I mean, I romanticise about it.
Dylan LeClair: Whether he designed it to be that way or he just designed it and it became that, I think, yeah, you're right in the sense that I don't think it could monetise another way. There's no way it would ever appreciate like Bernie Madoff or the Alameda equity curve, and it's never just going to go up 1% a day and then 1%, and 1%, and never go down.
Peter McCormack: Because if it did, people would just pile in and buy more.
Dylan LeClair: And then they'd leverage and they'd borrow money and do all these things and throw their life savings into it and it would go up 200% in four days.
Peter McCormack: And then they would exit and we'd crash. So, it's almost impossible for that to happen.
Dylan LeClair: Yeah, and I think that's by design, and it's trading with relatively low volatility now because every market maker and hedge fund and exchange, they all got wiped, but I think that sign of low volatility is almost like a sign, and maybe, yeah, could we go lower? Of course. If equities limit down and the dollar goes to the moon and volatility explodes everywhere, then Bitcoin's going to crash for the time being, but the sign of the low volatility now, I think, is somewhat of a sign of, and we've seen this in the past, relative seller exhaustion.
So, maybe you play this clip in six months and you're like, "Oh, seller exhaustion", and Bitcoin's down 50%, who knows, right? But what do you see typically with any financial asset, but with Bitcoin in the past when Bitcoin was just like $3,000 for six months and everyone was like, "Oh my God, this thing is so boring", and then, all of a sudden a few funds buy, some flows come in and then shorts covering, what, it went to $12,000 in like a month, two months.
Peter McCormack: Yeah, let me ask me some of that stuff that you'll understand. You say "shorts covering", are there shorts still waiting for it to go lower?
Dylan LeClair: Yeah, of course. Like open interest, for every short there's a long, and depending on collateral type and where they entered or not, they can be in or out of position. For instance, here's an example that you'll probably remember quite well. In the middle of 2021, when there was the Elon thing and the China FUD and all that and Bitcoin was off its high of $60,000 and it kind of muddled around $50,000, then went to $40,000, and then one afternoon, I think it was the morning on East Coast time, it went from $40,000 to $30,000 in 25 minutes and it was like everything was down in crypto 30%, 35% in a matter of an hour; why did that happen? It was mechanical.
There was a whole bunch of leverage longs who were using Bitcoin as collateral, and they all became forced sellers at once, and that was just because of where they purchased. So likewise, if you think of literally the inverse of that, for instance there's a whole bunch of guys on Wall Street going to CME Futures and using the new Bitcoin futures ETF, or even the Bitcoin short futures ETF, and then using that to short sell Bitcoin, and it's paper denominated, so it's USD collateral to short Bitcoin. If price starts to creep up, and you need buyers for prices to start to creep up, but eventually, there are forced buyers at some point.
So, when Bitcoin in 2019 was at $3,000 and it went to $6,000, it was up 25% in a day, and then it went to $6,000 in a week, that was more mechanical than anything. It wasn't like there was a flood of new buyers that doubled the market cap, it was old sellers that became forced buyers with short sellers covering. And we're seeing that right now, today, with Bitcoin miners, Coinbase, MicroStrategy, they're all up like 10%, 15%, 20% or something.
Peter McCormack: Yeah, what's that about; why's that happen?
Dylan LeClair: Well, it's just they're much more liquid than Bitcoin is and there are people shorting them. So, if you're a forced buyer into a liquid market, the price explodes, and the chart's still super-ugly.
Peter McCormack: Yeah, but why today; why suddenly all these popping?
Dylan LeClair: Bitcoin's up 3% and the stock market's up 2% and you try to cover your Marathon short and there are no sellers and you'd have to buy higher.
Peter McCormack: And is it covering that short or is that some kind of fear that this 3% up might be a signal of the bottom, we could see higher highs, sorry, not higher highs, but maybe like a 10%, 20% over the coming months; or is that literally just a reaction to 3%?
Dylan LeClair: Yeah, it's all relative and these things are almost like Bit Trade, like the miners' trade derivatives of Bitcoin in a way.
Peter McCormack: Okay.
Dylan LeClair: It's almost like leveraged Bitcoin, like Marathon, they have liabilities in dollars, they produce Bitcoin, they're quite literally a leveraged Bitcoin operation. If you look at all these charts, like Marathon, Coinbase, MicroStrategy, they're still super-ugly despite being up big today, they still look terrible; if something's down 90% and goes up by 25%, it's still down 87% or something, it's not that impressive. If this is the bottom, or when we get through the bottom, and some people are in the market for that, some people are just passively acquiring the thing, and I respect both, but it will be a combination of new money coming in, and partially that's like dollar liquidity-tied type things, and it'll also be like the people that were short selling and waiting to cover or waiting for lower prices, maybe they even shorted into the lows, they're going to cover and there are not going to many sellers left.
Think about all the selling that happened over the last 12 months, all of the forced selling, and if you hadn't sold Bitcoin in the last 12 months and you're a hodler, what are you going to sell for? Maybe we go into a recession and you sell what you can because you lost your job, that's certainly an aspect of it; maybe you are a Bitcoin and Tesla holder and Tesla went down a bunch and you need some cash. These are all things that are going to happen at the margin, but the brunt of the selling has happened, we're down 80%, every firm in the space has blown up, we've had three exchanges blow up.
Peter McCormack: Dylan's calling the bottom; that's going to be the title of the show, Danny!
Danny Knowles: The Bottom's In!
Peter McCormack: The Bottom is In with Dylan LeClair.
Dylan LeClair: Oh no!
Danny Knowles: A bit like the Willy Woo shows.
Peter McCormack: But in quotes, fucking quotes! So, I don't know your work structure, but you are relentless in producing content. What is it you're specifically always looking for, or are you just dealing with whatever comes in?
Dylan LeClair: Yeah, I full-time research essentially. So, with Bitcoin Magazine, I just came from the HQ; we produce a research newsletter called Bitcoin Magazine Pro, and that's part of my day. But more so, my day's not spent in writing that, my day is spent studying, researching what to write, not for that specifically. I work with a fund, I do a couple of things, have my own company where we consult with people on Bitcoin and Bitcoin-related things. But yeah, I spend probably eight to ten hours a day reading and looking at all this stuff.
Also, increasingly, as I've come to talk to more and more people in the legacy space, it's explaining Bitcoin to boomers and explaining like FTX imploding and why that's not a death knell of Bitcoin; it's something that takes time, there's a lot of nuance to these things. So, making a sense of this whole shitstorm is certainly part of my day.
Peter McCormack: So, the boomers are still interested?
Dylan LeClair: Yeah, of course.
Peter McCormack: Okay. So, yes, most of the companies that are going to blow up have blown up, but there is one important situation that's currently bubbling away that people are not sure how it's going to play out, so Genesis trading, what's going on with GBTC? So, we had Steve McClurg in the other day, we've talked about that with him, it's actually affected one of my sponsors, Gemini's a sponsor, they hold $900 million of their customer funds. What's your read on it, or let's just go back a step, do you want to explain what GBTC is to the listener?
Dylan LeClair: Sure.
Peter McCormack: And then talk about the trade, that everyone was piling in, what the benefits were, why we're negative, and then let's get into the details.
Dylan LeClair: Sure. So, GBTC, Grayscale Bitcoin Trust, was founded in 2013, maybe 2014, and it trades over the counter, OTC, so it was really the first thing Wall Street or legacy funds could access that was like Bitcoin exposure. So, it's a closed-end trust meaning you could bring $100 or an equivalent amount of Bitcoin to Grayscale, you'd give it to them and then they'd give you shares of GBTC, an equal amount, or at least an equal amount of net asset value, in this wrapper, in this GBTC wrapper.
At first, it was locked up for 12 months so you couldn't sell it or exchange it elsewhere over the counter, but that changed to 6 months in 2020. But this product has a built-in 2% fee forever, so whatever you hold, that net asset value, they take 2% of that divided by 365, or technically it's probably divided by 252, the amount of Wall Street trading days, and they shave a little bit off that net asset value as a fee in perpetuity, and that's what you sign up for when you create shares of the Trust.
Peter McCormack: And the reason to buy is because you can't get direct exposure to Bitcoin, you just want somebody else to handle that exposure for you?
Dylan LeClair: Yeah, so there are a couple of reasons, one is because Grayscale was the only product on the market for such a long time. So, for instance, it traded at a premium to net asset value for almost its entire existence. So, I told you, "You bring $100 to Grayscale" and they give you your GBTC shares. Well, for the longest time for instance, if it was trading with a 20% premium, you would go to Grayscale, you'd give them $100 or $100 of Bitcoin, you'd get $120 of GBTC shares that has a net asset value of $100, but on the market it's worth $120.
So, whether you were interested in the Bitcoin itself or you just were interested in the arbitrage, there was almost this ability to pick up free money for the longest time because it was the only option for Roth IRAs and Wall Street and whatever. And really this kicked off in a big way, they held Bitcoin, they held 100,000, 200,000 Bitcoin going into 2020; but post-COVID, Money Printer Go Brrr, there were all these Bitcoin catalysts, here's GBTC trading at a premium to its net asset value, this became a real popular trade on the street and for crypto funds, and they switched that 12-month lockup to a 6-month lockup.
So, a ton of funds came in, and whether they were shorting Bitcoin and buying the GBTC, or they were just outright taking their Bitcoin or dollars to Grayscale to get their shares, they pummelled into this trade. Specially, say at the end of the year in 2020, some funds literally would go to Grayscale with a couple of days left in the year just to mark up their books. They'd give the $100 to Grayscale, they'd $120 of GBTC back that they can't even move yet, and they'd mark up their year-end funds and be like, "Look at our net asset", or, "Look at our performance this year", because all of a sudden, there's that, say 20% performance. So, I'm not saying they did that with their whole fund, but there was an incentive to do so, a massive one.
So, as it turns out, Genesis, which is a subsidiary of Digital Currency Group, which is the owner of the Grayscale product, has a lending desk, and they were allowing all these funds, both in TradFi and crypto, to pledge crypto assets, Bitcoin, shares of GBTC as collateral. So, I could go to DCG, and funds did this specially, Three Arrows Capital, I believe BlockFi although don't quote me on that, and a few other funds went to Digital Currency Group, they got shares of GBTC, they pledged them with Genesis, borrowed more money, whether in dollars or Bitcoin, went back, did it again, did it again.
So, in this process, if you think of the bull run and the catalyst, everyone thinks of Saylor, which is true, he was preaching Bitcoin institutional kind of adoption, all this; but Saylor bought 100,000 Bitcoin, right now he has 130,000 Bitcoin. Grayscale bought about 400,000 Bitcoin from the start of 2020 to when they stopped buying in February of 2021; 400,000 Bitcoin. Some days, they literally announced the flows, and it was like 15,000 Bitcoin they just market bought. So like we said, price is set at the margin, and if there are not any sellers, the price is going to explode.
So, GBTC was kind of like a quiet, biggest catalyst in the bull market, and all of these funds levered up to put on this trade because it was free money. But what happened was this trade got arbitraged so hard and people created so many GBTC shares while they're shorting Bitcoin or maybe hedging and eventually selling these shares after a six-month lockup that the premium that was, historically, always a premium, or like 99% of the time a premium, went to a discount to net asset value.
So, the day that premium went to a discount, GBTC, Grayscale, stopped buying shares. So, in February of 2021, Grayscale stopped purchasing Bitcoin because why would you bring $100 to get $99 back in something that you can't access for six months and doesn't have the liquidity that Bitcoin does? So, there was no incentive to create any more shares of GBTC anymore, and it's an illiquid product. So, as it turns out, not only were funds doing this, but DCG itself was going to Genesis, borrowing money and buying GBTC in the market to attempt to prop up that discount and that asset value to get it back to flat or to a premium again.
Peter McCormack: It sounds a little bit like what LUNA was doing, there are synergies in that you're trying to essentially manipulate the price.
Dylan LeClair: Yeah, maybe not what LUNA was doing, honestly, maybe the parallels, and it's a little different, but the parallels are maybe more of like what Alameda was doing in a sense of parent company, subsidiary that were supposedly not related to each other, using leverage and pledging their own shitcoin, like FTT, there was nothing backing FTT. Legally, the Bitcoin backs the GBTC Trust, the Grayscale Bitcoin Trust, and legally it's the shareholders that have title to the Bitcoin; the only problem is there's no redemption possibility.
So, Three Arrows was huge in this trade. When all this started to blow up, Three Arrows, and I think BlockFi was one the customers or one of the counterparties of Three Arrows, the Bitcoin exchange rate starts to go down, they have these loans from BlockFi, BlockFi says, "Hey, man, margin call", BlockFi starts to sell off their GBTC because that's their collateral. And even Bitcoin, during certain deleveraging, it has buyside liquidity, but if you're trying to sell $5 billion of an asset and that's not typical, the exchange rate's going to go down, so with GBTC, it does a lot less volume than Bitcoin does.
So, you see during every single one of these, whether it's the LUNA implosion or the FTX implosion, Bitcoin went down but that GBTC discount went down more because there were forced sellers of this product. And as it turns out DCG was kind of -- and I'm not a legal expert, but you can argue that there were sufficient disclosures or not about the company doing these things, and they really had their hands on both all of the upside catalysts in this bull market and many of the downside catalysts too.
Peter McCormack: But it seems like they didn't really need to do it; I can understand why they want to prop up the price.
Dylan LeClair: Correct.
Peter McCormack: But it seems like, if you said there's a management fee of 2% in perpetuity, even with a discount, they're still getting their 2% in perpetuity.
Dylan LeClair: 30 Bitcoin a day.
Peter McCormack: They didn't need to do it.
Dylan LeClair: No.
Peter McCormack: I don't know what the kind of strategy behind it was, but they're trying to push against the natural market forces that's pushing that into a discount.
Dylan LeClair: Yeah.
Peter McCormack: It seems pointless to have done it, because one, it's risk.
Dylan LeClair: Yeah.
Peter McCormack: Not only risk for them, but risk for Genesis, risk for Genesis' customers, potential legal risk.
Dylan LeClair: Yeah.
Peter McCormack: Why do it?
Dylan LeClair: Yeah, I can't think of many other things than greed, and I'm not one to judge, do what you want, but the market forces, there's a reckoning coming. Just off of Bloomberg headlines, the SEC and the DoJ and all that are looking into the Grayscale DCG operations, and we'll see how it plays out. There is an activist campaign to redeem GBTC that's gaining plenty of traction right now.
Peter McCormack: What is that; can you talk to me about it?
Dylan LeClair: Yeah. So, there is organised buy, in part David Bailey, redeemgbtc.com; it's somewhat of a coalition to organise GBTC shareholders to get some form, and in what capacity is yet to be known. There's not an official planned action yet, more so just a way to organise and coordinate shareholders because 600,000 Bitcoin, like billions and billions of dollars of value, are locked in Hotel California with no way out with this company that may or may not face bankruptcy and owes money to Gemini's own product and all of these other counterparties. They have this really golden goose of an asset which is this Grayscale Bitcoin Trust.
So, trading at price equivalent of, if Bitcoin's at $17,000, it's trading at a 50% discount, right, that's Bitcoin trading at $8,500 equivalent. So, a lot of people that have bought GBTC have gotten screwed, and these are people in Roth IRAs, these are institutions, etc. The SEC, for good reason or not, isn't allowing an ETF; an ETF would fix these flaws. An ETF, every dollar of buying pressure, every dollar of selling pressure is a dollar of Bitcoin that's acquired or sold, which is not what happens today, no Bitcoin can leave that vault.
So, redeemgbtc.com, we'll see if it's successful, but it's certainly gaining plenty of steam. I know first-hand there are big-boy institutions that are getting involved, so we'll see what happens. I'm no legal expert, but I think it would certainly be a tragedy if I was Barry Silbert; I don't know him, I have nothing against him, but it would be the fumble of a century to lose that cash cow.
Peter McCormack: Well, we brought this up the other day, we were talking about how one of the most interesting parts of this bear market cycle and the number of people who were either billionaires or believed to be billionaires and believed to be some of the most successful people in the industry have taken ridiculous risks not only with their own capital, other people's capital, reputation; some are certainly risking jail time.
I've also seen Mashinsky is being sued by the New York AG, but so many people with certainly credible reputations, if you're Barry maybe some of the Bitcoin maxis don't like you, but good reputations and serious amounts of money, and they've taken this massive risk and they've rekt themselves, rekt other people's, rekt their reputation, rekt their career and are potentially facing jail; I just don't understand.
I was talking to Danny and saying, "Look, if we could take this here with the podcast, if we could take this big risk and we might be able to 10X our money, but if we fuck it up, we're going to be rekt and in jail", we wouldn't do it, we're not fucking morons, so I don't understand why these people have done it, I don't understand, Dylan.
Dylan LeClair: Yeah, if you just look on public Twitter, Barry in February was bragging about buying tens of millions, $50 million, $100 million of Zcash, which is like a bottom-tier shitcoin. So again, I don't relish in the success or failure of some others, but it's certainly, at some point you pay the piper. It's interesting that, yeah, I agree, so many people had the world and lost it all. Peter, I do ponder though, and we're both sitting here and we're both surviving, we both didn't lose all of our Bitcoin, at least I can't speak for you, but…
Peter McCormack: No, I'm good. I've accumulated, and if you consider, I'm certainly underwater on some of it. I've been accumulated since Bitcoin was at --
Dylan LeClair: But you're not zeroed.
Peter McCormack: No, not at all.
Dylan LeClair: But I try to be a little empathetic and if was on the cover, not on the cover of Forbes, but if I was this hotshot billionaire and if you just look at some of the stuff that was happening in the bull market, Three Arrows Capital was borrowing hundreds of millions of dollars unsecured, no collateral, just an IOU, maybe it was tempting to them. I certainly think I would have been a little more prudent in those shoes, but who knows? It's pretty mindboggling how many zeros there are. And Forbes, if you look at the recent Forbes list of crypto billionaires, they marked Barry as a zero.
Peter McCormack: Did they really?
Dylan LeClair: Yeah, I think they published it on 24 December; if you look up Forbes crypto billionaire list it says Barry Silbert, ex-billion to now zero.
Peter McCormack: Holy shit!
Dylan LeClair: Yeah, that's an estimate, but when you can't pay your loans…
Peter McCormack: I mean lending, actually lending to people unsecured is crazy.
Dylan LeClair: Yeah, it's nonsensical.
Peter McCormack: Yeah, borrowing unsecured is tempting, but I take limited risks in my life with regards to Bitcoin and what we do for work and my football team and my house, I take limited risks. I say all that, Dylan; in 2017, I traded up from £25,000, so $32,000, to over £1 million and then back down to under £200,000 in a matter of months, and then with the tax bill, I had to sell off a lump of Bitcoin. I went through a situation like that, but then I wasn't leveraging other people's money, it was my own risk, but I don't know, man, I just try and think what was going on in your mind?
Then also, when they realise they're fucked, when they realise, like, "Holy shit, this has gone bad!" Do you know what it is, maybe everyone bought the Kool-Aid, like, "We're going $100,000, we're going to $150,000, we're going to $200,000", and if you're honest, we didn't get near it; I bought the Kool-Aid.
Dylan LeClair: Yeah, and I drank the Kool-Aid. It's much easier to manage, and if you're trading or not, or managing capital or not, it's a lot harder to manage nine figures, ten-figure positions than it is to manage five-, six-, seven-, even eight-figure positions, right.
Peter McCormack: Yeah, look at Jed McCaleb, he's only down $0.1 billion, $2.5 billion to $2.4 billion.
Dylan LeClair: I don't know where they're coming up with those numbers, but the CZ numbers aren't really there.
Peter McCormack: Cameron and Tyler, that's a big drop; Brian Armstrong. But Brian's are slightly different, his drop is just a cycle drop, right?
Dylan LeClair: Yeah.
Peter McCormack: Most of these people are cycle drops.
Dylan LeClair: Yeah, he has equity in a business.
Peter McCormack: Yeah, and then, in the next cycle, that $1.5 billion could become $15 billion.
Dylan LeClair: Yeah.
Peter McCormack: Fucking hell, CZ, $65 billion to $4.5 billion!
Dylan LeClair: Yeah, that $65 billion is just wrong, it's just nuts.
Peter McCormack: Sam needs to be a minus!
Dylan LeClair: Yeah.
Peter McCormack: Are you on there, Danny?! Look, that's crazy.
Dylan LeClair: Yeah.
Peter McCormack: What role can leverage play in these markets sensibly?
Dylan LeClair: In the future?
Peter McCormack: Yeah.
Dylan LeClair: I think, and this kind of ties to when people say, "Bitcoin is an uncorrelated thing, Bitcoin needs to decouple from equities", or whatever, I say the opposite. I'm like, "No, if you want Bitcoin to win, if Bitcoin is to become whether it's a global reserve currency or not, we don't have even have to get that far, Bitcoin is like a $10 trillion asset, $50 trillion, $5 trillion, $2 trillion, whatever it is, if you want Bitcoin to entrench itself on the asset side of the balance sheet around the world, it's going to be correlated to global equities, it's going to be correlated to the dollar". That's just the reality of these things.
Peter McCormack: Why? I don't get any of this shit, Dylan. You use language and you talk about marginal buyers and you talk about all these different terms, and it's natural to you, it isn't to someone like me. So, there are other people listening I know who will feel the same. Why is it correlated?
Dylan LeClair: Yeah, so in the current system of fiat money, of government-backed money, money is created through debt, so money supply is created through debt, and it's actually cancelled or destroyed when the debt is repaid or defaulted upon. So, the reason that you get these business cycles, or the reason you get these credit cycle booms, whether it's tech stocks or housing in 2008, never mind the business cycles, but the reason that in 2008, when the mortgages were going bad and something completely unrelated to subprime is crashing, that's because the money supply, the assets, the global balance sheet, it's all tied together. So, you have assets and liabilities; if your asset side is falling and the liabilities need to be paid, you sell your assets to pay the liabilities, and maybe that's a bad explanation.
Peter McCormack: No, it's good.
Dylan LeClair: But that for that reason, all assets in a way are interrelated in a sense it's all based on the credit based system of whatever fiat currency, of which the dollar is a dominant majority. So, when you have global equity, global stocks falling, the reason that Bitcoin traded almost one-and-one with the Nasdaq was because a lot of the people that own Bitcoin this year, or the last couple of years, also own tech stocks, they also own equities, they also own -- I was going saying housing but housing doesn't trade on a day-to-day market.
So, even just basic maths, what is Bitcoin's exchange rate? BTC/USD, the numerator's Bitcoin, the denominator's the dollar. So, what happens when stocks are selling off, or the dollar wrecking ball, what does that mean? It means the dollar's appreciating against other things, specifically other currencies. But when you see the dollar up big on a day, you see equities down, you also see Bitcoin down; why? Well, the denominator of this fraction is increasing, so the value of this maths equation, BTC divided by USD, is decreasing.
So, in that sense, I think when someone's like, "Oh, Bitcoin shouldn't be correlated", or, "It's uncorrelated", it's like, "Well, I want it to entrench itself on the balance sheet of the world, and for that reason, I want it to be correlated to these things". If 5 billion people own Bitcoin and if the biggest Wall Street institutions and all the public companies have Bitcoin, if that's the vision of Bitcoin succeeding, Bitcoin as a world reserve currency or world reserve asset or whatever, then it will be correlated to global risk assets, it will be correlated to the dollar and these other things.
Maybe there's that utopian vision of it's going to supersede all those things and it's going to get rid of the dollar, but there's a big, big, big journey in between that phase, and it won't be just doing its own thing through that transition.
Danny Knowles: On the way to that though, does widescale usage of Bitcoin not change that? If you're getting paid in Bitcoin or if you're paying your mortgage in Bitcoin, it doesn't matter if the Fed's tightening or if they're printing money, someone's buying it at that time.
Dylan LeClair: That's a great question. I think it's more so the fact that, in this dollar credit-based system, like at this point now, aside from a few examples of maybe crypto hedge funds or a Genesis trading or whatever, no one has liabilities in Bitcoin. So, maybe if Danny asked you, Peter, "Hey, I want my salary denominated in Bitcoin terms", then that would mean that you are short Bitcoin, you are short a stream of Bitcoin over the next 12 months or whatever his salary is, but no one does that, at least now, or at least not in scale, but there is a massive, massive global short position for dollars.
So, when the dollar is appreciating a bunch, essentially that's just a short squeeze on the currency. So, when everything's selling off -- people will understand what happened with GameStop, "It's a short squeeze, we're going force the hedge funds to cover". Well, everybody's short dollars, because if you have student loans, if you have a mortgage, well I guess you're short pounds, but if you had any sort of debt -- the US Government is short $30 trillion, they're short $30 trillion, so in that sense, that's the reason why things are correlated.
Even if Bitcoin has all of this native adoption and organic use, the real driver of all of this, globally, is the $100 trillion of forced buying of dollars because you're short dollars; it's dollar liabilities. So, that's why, more or less, not it's all one trade because things will outperform and things will underperform, but in the interim, if you just watch stocks, Bitcoin, the dollar, bonds, you'll see they'll move tick for tick; you'll see on the second, the minute, the hour, a lot of these things move in tandem, and that's because they're all sharing liquidity, if that makes sense.
Peter McCormack: Yeah, it does, but if we were to get to a point where, you talk about every company having Bitcoin on its balance sheet, there was a massive amount of adoption to support that, it can't be correlated through that. Is it only correlated at a time where liquidity is low?
Dylan LeClair: Yeah. So, I think there will be periods of maybe like --
Peter McCormack: Every four years?
Dylan LeClair: Maybe periods of the decoupling. There were times during the second double bubble in 2021 where stocks were down, the dollar was up, volatility was kind of going up and Bitcoin was up 11% and it was like, "Whoa!"
Peter McCormack: "We've decoupled!"
Dylan LeClair: Yeah, and now we know that it was Alameda taking a customer's money and raising fraudulent venture money and pummelling. The day of the bottom in 2021, Bitcoin floating around $29,000, it dropped below $30,000 and people were like, "Oh no, it's finally going to go lower", and then the stamp of the bottom, FTX raised $800 million, and it was like boom, and then we started going up only again. It was like "Oh". Well now in hindsight, they were just pummelling money on their own exchange, leveraging it, buying Solana and shitcoins and Bitcoin and all this other stuff, and so we "decoupled".
I think there will be time again in the future, whether it's an idiosyncratic catalyst or the Saudis or any of these narratives of like, "Who were the buyers coming in?" I do believe that most people that haven't bought Bitcoin yet, at some point in the next ten years, will own some, and there are not that many sellers; there are probably a couple of million Bitcoin out there that are going to be parted with. That's one of the beauties of the bear market, is all of the psychos that yell at you on Twitter, they buy it all.
Peter McCormack: Yeah.
Dylan LeClair: That's one of the best parts about this cleansing process, but it takes time, and the big boys, the Paul Tudor Jones, the Druckenmillers of the world, they'll come back, but they're not dogmatic, they're not religious, and when they come they'll bring billions of dollars.
Peter McCormack: What can you tell me about Silvergate from your side? And just to note, I know the company well, I speak to Alan occasionally, I've seen their press releases this week, but I know you've been tracking it.
Dylan LeClair: Yeah. There are a ton of allegations, etc; just based on banking regulations and whatever, the whole FTX thing was a real big black eye. Basically, Silvergate was one of the only two banks, Silvergate and Signature are two of the banks that basically deal with crypto companies at scale in the US. There are really tight regulations because of all of this stuff that happened with crypto, most banks don't want to touch it, rightfully so are not.
Silvergate comes out with a SEN network that basically allows crypto companies to settle dollars between each other on banking rails. So, the stablecoins exist but it's almost like a walled garden, like if you want to get the money out, you have to go to Tether's bank or USD, and it's this whole process. But if I can just have money on a bank, as a Coinbase or as a Circle or as a Marathon, as a Gemini, if you just look up "Silvergate banking regulation" on Google Images, there are these images of all of these crypto companies, some of the most notable in the space, and they're all connected, and in the middle, it's like a SEN network.
So essentially, what that did was that gave Silvergate all of these dollar-denominated deposits, and as a bank, as a fractional-reserve bank, a Fed member bank, they can lend that money out; that's the banking model today. Post-FTX, it comes out that Alameda was laundering all this money; it was funny that this didn't come out beforehand, but if you wanted to wire money into FTX, you literally sent it to the Alameda bank account. A lot of red of flags, in hindsight, we're like, "Wait, what?!"
Peter McCormack: "Hold on a second!"
Dylan LeClair: So, because of that, because of really the FTX thing, a ton of people have pulled their deposits from Silvergate, and as a bank, the last thing you want to do is have a run on your deposits. So because of that, they've had a run on deposits, and what did they do? They had to sell a bunch of their portfolio to get liquid, and they had a bunch of debt securities, and what happened in the bond market over the last year, bonds went down 20%, 25%, so they had to sell a bunch of bonds at a loss. The share price has been pummelled; it's down 90% from the highest, it's down 70%-something since FTX collapsed. Full disclosure, I was short the stock, not anymore, but more so just as a play.
Peter McCormack: Good trade for you.
Dylan LeClair: Yeah.
Peter McCormack: Yeah, look, I like those guys, I've been over there a couple of times, and I feel like everything I've read they've managed to survive it and ride it out.
Dylan LeClair: Yeah.
Peter McCormack: Did you see the press release this week?
Dylan LeClair: When their stock went down 40% in a day?
Peter McCormack: No, they did a press release in relation to I think they've let some of their team go and in terms of recapitalising the business. I kind of feel sorry for them in some ways because I do feel like they're an honest player in the market that's trying to support crypto companies, Bitcoin companies, whatever, and we need that.
Dylan LeClair: Yeah.
Peter McCormack: Banking has always been a challenge for these companies and they've gone out and they've provided the products. They don't feel like a crypto company when you visit them, they feel like a bank, and I feel like they're an honest player, so I want them to survive and work it out, so it's good to hear your own analysis on that.
Okay, before we go off and get some chicken, looking ahead to this year, what are you looking at; what are most excited about?
Dylan LeClair: I'm interested to see how 2023 players out in the legacy system. I think the last time we talked it was a little bit dark, and it was less about the crypto and more about the macro stuff, and it was certainly a wild year, biggest fixed income sell-off ever. I think we met just after Ukraine's invasion.
Peter McCormack: We did.
Dylan LeClair: Yeah, I forget some of the particulars, but I think we had a pretty good convo.
Peter McCormack: Yeah, a bit doomy.
Dylan LeClair: Yeah.
Peter McCormack: It was like a reality check, right?
Dylan LeClair: Yeah, it was a reality check. I don't know if 2023 is as doomy, but I think certainly a lot of people are conditioned, not so much in Bitcoin, I think people in Bitcoin and crypto are used to getting kicked in the teeth, but in the legacy world, just investing in general, people have been conditioned. And I say this, like I recognise, I have full awareness that I say this as a 21-year-old, not that I'm some wise old sire that has seen 60 years of market cycles, but it seems that people are very conditioned from the up-only QE era of stocks only go up, a slight recession or a slight downturn in equities or bonds or whatever, the Fed's going to step in, everything's going to be fine.
Maybe the regime change that we saw in 2021 or 2022 in terms of inflation finally showing up, we can't print unlimited money and have no implications anymore, that's not great for financial assets. One of the things that I was actually wrong about, well many things, but in 2022, was I thought the recession was going to come faster, but surprisingly resilient economy.
So, I still think that there are some pretty big headwinds in terms of whether you want to think of it as like a liquidity perspective or just like a business cycle perspective. I was telling a couple of people on Twitter, and this was just my opinion, but people were like, "Oh, this has to be max pain". I was like, "Man, respectively, max pain is not your investment portfolio goes down, max pain is like you lose your job and you can't make your mortgage payment".
Peter McCormack: And you can't find a new job.
Dylan LeClair: And you can't find a new job; that's max pain.
Peter McCormack: There are certainly people in the UK, and that's my lens from living there, who are living through max pain, but the max pain's really hit the working class most of all because these are the people whose energy bills have shot up and they can't afford to pay their energy bills or they can't afford to pay the energy bills for their -- actually, I think the UK Government just announced today they're going to subsidise it; how much are they doing?
Danny Knowles: £5.5 billion, I think.
Peter McCormack: Yeah, and they have to do that, because if they don't, companies are going to close because these companies cannot afford to keep their business open.
Dylan LeClair: Yeah.
Peter McCormack: There is certainly pain existing but I say "working class", working to middle class, I know people who are saying, "Yeah, I just don't put my heating on in the evening now, I've got a hot water bottle and a blanket; I can't fucking afford to do it", and if they're getting squeezed there, it's getting squeeze everywhere. So there are certain people feeling pain, I think there are others who haven't yet seen it.
Dylan LeClair: Yeah, and I'm not calling for economic Armageddon in a way, but I just think, if you think about a lot of the conditions that persisted over the last, you could say 10 years, you could say 20 years, you could even say 40 years of, "Okay, we have this unipolar world order", geopolitics in an investment sense, meant nothing, it was just kind of smooth sailing. Yeah, the US, kind of imperialist, went over to the Middle East, but everyone just didn't really care and everything was great. That sounds kind of messed up, but now we see a lot of these big forces in terms of Russia, China challenging the hegemon.
I'm no geopolitical strategist, I don't know how to quantify these things, but there's a tail risk of Xi invading Taiwan. Certainly, smart people have paid attention to this, and there's a war going on basically on the European continent with the biggest commodity producer in the world, like all of these things, the US is draining its SPR to stave off inflationary pressures, maybe ahead of a hot war conflict; all of these things, that's not great.
You have Germany and the European nations, the UK, that are facing this massive cost of energy increase, and what are they doing? They're like, "Oh, we're just going to go issue more debt", and the central banks are like, "Yeah, we're going to taper our balance sheet and stop buying debt", and so what did the bond market do? Yields soar up and bonds sell off, and it's like, "Okay, yeah, if you want to issue more debt".
Like what happened with the gilt market and the pound earlier this year, it was like, "Okay, we're going to cut taxes at the same time as we subsidise all the energy bills", and the gilt market, UK bonds, just absolutely tanked, yields soared and the pound crashed. And they were like, "Okay, whoa, we're not going to do that", and they scrapped the government for the second time, a total mess, right.
Peter McCormack: Yeah, total mess.
Dylan LeClair: So, do I know exactly what's coming? No, I don't, but I expect turbulence I guess is what I'll say.
Peter McCormack: What are you optimistic about?
Dylan LeClair: That's what you I asked me and I completely --
Peter McCormack: No, I said what are you looking forward to?
Dylan LeClair: Okay.
Peter McCormack: Looking forward to, it's more like what you're looking at, but what is there to be optimist about? Nothing; we're fucked!
Dylan LeClair: I think, aside from exchange rate, the reason I'm talking on a show, What Bitcoin Did, the reason I work for a Bitcoin company, the reason I log on to the bird app every day and talk about this orange coin is because I'm optimistic about a future that we have control of our own property, our own money, we're not ruled by tyrants, and not in the US, but there are dictators all over the world, there's kind of an overruling elite class of people that kind of pull the triggers of the world.
So, I'm optimistic about Bitcoin despite its exchange rate volatility, despite all the financial jargon BS because I think it's really one of the only chances we have, in my lifetime, in our lifetime, or really ever maybe, there's that old shiny metal that people like, but in terms of an engineering solution, a tech solution to this kind of Orwellian future. That's why I, through the ups and downs, that's why I'm actually really passionate about Bitcoin.
The money's fun, I love finance because I love maths and I love the challenge, so I'll talk about the GBTCs and Silvergates of the world, and that's fascinating to me, but is that what gets me up in the morning? I guess, but not really. What really drives me and I'm passionate about this thing is because I think it's probably our only shot at global money that's not ruled by people.
Peter McCormack: Love it. Well, listen, dude, it's been great to get to know you over this last couple of years and see you blow up and everything you've done with your career. It was great to meet your parents in Miami; that was awesome. Have we got a saxophone in; did you say we had a saxophone?
Danny Knowles: A saxophone?!
Peter McCormack: Don't you play the sax?
Dylan LeClair: Yeah, I do.
Peter McCormack: I remember that.
Danny Knowles: I don't remember, yeah; next time.
Peter McCormack: Do remember when I was playing that?
Danny Knowles: No!
Peter McCormack: Do you still play that?
Dylan LeClair: I actually touched it for the first time last month, but I don't actively play the sax anymore.
Peter McCormack: We should get you bring it next time because we know we have Junseth in every time singing for us?
Danny Knowles: We need you on the sax, Junseth singing and Troy Cross playing piano.
Peter McCormack: Yeah, we could start a band! No listen, dude, congratulations on everything. You've obviously got a good work ethic and it's been really impressive to see what you've done. It's great to get to know you, just continue crushing it, man, and where do you want to send people?
Dylan LeClair: Yeah, first off, I appreciate you having me on.
Peter McCormack: Anytime, dude; you've got a permanent open invite. If you ever message me or Danny, you go, "I want to come on", it's like, "Dylan's in".
Dylan LeClair: Love it. Yeah, you can just find me on Twitter probably; I do all sorts of things, like I said at the beginning, @DylanLeClair_, it's where I'm at mostly. I work for Bitcoin Magazine, do a couple of other things, but yeah, reach out to me there.
Peter McCormack: All right, thank you, man. All right, take care. Let's go and get some chicken.
Dylan LeClair: Cheers, Peter.
