SLP274 William Clemente III – Bitcoin’s Great Consolidation

William Clemente III joins me to talk about analyzing Bitcoin on-chain and why we’re still in the middle of this cycle. We chat:

Getting into on-chain analytics
Is this time different? Supercycle or not
Analyzing what different cohorts are doing
What does a market top look like?
MVRV, NUPL, SOPR
Futures and contango trade

William links:

Twitter: @WClementeIII
Website: Substack

Other relevant episodes:

Sponsors:

Stephan Livera links:

Podcast Transcript:

Stephan Livera:

Will, welcome to the show.

William Clement III:

Hey, Stephan. Thanks for having me on man. I’m a big fan of your show for sure.

Stephan Livera:

Thank you. I’ve been watching some of your work on Twitter and what you’ve been saying in terms of Bitcoin on-chain analytics. And I thought, Oh, it’s time to get this guy on the show. He’s got a lot of interesting things to say. But I know you’re a young fellow, so tell me a little bit about yourself and how you got into Bitcoin.

William Clement III:

Absolutely. So I just turned 19 a little over a month ago at the end of March, but I got into finance at the beginning of last year when we had the big liquidity crisis. You know, everything looked really cheap and I wanted to, make a quick buck and I had really no idea what I was doing though. So I decided, okay, I’m going to listen to some different podcasts and stuff like that to try to just, grok investing a little bit. And what really stuck with me was the Warren Buffett, free cashflow kind of investing, right. You know, I read intelligent investor and a little bit of security analysis. I listened to Preston Pysh’s pod, of course, and got into all the, very basics of value investing.

William Clement III:

Right. And, obviously when you start to look into it, you realize, Oh my gosh, value investing is getting absolutely obliterated by momentum and growth strategies, especially since 2008. And so I was like, Why is that happening? And what you really come to all roads kind of lead to the fact that we had no sound money. And the money that you’re using to kind of make economic calculation with on these businesses is not sound it’s like, you’re trying to build a house with a ruler that’s changing in size constantly. And so that kind of led me down the rabbit hole of, okay, so what, what could be the solution to this? Because right now equities, aren’t really based off of, their earnings and things like that. They are a little bit, but not to the extent that they should be.

William Clement III:

And it’s basically just coming down to where the liquidity is sloshing around to, and the momentum of where the liquidity is moving to. So that kind of led me down to questioning, well, what’s the definition of money, what makes sound money important? And then that obviously led me to Bitcoin eventually. And at first, I really understood the number go up technology and got into, I think, like all of us, anybody who says they didn’t get into Bitcoin for the number go up technology is kidding themselves. And they’re trying to act like they’re on some high horse, but at the end of the day, we’re all in here because the price is going up. But then you start to understand, you know the humanitarian and the societal impacts of what sound money will really bring for society, right?

William Clement III:

Like the incentive structure that’s built around Fiat, not only just inequality, right? Which is a whole nother route. We can go down, but, the fact that the equities are being pumped up by the QE, and if you don’t own equities, then you’re getting rekt by this money printing. And the wealth inequality gap is just getting wider and wider. But also just the incentive structure that’s set up for society when you have like a super inflationary currency you’re incentivizing spend, spend, spend all the time. And you have sprouting out of that, like materialism and all these kinds of things, which in my opinion, are very toxic for society. And just in general, as Bitcoiners would like to put it where they talk about time preferences. I think inflationary money incentivizes a very high time preference throughout society.

William Clement III:

And so that’s something that also made me very passionate about Bitcoin, because it’s going to incentivize this better framework for what our society is built on. Right. when you have money that you realize is going to appreciate over the next five, 10 years, you’re going to do other things in your life so that you can appreciate that spending power, right? Like just, a personal example for me, I’ve started eating better. So the Bitcoin, incentivizes a whole different framework for society where you are implementing a low time preference where, people are looking at, okay, how can I build a better future for myself over the next five, 10 years? One personal example for me is now, obviously I understand where Bitcoin is going. I’ve been taking care of myself, eating better, things like that. Trying to take care of my mind, read a little bit stuff like that. And I think when you kind of apply that thinking and that framework to a broader society, that changes the way that everybody acts in the world as a whole. And I think that’s super good for humanity.

Stephan Livera:

Yeah. That’s a really interesting way to put it. And it really reminds me as well. Like when we’re reading various economic articles and things, they can spell out how time preference really changes the way we act as people. And when we are operating in that very high time preference mindset, which in some ways fiat money drives that onto all of us. We’re acting more like animals. We’re actually thinking more and more just about baser instincts. It’s just about survival. You become more like just an animal. Who’s like, if you go to Safari and the Safari guys like teaching you, Oh, look, these guys are all about survival to them. It’s literally, how do you get to the next — how do you get your next meal? How do you survive? How do you not get eaten? As opposed to being able to think and plan for the long term, which is actually a very human thing.

Stephan Livera:

And that’s something that is enabled by when we are able to apply capital accumulation and all of these kinds of ideas. So you got into Bitcoin, obviously like many people, you came here for number go up technology, and then you started to go down the rabbit hole a little bit more. So as you got into the Bitcoin world, what was it that led you towards the whole on-chain analytics thing, as opposed to something else? Like maybe you could have been a privacy guy or maybe you would have been, a TA guy or what made you into, on-chain analytics?

William Clement III:

Yeah. Great question. So, I think obviously, I was just consuming like a whole bunch of podcasts and yours, Preston’s, Peter McCormack’s pods. I’m sure I’m going to miss a few, but I’m just naming some off the top, but eventually yeah, I think it was actually on Peter McCormack’s podcast. He interviewed Willy Woo. And I remember he did like this 2020 yearly recap of the year on-chain and the way he was talking about Bitcoin. It was just really fascinating to me, the fact that you can — the way I like to think about on-chain is if you could track, in, in the world, we have now every time someone hands each other a $5 bill or, transacts cash anywhere at any time, and you could track all of that on an open ledger, and then you can sort that data out and then make assumptions about the behavior of different groups of people based on how much money they have or how long they’ve been holding their money.

William Clement III:

Like all these things. It’s really fascinating in the way that he can really the way he described the fact that you’re able to, describe where, where we are in the cycle the behavior of different entities and cohorts of Bitcoin holders. It was just really, really interesting to me. And so I was like, I need to take a step further into this stuff. This stuff is really interesting stuff. And so I just, I went down the rabbit hole with that. I just went on YouTube and obviously I typed in Willy Woo and just listened to like everything that he’s been on a lot of like the Tone Vays’ episodes that he’s done on YouTube. Those are kind of hidden gems in my opinion for people that don’t like Tone, just skip over when Tones talking and skip to when Willy’s talking.

William Clement III:

But those are the ones that are pretty unique because it — he screen shares like when he’s doing the pods with Peter, or I think he’s done one with like Jimmy song. You, you don’t get to see what he’s looking at, but in the episodes with Tone, he screen shares the whole time. So you can actually see all these charts that he’s looking at and really kind of pick his brain as to what he thinks really makes the market tick. And so I started watching all those another guy who was really smart with the on-chain stuff is David Puell as somebody I look up to as well as Murad, everybody knows Murad. He’s kind of gone missing since last March, but I’m sure he’s out there somewhere. And he’s a really bright mind in the space. He knows a lot about the different data aspects of Bitcoin.

William Clement III:

Also of course, Rafael, I think he offers a really interesting perspective because there’s people like Willy where they’re interpreting the data, but Rafael has this really interesting perspective where he’s actually on the back end typing in the data. And he’s actually putting all of these metrics together that we’re all reading. So he has this really interesting perspective where — okay, he’ll say, Oh, maybe this is an outlier because of this. And he understands all of these little movements in the data that maybe you or I wouldn’t be able to explain. So he’s somebody that I often ask a lot of questions to cause he has a very deep of on-chain stuff. And then as well, checkmate does the weekly reports for glassnode. He’s somebody I kind of like to keep in touch with because he’s somebody I’ve learned a lot from, so there’s a lot of really bright minds in the on-chain space.

William Clement III:

Just looking at all the work that they’ve done, trying to soak up everything from them, pick their minds, you know I like to think when this is actually something I learned from Preston, when you are trying to understand something, you kind of find the smartest minds in that discipline, right? And then not only do you try to follow what they’re doing, but you try to pick apart their brains and say like, what is driving their thinking? What kind of things taught them what they know. and then you kind of get this very balanced perspective from different angles of people in that discipline. So that’s what I’ve been trying to do with on-chain stuff. I think it’s really so early with all these metrics we have. The very first one was when Willy came out with NVT and NVT is this very basic metric.

William Clement III:

Willie likes to describe it as the PE ratio of Bitcoin. It’s basically valuing Bitcoin based off of the transactional volume on-chain. There’s literally a ratio of the network value or the market cap to the transactional volume on-chain. And so whenever we get to the end of the bull market, you have this huge run-up in market cap, but the underlying investor activity on-chain, isn’t going up, therefore it’s overvalued compared to its organic transactional volume that’s going on, on the blockchain. So that was the very first metric that was created by Willie. And then in 2018 you had like the HODL waves. Murad and David put together the MVRV which is a really good indicator. That indicator is the market value to realized value. So the way you can think of this as like, you’re obviously taking a market cap, but then you’re taking a ratio of that to realized cap, which is the price of all Bitcoins based off of when they last moved.

William Clement III:

So, let’s say Roger Ver bought a hundred thousand Bitcoins at a dollar or something crazy like that, right? Let’s say he never sold them, which I’m sure he’s moved those coins, but let’s say he never sold them, for in market cap. That would be Bitcoin’s just dipped a little bit. I think it’s down to 54k now. So that’d be $5.4 billion of market cap that’s added, but let’s say the coins never moved since when he bought them at a dollar, then a hundred thousand is only added to realized cap. So you’re taking a ratio of the market cap to that. And so you get these overheated zones when the market cap is rising way above underlying investor activity where coins are actually moving and when investors are actually buying the coins and then also you get these very distinct buy zones in the bear markets, when, because if the market cap falls under the realized cap, you have capitulation by definition.

William Clement III:

So those tend to be very very promising buy zones where you could take, you know statistically, especially if you have under other indicators that are screaming that it’s a bottom, right. You can take a statistically a higher risky a more risky buy. So, maybe you don’t go a 100x long on BitMex, but if all these indicators are screaming bottom and that the MVRV is one of those that I would include in that basket to look at, then, you can take a 2-3x leverage buy or something like that.

Stephan Livera:

Yeah. So let me break some of that down a bit. I mean, because, we’ve thrown a lot out there. So just for some of the listeners, who might be a little bit newer some quick refresher material, also anyone who is interested to listen to Raphael Schultze-kraft, I’ve got two episodes with him and some very], but I think just a bit of background for listeners, if you’re new to Bitcoin, think of it like every time you spend some Bitcoin, that’s obviously visible on-chain. And then the other thing that we can see is that we, we know we can see when that “coin” or UTXO unspent transaction output, it last moved. And so by looking at those metrics and combined with other things, we can sort of get a sense of where we are and get a sense of where the market is. And I think there’s a few different, I guess, underlying objectives. And I’m curious what you think is a well, but I guess high level you could think of it. Like sometimes you want to see what are the whales are doing and what are the OGs are doing compared to what other new people doing, because what the new people doing might be a little bit more erratic. There might be more, I guess, speculative or kind of in and out and more gambler type. Whereas typically the veterans are a bit more predictable in how they do this stuff. And then I guess at the end of it, you boil this all down. What we’re trying to do is get a feel for where we are in the cycle. And I think the way I would, I guess, summarize it is not that you can call an exact top or an exact bottom, that you can just have a sense of relative risk. You can have a sense of, okay, we’re getting sort of, there’s more of a risk that we’re toppy, or there’s more of a risky that, or an opportunity here that we’re kind of towards the bottom. And therefore now is a better time to be buying. Now, personally, I’m not a trader, but I just — I do find this stuff interesting as well, just to have a sense of where we are in the market. So how do you think about that? Do you agree? Disagree? Have a slightly opinion? Slightly different opinion?

William Clement III:

Yeah. I think you’re pretty spot on there. You know, like you said, I’m not a trader either, but I just think it’s interesting to know where we are in the cycles. Right? Just kind of understand where we are. And like you said, the on-chain stuff, isn’t going to give you an absolute top. Anybody that says that they can time the top is either drinking their own Kool-Aid or their kidding you. And they’re just flat out lying to you. But like you said, we can get these rough estimations of, okay. Things are starting to get a little frothy here. It’s starting to look a little toppy or you can say, okay, where all these metrics are lining up saying we’re near this capitulation bottom of the cycle. And it might be a good time to, you know take some heavier buys here.

William Clement III:

And like you said, you can track all the behavior of the long-term holders, which at the end of the day really is the smart money in the space, because these are the people that have been through multiple cycles. When we’re talking about the people that have had their coins and wallets for 10 plus years, which by the way, we can track all that, right. Because you can, like you said, we can track the age of the coins. So you can see coins, that I’ve been held in a wallet for under 24 hours a day to a week, a week to a month, et cetera, et cetera. And you can see all the way out to these older holders that have held for 3 to 5 years, 5 to 7 years, 7 to 10 years, 10+ years. Right. And when you start to see these older holders and you follow their behavior, that tends to be the smarter money in the space.

William Clement III:

And at the bottom of the bear cycles, you see them accumulate very heavily and you see the new money kind of step out that speculatively hopped in during the end of, under the previous cycle, like at the very top of the bull cycle, they fall mode in and on the way down they freak out and they sell and capitulate. And then at the bottom. So to illustrate this, if anybody has a Glassnode subscription, you can look at this there’s something called HODL waves, which I know Glassnode isn’t the only provider that has this, but HODL waves basically shows the portion of supply. That’s held by different ages of the different cohorts. And so when we get to the top of the bull market, like Stephan was kind of getting at here, the smarter money at the end of the cycles.

William Clement III:

They start to sell off into strength. And so you start to see a larger portion of supply becoming held by these these younger aged coins AKA, for lack of better word, the dumber money, the speculators, the people that are FOMOing in. And then at the bottom of the bear market, you see a larger portion of supply is held by these longer-term holders. These, 5 to 7 year age addresses, these 10+ year HODLers. They’re add, they’re adding to their positions heavily during the bottom of the bears because they understand the cyclical nature of Bitcoin. So yeah, I think following that smart money and the behavior of those wallets is one of the things that’s very important when you’re trying to time where we are in the cycle, engage that.

Stephan Livera:

Yep. Now one other point to add here. One episode I did with Preston actually, where we called it the final cycle, or there’s also the conversation around super cycles, right? So whatever term you want to use, we could think of it like, is this time different? Right. So historically we have been through bear markets where there were 80% draw downs from the top to the bottom, right? So 2013 kind of 2014-2015 was the bear market for that. And then 2018, we went from that top of 20,000 down to call it three or 4,000. So now the conversation coming now is that maybe this cycle will be different, that there won’t be a big 80% or 70% draw down this time. We might see only little pullbacks along the way. So in your mind, how are you thinking about that when you try to marry up that fundamental analysis question, or just the shift in the narrative — the shift in the way the normal person is thinking versus some of the on-chain analytics, how do you mesh that together?

William Clement III:

Yeah, that’s a fantastic question. You know, that there’s been a lot of talk about the whole Supercycle thing. Everybody wants to know Supercycle — is this it? I think it’s something that’s definitely on the table and you just have to monitor it over a day to day, week to week basis. You know, the way I look at is the, some of the behavior on-chain definitely is different than previous cycles, but at the same time, I think, and I’ll get back to that. But I think it, at the end of the cycle, it’ll be interesting to see will we see human greed kick in, which is just natural market behavior. And we start to see this huge blow off top, which in my opinion will happen just because that’s human behavior. But what I mentioned about some of the metrics that are different, I think the biggest one that everybody knows of is the exchange depletion.

William Clement III:

I’ve been posting a fair amount about that, and I know many others have as well. It’s — I think can be credited to a couple of different things. I think the first one is definitely just custody solutions. Like people in like the players that are stepping in now, the high net worth and institutions that we can see are coming in on-chain. They’re not going to mess around with just holding their coins on Coinbase exchange. They’re going to withdrawal to some, I dunno, Fidelity custody or something like that. I had the privilege of speaking with somebody from SkyBridge capital and they have a huge Bitcoin fund and they’re like, yeah, we’re not going to play around with taking custody of our coins. We get them and send them right to Fidelity. Right. I’m sure they’re not the only ones thinking that way.

William Clement III:

So there’s definitely some of that there. And then also something not as prominent but something that’s very interesting is the locking up of coins and derivatives contracts, to do something like, the cash and carry trade, right? You have to have spot Bitcoin to to capture those, the spreads between the futures premium in the spot, which we can get to it back to that. Cause I know that’s like a whole another conversation, but also grayscale is playing not as lately, cause they haven’t had any recent purchases, but I think towards the end of last year, then they’ve definitely played a part in that decline. And then also BlockFi. BlockFi has over like $20 billion assets under management. I might be wrong. I might be understating that a little bit, but they definitely are playing a fair portion in there.

William Clement III:

So I think it’s a combination of those things, but more importantly, I think this liquid supply or illiquid supply metric that Glassnode has is an even more accurate way to really understand what’s going on because yes, when you look at the coins, moving off exchanges, it’s illustrating this decrease in supply, obviously supply and demand, less supply, even if demand stays the same, price should theoretically go well. But obviously just because people withdraw coins from exchanges doesn’t mean they can’t send them right back on within a 30 minute or whatever and just dump them. So I think when you look at the illiquid supply metric, it’s giving you a lot more accurate picture of this narrative that people are buying coins and not selling them. So Glassnode’s illiquid supply metric is basically they, take different addresses and they group them into entities.

William Clement III:

So they forensically say, okay, this group of addresses looks like one person. This group of addresses looks like another person. And then they take the behavior of that entity. So they say, okay, this entity has moved. You know, they’ve taken in this amount of coins, but they’ve only moved out this amount of coins. And based off of that percentage, they get moved into different cohorts. So there’s highly liquid, which are like, daily in and out traders liquid, and then illiquid, which are people that statistically have a very, very minimal likelihood of selling. And I think they use 155-day threshold for that metric? I might be wrong, but it’s either, I think that’s the threshold. It might be for the long-term holders, net position metric, but it doesn’t matter. Anyway, there’s a certain threshold that Glassnode uses and they say after this threshold is crossed statistically, the likelihood of these coins being moved back out of the wallet, goes down drastically and the amount of supply that’s moving to these illiquid.

William Clement III:

This liquid cohort has been just continuing just without any sign of letting up since March of last year, which is very interesting because of course that the whole narrative of Bitcoin being an inflation hedge really kind of spewed up then. And so you’re just seeing these coins moving to these addresses that have no history of selling at like an unprecedented rate, especially when you compare it to previous bull markets, obviously in the bear markets, you see these spikes, cause we talked about, smart money’s accumulating because they know the bull market’s coming two years later or whatever, but in a bull market, seeing this liquidity depletion is just really kind of unprecedented. And I think that paints the picture a lot better than just the balances from exchanges. And that’s, I think to me, the big thing that’s changing in the on-chain setup, that that’s gonna kind of be interesting to see how it plays out throughout the year to those entities, all of a sudden decide that they’re going to change up their behavior towards the end of the year, or does that continue? But as of right now, it’s looking like that’s not showing any sign of slowing down. I think this market — the whole derivatives market, if you want to, we can get into this, but I think that’s something that’s really important and something that hasn’t been around in previous cycles.

Stephan Livera:

Right. So there are certain changes about the market as well. So I guess one other point just on the whole illiquid supply, I guess it is also worthwhile remembering that this is one of those things where I have to catch myself as well every now and again, but it’s not that okay. Yes, there are new coins being mined into existence, but as we speak today, it’s about 18.7 million out of the 21 million total that are already issued or mined into existence. And so really what we’re talking about is the relative changes between that. So then the other point to layer on is that yes, the amount of coins held on exchanges is going down. Yes, there are more people HODLing, but it’s also fair to say that as we start getting to really high highs, there’ll be some old holders from years ago who were like, Oh man, even if I just took a little bit off, I could buy a house or a car for my family or whatever or maybe they want to buy their Citadel or whatever it is. Right. at some point on the margin, people will start taking some off the table. I mean, we can tell them, Hey, you should be HODLing all the way to hyperbitcoinization but that doesn’t matter to them because they’re like, Hey, I might not live forever. Well, I’m not going to live forever. And I want to be able to do this thing with my coins now. And so I would hypothesize then that really what we’re going to see is that yes, we’re seeing the coins on exchanges go down. But towards the end of this cycle, we’re going to see the reverse of that trend. And we’ll see more people who are going back the other way, because now they want to buy something with that Bitcoin. So what do you think about that dynamic?

William Clement III:

Yeah, it’s a really good point. You know, I think the whole narrative about the coins moving off exchanges, at some point, people are going to start freaking out because we’re pushing this narrative so hard when coins start to come back on exchanges, which will happen at the end of the cycle because it’s just human nature. You know, if you bought Bitcoin 10 years ago, you were 30 years old and you’re 40 now and your Bitcoin’s worth whatever crazy amount and you can retire and never have to work again in your life or buy, your dream house or whatever. Yeah. You’re going to take some chips off the table who cares. But I think what’s interesting though, is when we’re just talking about where we are in the cycle right now, we’re seeing very limited selling from those holders. So like to me, that’s illustrating that they’re expecting a lot more upside and one way to look at this is dormancy, which is this metric. In on-chain metrics, there’s this metric called coin days destroyed and dormancy is based off of this.

William Clement III:

And I’ll explain how a coin is destroyed. You could think of this as if a coin is in a wallet for 10 days, that’s 10 coin days. Then the coin is moved out of the wallet. Well then 10 coin days are destroyed. And so dormancy adjusts this for volume to give you a little bit more signal on the behavior of the older coins that are being sold. What you saw a peak in dormancy at the end of January, which I think is very interesting timing because you start to well since then, you’ve seen a steady downtrend in that. But I think the timing of that is interesting because that’s right around when Tesla announced their buy and whether that’s just correlation without causation or was that actually the catalyst for someone to step back and say, Oh, hold on. Maybe we’re actually going to get that institutional adoption this cycle. I think it’s a very interesting question, but since the end of January, we did see a huge drawdown in selling from those older holders. And I think that’s just a testament to — they know the cycle was still very far from overheated and still probably have still, probably has a while to go. You saw the same thing with miners, like miners ramped up selling around 27,000 or 32,000, which is to be expected. Like when you see miners in these long-term holder selling, after we break all time highs, they’ve been waiting for this for a long time. They’re selling a little bit and then they’re waiting for the next crazy run back up. And I think that’s just another way to understand that we’re in this consolidation and they’re waiting for higher prices to start unloading again. But I absolutely agree with you that the end of the cycle, we’re going to see some of those older cohorts begin to unload some of their bags as well, because I know I would.

Stephan Livera:

Yeah and so I guess that’s also the question then as well, because I think there are some people out there saying, yeah, it’s going to be a Supercycle. Don’t expect that it’s going to be a huge drawdown, whereas others in the camp. And I think probably you and I are similar there, I think we are going to see a big drawdown. Again, not that we want to see this. I just think that that is the likely outcome in my view. So the way I’m thinking about it is that really it’s about how big is the, for want of a better word, DCA army, right? How many people are out there stacking sets every day or every week. And eventually at some point we’re going to reach a point where we overheat and the market overextends beyond the level of what those DCA army people can suck up. And so I think that’s probably the question that if you built up theoretically, if the DCA army built up so much, then maybe we would enter the Supercycle. But I guess what I’m saying is I think it’s unlikely the DCA army grows that large that that we entered the Supercycle this time around, what do you think?

William Clement III:

Yeah, absolutely. And if we’re going to see a Supercycle, it’s going to have to be something where, we consolidate, I mean, we shoot up and then we consolidate for two months. Like we have now between 40k-60k, we consolidate for a while and then we move back up and then we consolidate for awhile, but that’s just not how human behavior acts. With these market cycles, the higher we go, the more the faster the price movement accelerates, right? The higher we get the like in the last cycle, it took us like, I wasn’t around back then, but just looking at the price charts. And it took like a week and a half for price to double or something crazy like that. And so the price appreciation gets faster and faster and faster throughout the cycle until, human greed obviously kicks in, people stop selling.

William Clement III:

Cause people are like, “Oh my God, we’re going to the moon”. You know, this thing’s going all the way. And then that’s where things like, the new NUPL net unrealized, profit and loss, it starts to get into that green euphoria zone because people stop selling because they think that this thing’s going to go up forever. That’s very dangerous because then people are just bidding, bidding, bidding the price up, and there’s no underlying investment activity that’s going on up there. And also like one thing that I’m really using to distinguish this consolidation that we’re in from any kind of bearish activity is on-chain volume. So when we get to the top of cycles, we see very minimal distribution of volume. There’s not a lot of investor activity that’s going on up there. It’s just literally FOMO, people coming in and just bidding the price up.

William Clement III:

But where we are now, we’re seeing this huge slice of little sliver of volume. It’s actually the largest sliver since 6k to 11k last year. And the 57,500 level is actually the largest single bar of volume since 11,000. So, every cycle once again, like, obviously I wasn’t around back then, but looking at the data, it looks like we build up this huge base of capital, like two to three times the previous, all time high in this the on-chain volume. And that’s what it looks like we’re doing now. And so I would kind of suspect this to be the bare market floor when we have the next drawdown, that’s the way I kind of see where we are now, but we’re building up this huge base of capital where we might be consolidating for a few more weeks.

William Clement III:

I mean, who knows, but when we break out of this thing, there’s so much volume support here. And there’s so much capital that has inflow to these levels. I don’t think we’re going to come back. I think it’s gonna be like 10k. You know, we were sitting under 10k everybody thought Bitcoin was stuck there forever. It was basically a stable coin at 9,500. And then all of a sudden busted out of 10k and never came back. And I see this consolidation very similarly also similar to the volume realized cap. And we touched on that earlier, realized cap has been going up dramatically over the last month or two, which is very bullish because you’re seeing a lot of capital once again, flowing in at these levels, new investors coming in to take positions at these levels. So in my opinion, we’re just, we’re just in this huge consolidation zone.

Stephan Livera:

And so I guess the other way to think about it also is that those players who are long-term thinking will not want to sell anything below that level, because that’s what they bought in at. It’s like maybe the analogy would be like you come to a poker table and you bought in with this amount. So you sort of feel like you don’t want to leave with anything less than that because now you’re losing.

William Clement III:

Yeah, absolutely. And it’s interesting you say that because there’s a metric that actually measures that, it’s called SOPR and it’s timed every bottom of the bull market corrections that we’ve had so far this cycle, because like you said, people have a very low tendency to especially smart, retail investors a lot of times panic sell, but big money that stepping in when you have, taking like a million plus dollar position, those are, it’s sufficient to say those are intelligent investors, smart money that’s coming in. If you have that much capital to deploy. So these people aren’t going to sell at a loss. And so it’s interesting when you see the market goes into a state of loss on like on aggregate. If the market on average is selling at a loss, that’s marked that’s what the SOPR metric measures and when that’s happened, that’s marked every bottom.

William Clement III:

So, yeah, like you said, the more capital that flows in at these levels, it’s building up a new floor for people that are, this is their new baseline, right. I mean, you may have bought in at whatever 5 – 10k. Right. But the people that are buying in now, this is their baseline. And so you’re building this higher and higher floor for price to kind of build off. Yeah. So we’re seeing a lot of that at these levels, also stablecoins coming in I think over a third of stable coins have been printed above 50k. I think we’re actually approaching 40% of all stable coins have been printed above 50k I think like $7 billion of stablecoins have been printed in the last 10 days. So, yeah, there’s a lot, I mean, obviously some of that is going to altcoins as much as we don’t want to believe that. I mean, it’s the truth, but a substantial portion of that is going to Bitcoin. So yeah. There’s a lot of capital coming in at these levels.

Stephan Livera:

Yeah. Yeah. I’m also curious your view on, okay. So I guess sticking with the poker analogy, sometimes there are times where you make the right call, but you still lose. Right. So as an example or whatever, maybe you went all in with Aces and the other guy is still, he sucked out on you. Right. I don’t know. Or maybe the other way around, maybe it’s more like, are there instances where, you might be looking at certain on-chain metrics and get led the wrong way, because you might think it’s a certain way, but actually you’re wrong. So I guess that’s not like the aces example, but just for instance, for that example, how do you think about that? Or how do on-chain analytics, people think about that and trying to make sure, I’m not getting the wrong signal here?

William Clement III:

Yeah. That’s a really good point. And I think, the way you kind of combat that is by looking at multiple metrics that are kind of describing the same thing. If you’re just going off of one metric and I’m glad you brought this up, if you’re going off of one metric, right. You can’t base your whole assumption, because at the end of the day, what we’re basically doing is forensics. Right. And that’s what I think is kind of fun about it is you’re looking at different clues and we’re just making an educated guess and saying, okay, these different metrics are saying the same thing. So it’s likely that this specific outcome right. and so it’s important not to just go off of one thing and you want to look for something called confluence, which is basically, a similar story that’s being told by multiple metrics that described something similar.

William Clement III:

And yeah, that’s very important because if you’re just going off of one thing, a lot of times there’s nuance to these metrics. And there might be something that you missed of, Oh, this is why this is acting this way. Or there might be something fundamental that you’re missing. I don’t know, like, one example would be like in 2019 when, and this isn’t really on-chain, but when price was pumping and everyone was very confused, cause like we haven’t been in a normal bear market, but then if you understood fundamentally the Plus Token Ponzi, that’s a piece of information you need to understand, to know why price action is acting that way. So you always need know that the fundamental drivers of what’s driving the data points. You know, if you’re just looking at the data without knowing what fundamentally is causing the behavior that way. For example, like if you were looking at whales popping up and the liquid supply metric that I was talking about, if you didn’t understand, there was this macro backdrop where everyone’s looking for an inflation hedge, and you didn’t know that corporations were coming in, you would be very confused about the behavior of whales and the liquidity depletion rate. So it’s important to understand the fundamentals as well. And then look for that confluence across the multiple indicators to understand the best possible picture, I think.

Stephan Livera:

Yeah, that makes a lot of sense to me. So it’s essentially marrying up the fundamental analysis and looking at really what’s going on qualitatively as well. And then also trying to look for multiple indicators that are pointing in the same direction. And so I guess it’s similar, like being a trader or whether you’re a poker player, the idea is that you’re not necessarily going to get it right every single time, but the idea is that you’re getting it right more often than not, or trying to tip the odds in your favor so that you know “okay now is a favourable time to be buying” or whatever sort of action you’re taking in that, and over time, the market evolves. And so there might be new metrics involved. So as you were saying, the growth in stablecoins, or maybe more and more people are playing in the derivative space, how do we think about that? And how does that change any of our approach around on-chain analytics?

William Clement III:

Yeah, absolutely. You know, I said over the long-term, the market’s going to evolve, it’s going to be harder to track on-chain movements when you start to have things like lightning come online, right? I’m sure the brilliant people over at Glassnode will figure out how to compensate for that. But it’s going to be a, it’s going to be different. You’re going to have to adjust and evolve to that. You brought up stable coins. Like that’s something that wasn’t around last cycle. And it’s very important to look at the flow of stablecoins because you understand where capital is coming into the market, the derivatives market as well. It’s very interesting because that wasn’t around last cycle. It is around this cycle. So a lot of these crazy swings, like we just had this crazy nasty wick down to like 53k or something like that.

William Clement III:

And I think what that is, it’s just liquidations, right? The market gets over leveraged in one way. And then in my opinion, a lot of times what this is a whale coming in and saying, okay, there’s a lot of leverage. Everybody’s got their liquidation price, where if the price goes down to this level, they have to sell and then they get liquidated. Right? And so I think these, a lot of these crazy price swings that you see on these shorter term timeframes are liquidations in both directions, and to some extent, whales kind of playing into that, knowing where those stop-losses are and hunting them to try to, move price, to kind of go their favor in the trade. But anyway, yeah, I think it’s very important to understand the derivatives, because that plays a huge part in like in, in the March crash, March crash of last year, a lot of the selling came from derivatives and not spot.

William Clement III:

So if you’re a long-term investor — if you really like, if you could see that, then you’d say, okay, well, if the fundamental long-term holders aren’t selling much here and it’s just derivatives, well, nothing has changed in the investment thesis, the smart money isn’t selling off here, there’s nothing to be concerned about — long term right. But I think the derivatives, the derivatives plays a huge part in, in a lot of these nasty wicks and price rises. It goes both ways. We see these disgusting drawdowns, like we saw, like at the end of last month where we went down like 15% in an hour, and we saw billions of dollars of liquidations. And that’s what that was — it was just a cascade of liquidations, but it also goes to the flip side to the upside where, if there’s a bunch of shorts, all of a sudden, the price goes above that threshold for the shorts. Their stops get hit. They have to buy in, they get liquidated. And then it, it’s a chain reaction of short liquidations on the, on the upside as well. So it’s kind of a double-edged sword, but that makes for these really crazy sudden moves in Bitcoin that we’ve been seeing lately on, especially on these shorter timeframes.

Stephan Livera:

Yeah. That’s interesting. And especially the short squeeze stuff as well, because it really makes you wonder who is actually going short and now, okay. Maybe there are some people who are — maybe they are just for whatever, some other position they’re doing that maybe they’re not that net short, but they are. And then essentially people get caught with their pants down during these moments and then — but who are these people?

William Clement III:

Yeah, that’s a really good question. I guess, some of it is just, speculative traders, they’re just doing like their TA or something. And they think that the price pattern they drew is saying price is gonna go down. But a lot of the short interest is actually coming from hedge funds that are trying to do this cash and carry trade, which is very interesting where you’re buying the spot Bitcoin and then you’re shorting the future. and so I don’t know, I’m assuming that their liquidation price would be a lot a lot lower than some of the spectrum they’re traders, especially the ones that are like going leveraged long. But, if we have a big enough cascade of liquidations, they’re getting thrown in there to getting liquidated, but yeah, you’re definitely seeing you see this huge increase in the futures interest from, from these hedge funds, which is just very interesting. And then specifically, like when you break that down, even further, the futures interest from the hedge funds is mostly short, like not even close, like way dramatically short. So in my opinion, that’s showing that some of them are trying to capture this risk-free spread between the spot and the futures. Yeah.

Stephan Livera:

Yep. So this is like the whole the so Plan B has mentioned this, there’s a lot of people talking about the, the contango trade and essentially it really works for people who are fiat denominated, right? So if you are a Bitcoin denominated, you don’t want to risk — generally speaking, you don’t want to risk losing your Bitcoins, but maybe if you, if you’ve already got your stack of Bitcoins and you’ve got a small amount that you’re doing on a Fiat, you’re kind of treating that like a Fiat denominated thing. Or there are people who aren’t hardcore orange pilled Bitcoiners yet, and they are still fiat denominated. So they’re trying to capture that. And because they’re, I think it’s, it’s, we’re living in this world where returns are really not that great in real terms, because because as we were mentioning earlier, the price earnings ratios on stocks are just getting bid up to crazy levels. Bonds are negative return or negative real return. So I guess there will be demand coming, but it’s just people haven’t all figured out how to execute that yet. Or maybe they’re not comfortable with the risks associated.

William Clement III:

Yeah, absolutely. And, I think the whole cash and carry thing is very bullish for Bitcoin. For this reason, if you’re going to capture the spread, you have to buy underlying spot, you have to capture the spread. You have to go long spot and short futures. So the wider that the spreads get, which is going to increase as the volatility increases and the volatility of Bitcoin increases the further out into the cycle we go. So I suspect that as the cycle goes on, these spreads will probably get fatter and fatter and the sort of break it down. The contango is basically when the futures are trading at a premium to the spot and the futures every so often, whatever, every month that they’re going out they’re trading at a higher and higher price. And so you can capture — let’s say the futures are trading at 60,000 and the spot Bitcoin is 55,000 for someone that’s operating in, like you said, in the fiat denomination, this isn’t for some hardcore Bitcoiners, but this might be for a fixed income investment fund or something like that.

William Clement III:

And so they can capture that essentially risk-free a $5,000 difference by shorting the futures, going long spot, and then holding those positions out until when the futures contract expires. And so this is going to be very interesting to see play out towards the end of the cycle, if, I mean, who knows if this will happen? My, theory is that it will the futures especially because they’re being driven by leverage. So like the exchanges with higher leverage, like Binance, FTX — the difference between the spot and the futures on those exchanges, the futures premium is way higher versus something like CME. And that’s because of the leverage that those, that those exchanges offer. So when we get to the end of this cycle, there’s gonna be more leverage positions being taken. Will these, will these spreads blow out to crazy stuff like 50, 60% plus, I mean, it might go higher than that, who knows?

William Clement III:

But the theory is, if that happens, then there’s going to be a whole lot of interest to come in and capture that spread. And the way that would be a bonus for Bitcoin is because people are going to have to buy more and more underlying spot Bitcoin, like market buy Bitcoin to capture the spread. So that’s just locking up more and more coins which I think could be something where if we get to the end of the cycle, will that be something that causes like the huge next leg up, I don’t know, but that’s something that I think is very interesting to keep an eye on. I don’t know how it’s gonna play out, but it’s something fascinating because we’ve never seen the behavior of these contango yields in a full blown bull market.

Stephan Livera:

Yep. So I guess in terms of the overall view where we are in the cycle, from your perspective and from, it seems most of the on-chain analytics people we’re still in the middle of the cycle. So if you had to kind of summarize, why do you think we’re still in the middle of this cycle? Why is that?

William Clement III:

Yeah, great question. So, I think the biggest thing is that the age of the coins that are being sold here are really young coins. And we’re continually seeing, like we had mentioned in the beginning, cohorts of addresses that really have no history of selling are continuing to scoop up these coins. Also, we’re seeing a realized cap go up, which is resetting a lot of indicators. Like the MVRV it’s showing that a lot of new capital is coming in at these levels. And we also touch on the on-chain volume, which is basically saying the same thing. And it really comes down to, yeah, there’s a lot of capital that are coming in that is coming in at these levels. We’re building up this huge base in my opinion, for price to kind of grow off of where there’s a lot of, new market participants stepping in, and this floor that we’re building up, we had talked about, the whole poker thing, people, when the price levels that they step in at is their bottom, that they’re basing their gains off of. And the more capital that flows in at these levels, the more that floor is raising up to where we are now. So I think we’re just in this huge midway consolidation.

Stephan Livera:

Yeah, really interesting. And as you were saying earlier, it comes down to marrying up a few things, right? The fundamental analysis, there’s a lot of people coming into Bitcoin, there’s more and more businesses building services that allow other people to buy Bitcoin or connect up. For example, NYDIG connecting up with banks to allow them to buy Bitcoin. So that’s like a very strong, fundamental thesis, this whole narrative of long-term store value, save your value. This is the thing to do it with that narrative is coming. And then the confluence of all the various, the on-chain analytic factors that you were mentioning earlier, like MVRV, the cohorts, who’s holding, who’s accumulating, as opposed to who are the people selling, not that many, but there are some. And I guess also, do you have any thoughts on where you think the top of the cycle would be? Do you have any guesses?

William Clement III:

Yeah. So I’ve got to be careful with what I throw out here. I would say 300k is a good, solid round number. I’m also kind piggybacking off of Willy and PlanB a little bit here, but also a lot of the metrics the broader cycle metrics, if you just kind of look at the ratio where we are now compared to the previous cycles, and you just kind of project out into the future, what that would look like in terms of the top of this cycle? I think across like three or four different metrics, that’s looking right around that 300k spot. So I think that’s my number as well.

Stephan Livera:

Interesting stuff. And so that might sound really crazy to people who are new to Bitcoin because that is literally, we’re talking 5 or 6x from where we are today, but Bitcoin can really move quickly. And so we will see a lot of people come in and it will be like that whole — it’ll feel like that whole eternal September there’ll be every man and his dog will be hitting, Bitcoiners up being like, Hey man, how do I get this thing? What do I do with it? And then, you’re gonna have to try to teach them but that’s just going to be the way it is. Also last question…

William Clement III:

It’s gonna get crazy, man.

Stephan Livera:

Yeah, exactly. I’m anticipating the next few months will really start to get crazy. And I guess for the last question, do you have any thoughts on how on-chain analytics will evolve in the future or perhaps are there directions that you would like it to go?

William Clement III:

Yeah, that’s a really interesting question. Something, I think about a lot. When we move into this kind of hyperbitcoinisation world, where Bitcoin becomes the dominant form of money and it is the global medium of exchange and all these things that Bitcoiners ended up, in the future. I think that it’ll be very useful to kind of track the behavior of the economy, right? Because everything’s on this open ledger, you can track the behavior of all different economy or economic participants, what they’re doing with their money and not in like a forensic way, right? There’s like the whole chain analysis people where they’re literally doing forensics on like who you are and where your money is going. Like I’m not talking about stuff like that because I also am a big proponent of the whole freedom aspect of Bitcoin and privacy and all these things, but I’m talking more so you can track the behavior of the economy as a whole. And just to kind of gauge where we are in things like economic cycles, which I think that’s super exciting and having an understanding of the behavior of money in combination with other macro-economic factors, I think will give you an even more accurate picture of what’s going on in terms of things like business cycles and stuff like that than ever.

Stephan Livera:

So yeah, we’ll just have to see what happens hey. So Will, really enjoyed chatting with you before we let you go. Where can listeners find you online?

William Clement III:

Yeah. So I’m, I’m on Twitter @WClementeIII cause I’m the third, so I like to throw that on there. And then as well I do a weekly newsletter that I put out on Monday it’s on, on my substack, which is in my bio, on my Twitter. And then on Friday it actually goes out on Anthony Pompliano’s Substack. And then on Saturday we do a weekly, very short, like 15, 20 minute recap of kind of the developments on-chain. Yeah. I’m mostly on Twitter. I’m super active on Twitter, especially now that I’m home from school. I’m pretty much glued to my computer all day. So yeah. Feel free to shoot me a message or whatever, but I’m constantly posting different metrics and stuff, so that’s probably the best way to get at me.

Stephan Livera:

Excellent. Thank you, Will, for joining me.

William Clement III:

Thanks so much, Stephan. I had a really good time.

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