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- [00:00]
A
Foreign.
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B
Welcome to the Defi Report. The question today, why does bitcoin track the four year cycle? That's a big question. We're going to dive into it June 24, 2026. You know Mike, I have started saying this in the past couple of years, like saying it with a bit more passion and a bit more conviction. Don't fade the cycle is what I say.
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A
Yeah, yeah.
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B
It's because this is the fourth time on schedule. A bull and bear market in crypto has followed this four year schedule, this four year timeline. And every time during, especially I hear it during the, the bull market, people start fading the cycle. This time it's different now this time it was institutional capital. Last time it was Suzu talking about a super. They also do the same during the bear market. It takes the form of, oh, bitcoin's dead. Crypto will never go back. Wasn't that a funny Ponzi scheme? Remember when we had that fad? And every time, both on the bull side and the bear side, they've faded it and they've been wrong. They need to stop fading it. But I also understand this. I also understand why people want to question the four year cycle assumption. Because it sounds like, it sounds arbitrary. It sounds like a statement of faith, almost like a religion. Oh, like you're telling me you can predict market cycles on a four year schedule. Like why, why should, like there's not a rational basis. And people reply with just like don't fade this cycle. So I understand why there would be a question about it. I think the question we want to get into in today's report and the question you are seeking to answer is are there fundamentals that we could see? Are there actual tangible drivers, some evidence in the data that we can see and measure and quantify and that will tell us why the four year cycle keeps playing out and whether it will play out in the future. You think this is a story of credit and leverage? I think which maybe all cycles really are, all financial cycles are credit and leverage. Any you're looking at stablecoin supply, you're looking at defi loans, you're looking at derivatives, of course, for listeners. Stick around to the end. Mike, I'm also going to ask you about your controversial takes that people have been asking about, about ether. What about ether? What about Solana as well? So we'll talk about that. Stick to the end to hear all that. I guess my question going into this though is do you think today's report, the report that we're about to get into that you've written. Do you think this fully answers the question of why bitcoin tracks four year cycles or is there still some mystery left at the end of you finishing today's report?
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A
Well, I do think there is still some mystery left to this. It is a very fascinating phenomenon, this idea that you could sort of predict when bitcoin's going to peak and when it's going to bottom. It seems really silly and markets are supposed to be efficient and if everybody knows this, then you know, why does it keep doing it? It is one of the most interesting things to me about the crypto markets and I do think that if you sort of understand the drivers more from like first principles, and that's really what I'm trying to get at, is what are the drivers of the crypto markets. And focus on that and then just see if that is sort of tracking this four year path. Because I do think the mystery that sort of gets layered on top of it is sort of just how the idea of a four year cycle sort of impacts, reflexively impacts like investor psychology almost subconsciously. And I think that is maybe the mystery that gets sort of overlaid onto these metrics and things that, that we're tracking. But I thought it was a good time just to get into this. It's a really important topic and I think if you have a really clear view and conviction on how this works. And I think it's sort of like an aha moment in terms of like as an investor being able to kind of look at things and feeling a little bit more comfortable, like assessing probabilities and kind of risk in the market. So excited to get into it today?
- [04:18]
B
Well, we're going to dive into one of the biggest mysteries of the universe, I would say, which is why we keep getting these four year cycles. Before we get in there, we got to shout out our friends and sponsors over at Galaxy. And this is for the institutions listening. I know there's a lot of institutional capital that tunes into the DeFi report on a weekly basis. Whether you're looking at crypto, which is the future of finance, or the next industrial revolution, which is AI. Galaxy is the name you need to know. Because they do both in crypto. They've established themselves as a global leader. What they do is institutional trading, custody and tokenization. On the AI side, they have massive data centers, including their helios site, which 1.6 gigawatts of power. They are a publicly traded company, one of crypto's finest. You could find them at GLXY that's the ticker. And you can also go to their website galaxy.com there's a link in the show notes. If you want to see how Galaxy helps institutions invest, build and transform relentlessly, you need to go check them out. Thank you to Galaxy for sponsoring. Let's get into the bitcoin price right now at the time of recording we are at what, 61k and dropping down about 2% on the last 24 hours. Let me just look at the seven day. Cause it's been a little bit since I. Oh, down 6% on the seven day. Okay. So the question of today's report is zooming out much more than the one day and the seven day which is why does bitcoin continue to track the four year cycle? Can you tell us at the highest level, Mike, what are the drivers here? What are the key things in your mind as like to answer the question of why.
- [06:03]
A
I think the key thing that I like to kind of look at and we kind of start with this first chart here is when you think about sort of, I call it the capital base of Bitcoin, for example, we can sort of assess the capital base of other large assets as well. But focusing on Bitcoin here, the capital base is essentially the realized cap. So the total money that's been invested into, into the bitcoin network. So that's kind of your capital base. And to me that is like where I tend to think that the market valuation will trade to, during, during bear markets and during the bull market what tends to happen is the, the market value will detach, you know, on the upside from that capital base. And that is essentially a combination of leverage, credit market psychology, reflexivity, spec, all of the things that we're going to talk about today that come into play during bull markets. And that is what creates that, that premium. And when you get to the top of the market it tends to, there's, there's a certain structure that forms that will, will sort of cause me to say okay this, the probabilities are starting to shift and risk is increasing. And a lot of that has to do with the amount of leverage in the system versus the amount of kind of durable spot buying and where you're at in relation to that capital base. So that's kind of how I think of the levers we're going to get through all of them. But it's really about stablecoins. It's about, you know, demand for, for loans in defi. It's about the derivatives markets and what we See, with the perps markets, there's other ways of, like, that leverage comes into the system with like digital asset Treasuries with basis trades, market maker financing. Like, these are all things that are impacting the liquidity of the markets, which has a reflexive move on psychology, speculation, all these other things. So, yeah, excited to get into it.
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B
That's great. All right, so let's make sure we understand the foundation here of your thesis and theory of why we get these cycles. So you have this idea of capital base, and we're seeing that in the chart as about $1 trillion, right, rounded up to maybe $1.1 trillion. And that effectively the capital base is realized price, which we'll come back to. Okay, and you're saying the difference between that capital base that we have is realized price, realized cost, and the value that we saw where bitcoin went to $2.5 trillion. A lot of that difference. The bulk of that difference is a. And that was a 2.3x premium at the cycle peak. That was leverage, and that was credit. You think that's a massive driver. Now we are nine months into the spare market, and that premium has pretty much eliminated, but it's still. The purple bar is still above the capital base blue bar. The capital base blue bar really hasn't changed. It's about the same 1.1 trillion. But you could see the valuation of Bitcoin obviously has massively decreased and that premium has been eliminated. So we're at 1.3 trillion or so in previous markets. We have during the 18, 20, 18 bear market, you write Bitcoin's valuation fell 29% actually below the capital base. So the purple was 29% below the blue bar here today we're at a 19% premium. So this is why, this is some, some of the idea of why you track realized yield price as a core KPI when we get on these, these weekly calls. But I want to ask a question here. So I understand the purple. It's. It's leverage and credit. That's kind of the premium we'll get into. The, the, the purple itself, I want to make sure I understand the capital base portion of it. So this is just realized price. Why would that form a floor of any kind? Because in particular for Bitcoin, it's a faith asset. Right? It's. You categorize it as it's a store of value asset. Okay, yeah. So I think when people look at the blue, they say, well, okay, Mike, you're saying that's kind of like A floor. And then credit and leverage is built on top. There is no floor. It's a faith asset. It's a store of value. Like why does it not significantly, why could it not significantly go below the realized cost capital base? Like make that part make sense.
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A
Yeah. And you know, another way to think about that is like we've talked about, you know, a lot of the sort of high level KPIs for the cycle, the one that we have not gone below is the market value to realize value. Right. So this is another way to think about this.
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B
Which is what, which is what, what Bitcoin price gets us there to translate that.
- [10:44]
A
That would be about 54k would get us to that level. That would be kind of wiping out this entire, this entire premium. But no, I think you're making a good point. Like yes, Bitcoin is a faith asset. It's a memetic asset. It doesn't have cash flow, it doesn't have the things that you would typically look for to kind of like give it some sort of like book value. As like when you're, when you're analyzing a stock and it's really undervalued, you can sort of always come back to like, okay, is it trading like below the value of all the assets? So that's a nice way for investors to like have conviction about, about value. Bitcoin doesn't have that. So we have to find these other ways to think about what could be setting floors. And I think as long as like the bitcoin story is intact, like these sort of, this sort of capital, this idea of a base does work. But again it's a, it's a good point. It's a faith asset. And so obviously it can break at any time if, if Bitcoin is hacked and there's always risks out there. But for me like this has been like a, a pretty good indicator of, especially in bare markets, like there is a certain holder of bitcoin that does just have that belief and I'm one of them. But I think that's, that's part of the story here is you do have to like realize that this is, this is a belief asset. And I think right now, like, if I'm thinking about why is it a belief asset right now I'm looking out 612 months and thinking about what's going to happen with monetary policy, what's going to happen with fiscal budget deficits. And I'm seeing a picture where there's going to be a lot of demand for Bitcoin. Again, at some point this is very cyclical, but to me it seems sort of obvious that there is going to be a lot of demand for bitcoin. Again, it doesn't feel like it when you're at the lows of a bear market, but that's the conviction I think you have to have.
- [12:42]
B
Yeah, I got to the place at the end of this report where it just dawned on me once again that in order for bitcoin to succeed, all it has to do is survive. Because Bitcoin acts as a sponge for liquidity. And as long as there's that, that trickle of liquidity, the scarcity story of bitcoin just absorbs it so long as it survives. And that seems to be what, what has to happen during each four year cycle just has to survive.
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A
Yep.
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But this amount here, the 1.1 trillion, when, when just to refresh us on, on the realized cost there, you almost equate it to, that's how much people have invested in the network. How does that make sense? Why is that the amount that people are investing. Are you talking about like opportunity cost or where does that investment piece come from? Why is that the capital injected? It's not like a bunch of investors wrote a check for 1.1 trillion and just market purchased bitcoin at some phase. Obviously some got in higher, some got in lower. Yeah.
- [13:49]
A
The way I think of it is it's basically the capital that's getting vested over time. So and the way that you would see that that capital base get increased like is if, let's say you bought bitcoin at a hundred dollars, you end up selling it to somebody at, at $200. Their, their cost basis is now 200. But you created a hundred dollars of realized cap because of that person just increased the amount of capital. You put in a hundred, the next person put in 200. So the capital base has increased by $100 and that's kind of how you get that increase. And then like when capital, when the capital base is dropping, what's happening is basically that, that capital that was put into the market, that 200, someone's selling at a loss and you're sort of destroying that. And so that's kind of how I think about, it's a little, you know, it's a little funky to think about, but it's really the, you know, kind of capital that goes in versus capital destroyed and like that to me has, has served over these cycles as a pretty interesting way to kind of think about the kind of, I call it the Capital base, you know, of the network.
- [15:00]
B
Okay, so let's then talk about the, the main event here with that foundation, which is the credit and liquidity that builds and creates this market premium during bull markets, that evaporates and busts during bear markets. And you have some primary drivers of leverage and credit. We're going to touch on each of them. I think stablecoin supply, VC active loans and defi derivatives, leverage perps, market maker financing and basis trades, miners and then of course strategy, digital asset treasuries and the like. So let's run through each. This chart is very interesting. This is stablecoin supply. And what we see is a kind of a trajectory up, but then certainly a dip in the amount of supply during the last 2023 market. And right now we're seeing sort of a, it's, it's flat, there's very little growth. It's kind of like just like flattened in the bear market in 2025 during the bull markets, of course, the amount of stablecoins in existence increases. Now it's not intuitive to me as to why stablecoin supply feeds credit and leverage for Bitcoin. Can you explain that?
- [16:14]
A
Yeah, so, and, and I'm referring kind of broadly to the crypto markets in this case. I, I would say stablecoin supply is probably impacting things outside of Bitcoin probably a little bit more. But I think the way I think about this is like, you know, stablecoins don't necessarily have like this inherent money multiplier effect like bank deposits do. Like when bank deposits increase, the banks can, can actually lend out more. And so you can have this money multiplier effect and like more liquidity in markets. That's not necessarily the case because we don't have like, we still have over collateral, mostly over collateralized lending in defi. But what we do see is like when stablecoin supply is increasing, that is sort of become the collateral asset for, you know, settlement, for trading for the derivatives markets. And so, and for, you know, when you think about sort of what happens in defi with kind of looping strategy, even though they're over collateralized loans, there's looping strategies. So you are sort of getting like this money multiplier when stablecoin supply does increase. And so that's something to always keep an eye on. I think what's interesting right now is we are, we've been in a bear market for about nine months or so and the stablecoin supply hasn't really dropped. It's kind of Flatlining there. It's up a little bit from sort of when the bear market started, but it's kind of flat lining and we may not see, you know, the stablecoin supply dropped pretty significantly in the last bear market and it's possible that it doesn't really drop in this bear market. I think the primary reason for this is just kind of like maybe on the margin utility of stablecoins and sort of dollar access, you know, versus just being used for, for trading and things like that.
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B
It's a geni too. I mean.
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Right. And I think people, you know, I think when the early days of stablecoins they were kind of used more as like this bridge, right? This bridge from fiat dollars to the on chain world where then you kind of hold your, hold your risk in stable coins but when it's time to go risk off, you bridge out. And I think the genius act, the utility of stablecoins is kind of giving people more conviction that this is not like a bridge asset. Like you can kind of just think about it as money. And so I think that's playing out. The other thing is I think people forget a little bit about this. You know, we lost the, the two like most like prolific systems for stablecoin settlement 24. 7 settlement. This was something that the exchanges, you know, a lot of the centralized exchanges were tapping into. This was via silvergate and Signature Bank. Both of those banks went bankrupt in 2023. And then the asset, that asset, that settlement infrastructure was actually excluded from the resale. This was part of operation choke point 2.0 which I still, I don't know if that's. We've ever, we've revisited this and just. I think the FDIC chairman stepped down after, after all this. But that was you know, kind of a crazy thing where basically those assets were removed from the market. And I think that was part of the reason we saw stablecoins decline and a lot of fiat redemptions in 2023. It actually stablecoin supply kept dropping even as bitcoin started to recover in the last, in the last bear market. So it'll be interesting to see. You know, I think we may not see stablecoin supply drop but what I'm really looking for is an increase in stablecoin supply to kind of bring liquidity back in, maybe get some of that money multiplier effect, you know, maybe sometime next year we start to see this really kick into gear again maybe after the, you know, the, the clarity act, you know, makes its way through hopefully. But yeah, this is definitely something to keep an eye on in terms of just like overall liquidity conditions. And what comes after, after stablecoin supply increases.
- [20:08]
B
How about VC capital? So here's a chart clearly showing kind of a trend line that again matches the four year cycle, but in sort of a different way where we invest much more during the bull market and then pull back during the bear market. And we're seeing a, a pullback. Now this is a form of, of credit and leverage.
- [20:27]
A
It can be. So the way I think about this is, you know, most of the venture capital that comes into the crypto markets that is invested and deployed happens during, during bull markets. And so what tends to happen is the companies that receive that capital do so somewhat quietly. Right? Nobody really knows about this or they're getting funded and they start to build in the, in the bull market and then continue to do so into the bear market when they're ready to kind of come to market and launch their products and do some marketing. You know, typically that's kind of early in the expansion phase or it can be. A lot of them are running incentive programs, airdrops, things like this to get users to come, you know, test out their products. And that is venture capital funded if you really think about what's going there. So VCs are kind of putting that into the market. This can be like, this can create a wealth effect, you know, if it's a large enough project, a successful project with a large enough airdrop. We have seen this in past bear markets. If you just go back to the last, coming out of the last bear market really Solana started to really kick into gear in Q4 of 23 and it was really the Jito airdrop that created a wealth effect and kicked that off. So that brings users on chain, then it can, you know, create more demand for loans and you kind of get the reflexive thing coming off of that. So I think that's something to pay attention to. We saw that with hype as well about a year later in the last bear market, you know, what is the project that's going to come to market? It's always hard to predict these things. I've sort of got my eye on pump. They've got 25% of their supply reserved for an airdrop. And you could imagine a scenario where pump, you know, either floats out that they're going to be releasing that and it brings people on chain again and it starts to kick things off in the Solana ecosystem. I could see, I could envision that type of Scenario, but just something generally to kind of keep an eye on as an investor is like these airdrops, which ecosystems are they happening in and then the wealth effects and what happens in defi and things like that thereafter.
- [22:47]
B
So the clean link is VC investment happens during bull market, but the building happens during the bear market. And sometime in the bear market you start to get some early forms of traction that converts into token wealth. Once you have token wealth, you're off to the races because that propels, you know, the rest of the cycle. Let's talk about active loans in defi. This is a very clean chart showing loans go up during the bull market, loans go down during the bear market. And this is very clearly on chain credit. I mean it's literally defi collateral backed, defi type loans. Talk about this graph and what you're seeing.
- [23:33]
A
Yeah, so this is active loans, this is Ethereum ecosystem only. And we've just got kind of the, the top, the top four in there. So we've got aave, Morpho, Spark and, and compound. And what we can see is like, you know, active loans, you know, hit a, hit, a higher high. In this last bull market, which is great. In the last bear market we dropped about 85% in terms of the, the amount of active loans out there. We're down about 57% right now. So, so definitely have come off significantly. And you know, the way I think about just active loans and you know, how this kicked off, it kind of reminds me a little bit of what you see in traditional, you know, traditional finance with the demand for loans. So there's typically other things that happen first that bring users on chain. So it could be, you know, speculation markets, you know, prices are going up, airdrops, you know, stablecoin supply is increasing. These things are happening. They tend to bring users on chain and then the demand for capital kicks on. A lot of DEFI protocols will run incentive programs to boost yields and attract capital. And that's sort of like a bank lowering its lending standards when there's lots of demand in the market. So it kind of has a similar look to it. And we tend to see this as the markets kind of kick into gear. This is now, you know, somewhat. Most of these loans are over collateralized still. But there is a money multiplier effect that can happen via looping and stuff on platforms like AAVE. So something to keep an eye on. We're down 57%. We'll be looking for this to rebound at some point once we see users really coming back on Chain.
- [25:19]
B
You know, I kind of, when I look at this graph and what you just said, I do think back to what we started this episode with, which is don't fade the cycle. There are all sorts of other narratives that follow price in this graph. So a narrative right now you'll say, you'll see the reason this line is down and active loans have gone down is because hacks, AI, North Korea, mythos, all of these things that are causing people to remove collateral from on chain lending. But like that's just a narrative. Okay. Because like if you look at the, the, the from the lens of a four year cycle, it was bound to play out that way. Like it doesn't matter what North Korea is doing with hacking, it was always going to go down and there would have been another reason for it. That's kind of the, the maximalist view, I guess of the four year cycle. But you can really see it here. Now let's talk about derivatives leverage because that has been a growing driver. Of course, perps are huge. What are we seeing?
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A
Yeah, so you know, something we've been covering in recent reports, we think most of the air has come out, especially of the majors. This chart is looking at bitcoin futures, open interest in the perpetual markets. It's down about 52% from the peak of the cycle. In the last bear market we were down about 55%. You know, when, when we bottomed, perps were much smaller in the last cycle. So you know, maybe there's a little bit more air to come out here. But I think generally speaking most of the air has come out. I think, you know, the thing that drove a lot of the perps sort of funding this cycle were the dats, which we'll get to here. But I think what, what happened is you have like these quite a few dots that came out for bitcoin also. We saw it on a longer tail of, you know, Ethan and other altcoins that is like a, you know, price agnostic buyer that just comes in and just spot, spot buy. So if you're, if you're a trader and you want to put on leverage, like that was the time to do it because you know, you have somebody behind you that's just, you know, basically boosting.
- [27:27]
B
Yeah, Tom Lee said he was going to buy 5% last summer. Right. Like you put some perps on that,
- [27:32]
A
you got the turbo jets, you know, right underneath you. And so that was like very interesting to watch. And that's when, you know, open interest, you know, really spiked. And once sort of A lot of that debt like this, this was kind of, in hindsight it was kind of easy to see it, but what happened was you just had this spike in open interest and then you could see that the, that, that the dats were basically done buying. And so that was sort of a house of cards set up at the peak of the last cycle. So I don't know if we're going to see something like this, you know, again, but something to pay attention to. And again, we think the air is mostly out of the majors right now.
- [28:11]
B
Maybe while we're talking about DATs, let's touch on that as a driver. So DATs, of course they purchase bitcoin. Some of them are doing so on some form of leverage. Whether Saylor calls it leverage or margin or not, that's what it is, at least a little bit. Talk about that as a driver.
- [28:30]
A
Yeah. So I think if we just kind of focus on strategy in this example, what they've been able to do is use the volatility of bitcoin to go out, raise capital via convertible debt in the markets. So that was kind of the strategy that, that Saylor was doing early on. Mostly, you know, convertible debt, 0% interest and able to take that capital, go in and buy Bitcoin. So you're not actually like levering up bitcoin in the way that you're doing it with perps markets, things like that, but you're just taking, you know, demand for access to bitcoin from the public markets, you know, converting that into debt and then buying bitcoin with it. So that is, you know, another form of leverage. So that's one way that they were funding. We've seen, you know, issuance of just, you know, equity as well. So issuing MSTR shares, issuing these new preferred, you know, part of their capital stack with the STRC products and others. But this is kind of like just another way to like and to create money to go buy bitcoin. And that's really what this whole story is about, is just like how do we sort of create money that then goes into crypto assets, goes into bitcoin, goes into other things. And this is like a way that that's been happening. So, you know, we saw the explosion of this, you know, last cycle with a bunch of sort of copycats. On the Bitcoin treasury side, we saw a number of dots on, within Ethereum, Solana, even, you know, further down the risk curve. So this was a, this played a big role. I think, you know, looking going forward here. It's really just like, is there some. Do we have to pay for? Like, is there more, is there more pain to come to pay for these sins? Because, you know, if you go back to that period, like, it was just, it was pretty crazy how many of these were coming to market. The capital markets were open. Everybody was rushing to create these things and it, it didn't last that long. It was, you know, basically a quarter and it was kind of over. And that was the peak of the market. So do we have more? Is there more? Do we have to pay for these sins? And I think strategy is the one everyone's looking at. They did come out, you know, so I. This was interesting. On Monday they came out and announced that, hey, we raised some more cash to basically to shore up the credit and create more confidence in these, these preferred products. So they've got 1.4 billion on their balance sheet now.
- [31:04]
B
Wow.
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A
To pay that. So they raised 300. 300 million. Good sign. And like, I think if they can get to the 2 billion mark, like, that probably like kind of calms things down. Maybe they have roughly, you know, two years of dividend payments short up. Should calm things down a little bit. But at the same time, is that the thing that's driving bitcoin weakness? We're seeing bitcoin, you know, weak today and it looks like the STRC product is trading down again. So this story may, you know, this might be the. The final domino. It's hard for me. I don't have a way to predict these things. It could be the final domino. We'll see. You know, does. Does strategy have to re. Basically shore up its balance sheet? Is the market going to force that as the kind of final domino? We'll see.
- [31:54]
B
Yeah, I guess so. As we compare this to the previous bear bust or bull bust. Right. We definitely saw that that was a huge deleveraging story. It was bitcoin basis trade, gbtc, remember that was all these funds. Then it was the centralized lending platforms like BlockFi and Celsius. And that was all leverage, of course, on top of Bitcoin. And that came crashing down in a much more acute, catastrophic type of way. What we're seeing this time, at least so far, is still the leverage is bleeding out of the system. And you could see that, right, with the valuation versus the capital base, now that's becoming one of one. But how much leverage will bleed out of the system and will it be so much that it'll cause a reflexive reaction among the holders to actually decrease below, to go below the capital base and will there be any acute type symptom? Right, and that's what we've been asking I think almost since October when you were asking the question of like well have we seen the dead bodies rise to the top yet? Looks around, no one know, everyone's still here. Like what is actually happening, whether we actually see it, whether it's acute, whether it's catastrophic, we don't know. But we can still see the leverage bleeding out of crypto because we see it in the crypto price.
- [33:11]
A
Right. And I think you're, you know, you're hitting on something there which when you get later into these bear markets, this is what we don't, what we don't have any insight into is like we know the leverage is leaking out, we don't know if there's somebody out there. Like the dead body you mentioned, FTX was a dead body in June of 2022 that didn't surface until November of 2022. So like there they already had a hole in their balance sheet as more leverage was being sucked out of the market. That's what exposed that made it impossible for them to paper over that anymore. So you have to wonder like is there somebody else out there? Is there a, you know, B or C tier exchange, you know, you know, something like that? We don't know. And this is the question.
- [33:58]
B
It's also the case that some of them could be right on the cusp but hasn't quite like deteriorated to the level where they need help. I mean there are, there is a parallel universe where FTX didn't actually go insolvent at that time, you know, I mean like they just barely made it somehow they got financing somehow and they somehow managed through it. And SBF is no longer in prison. He's like the king of crypto at this point and he's probably levering up for like an even bigger catastrophe later. But like firms could be on the cusp but not yet go under the watermark to kind of cause this cascade. The last driver you say is minor financing, which feels like a story that many have talked about through out all of these cycles. And is that basically like miners are kind of their long bitcoin. Of course, so many of them go broke during the bear market and die. Is that what this chart is showing us?
- [34:50]
A
Yeah, I mean I think the way I think of the miners is they're kind of like leveraged producers of future bitcoin. So they go out and raise capital to get the machines to get the ASICs to invest in real estate to get access to power. So they're going into debt to all this and then they're going out and buying bitcoin. And the goal is to kind of hold that bitcoin, not sell as much of it as you can. And in, in bull markets, when you know they've got really strong margins and the bitcoin price is, is well above their operating costs, you know, this is not an issue. And like what you kind of want to see from them is like actually selling bitcoin when it's favorable to do so, to kind of shore up their balance sheets. Because, because what we have historically seen is once the bear markets come, the margins compress and then like they can't access finance. Like it's just, nobody wants to finance somebody who's just losing money and their equipment costs more than the revenue they're making. And so what tends to happen is you have like a capitulation at the worst time, right? The miners should be the smart money of the industry. They end up oftentimes selling at the absolute worst times. And you know, it's, it's. And then you tend to get the consolidation which, you know, bitcoin's a decentralized network. But every cycle because of this dynamic, the, the largest miners actually get bigger and you're, you're actually centralized.
- [36:13]
B
I mean it's straight. It strikes me, Mike, this could be the, one of the core reasons why we see a cycle playing out every four years. Because guess the miners that survived are the ones who didn't fade the four year cycle. This is almost like natural selection. The ones that did fade it are now dead. And so if you're a miner and you've only survived, you've watched your peers die because they faded a four year cycle, you didn't. During the good times, you short away cash in the balance sheet. What are you going to do the next time around? You're going to believe in the four year cycle, aren't you? And that's enough kind of deleveraging in the system to kind of kick off the reflexive feedback loop for why we see cycles in the first place. This is how all of this works, isn't it?
- [36:52]
A
Yeah, yeah, it is, it is. It's all tied together and it's, you know, you can sit, I hope people can kind of sit with this report. This is something I've thought, you know, I'm always thinking about. It's just like everything comes back to leverage and credit and it's all, it's very Complicated, but it's all kind of tied together and it's a fascinating topic. I think it's something you can really kind of spend some time on.
- [37:13]
B
I love how you put it when you're close, as you close, the four year cycle is not a random coincidence. You say this, it's just how leverage, credit, media attention, human behavior and incentives collide to create a market cycle. The big story is leveraging credit, which you've emphasized in today's report, and then the feedback loop around media attention, human psychology and all of the incentives. That's why we're getting these four year cycles. Why is it four years? I mean, just because it has been previously four years. I mean, is there any fundamental reason for why four years? Why not six? Why not five?
- [37:54]
A
I don't know. I mean, there's obviously no clock here. There's no law at play. I think there has, I think real vision has done some work on just the actual refinancing schedule of treasury debt and things like that and how that feeds into liquidity and maybe that's playing a role. But we've seen bitcoin at the end of almost every bull market cycle actually detached from global liquidity, which it has done in this cycle as well. So it's really hard to say. I think for whatever reason it's been playing out this way. That almost becomes an anchor, I think in some ways on top of all these other things that we talk about. So the way I sort of deal with this is I sort of expect people to start fading the idea of the cycle at different parts of the market. And I think some people are doing that right now in terms of the sort of length of the bear market. You know, I want to observe that, right? But then I also want to go back to the data and say, like, is, is there any reason to set to come out of this stance of a. I sort of, I sort of say, okay, my default stance is going to be that the four year cycle plays out. But then let the data guide me on that, right? Then let, actually let the data dictate where the sort of risk is in the market. And I think that's what really for me as an investor and somebody who tries to play these, these longer term cycles, this is the key almost to everything that we do. Obviously there's a lot, there's no easy button for this and it's a, it's a ton of work. And we go through a lot of the data points, you know, from kind of how we assess this almost on A weekly basis. But we haven't really shared it from this kind of like leverage and credit perspective. So I wanted to share that this week.
- [39:45]
B
This is great. It's a very Michael Howell of Bitcoin type take of you and I think it's really smart and I think it makes sense and it has built more of my conviction in the fundamentals of a four year cycle. So I can tell people it's not just a religion. There is some data that is backing this and it's the same that propels other global markets which is it's credit and it's about leverage. That's the story. Before I leave you Mike, I've got to ask a question that I think a lot of TDR Pro members have been asking which is when they look at your portfolio, got a lot of great assets in it. Of course, you know, Bitcoin. To unlock the full, full portfolio, you guys are going to have to become TDR Pro members yourself and see that what they don't see very much of in your portfolio right now is the asset Ether and the asset Sol. Why is that? Are you just not bullish on them? Are you biding your time to enter in them at some point? How are you playing Ether and Solana right now? And why aren't you more bullish than you are? Because you do have a sizable crypto position. You've got a lot of dry powder, but you have a sizable crypto position. But Pro members have not seen you go in size in Eth and Solana as yet.
- [41:02]
A
Yeah, it's. Yeah. And I've been getting some questions on this. There has been a little bit of a narrative forming around Sol I think a little bit right now with maybe real, real world asset activity. My sort of thinking on this right now is, you know, I was more exposed to Ethan Soul. Seoul was one of the most, the best performing assets in our portfolio in the last cycle. Became a large percentage of the portfolio. And I'm not necessarily bearish on these assets. It's more that I think that the applications, the best applications that have product market fit, that are in a growth sector, that have strong token economics and good leaders. I tend to think that these projects are going to outperform. It doesn't mean Ethan sold do poorly. But I do think that if you're in the right assets, you're going to outperform the base infrastructure. The challenge on that is you have to be a stock picker. Right? So this is kind of a risk. It's a question about risk and how much risk you want to be taking. If you, if you sort of have maybe you're a little more risk averse, you might say, okay, well, I just, I just think there's going to be a lot of apps that do well on both of these networks and I just want to own the infrastructure on that. And that's one way to play it. And I think that's a fair, that's a fair strategy. You know, I, I think eth, Eth in particular, you know, did not outperform and we still, we do own a little bit of eth. It's a small, it's a small percentage of the portfolio that we just didn't sell last cycle. The, the challenge for eth, I guess is, is, is it going to outperform bitcoin? And this is like the, the big question. It did not outperform bitcoin in the last cycle. And so I have to form a thesis for why that's going to change moving forward. And I just haven't been able to really get there with, with kind of what I've been seeing. And you know, the strategy here is like any capital that I'm putting into the portfolio that's not going into bitcoin, Bitcoin's the benchmark. I got to outperform bitcoin with that, with that capital. And so that's kind of how I think about it. And if I can't get conviction that it's going to outperform bitcoin, then we're not putting it in. Obviously, like my thinking can, can change here a little bit. A little bit, but this is kind of where I'm at right now. And you know, Solana significantly outperformed bitcoin in the last cycle. But if you look at these charts, it's starting to look similar to the ETH BTC chart for Seoul. And I think the question for Seoul whether it's going to outperform bitcoin kind of comes back to like token economics. Like, you know, we're going to be covering, we're going to be doing some quarterly updates here in the watch list in the next few weeks. And I'm looking at just, is, is Solana leadership going to step up and are we going to see like some interesting stuff where, with token economics and things, real world asset activity, like, we need to see some interesting stuff happening there. And then can Seoul sort of compete with something like hype? Right? Or, or, or can ETH compete with something like hype that has better token economics? Like you have to think. I think this is where the market is going and so I have less conviction on, on eth on that side. Just because the Ethereum leadership is sort of like hands off. They want to be a little more hands off with things. I sort of as an investor I want to see a little more like, like I don't want to see bitcoin, I don't want to see any of it. Bitcoin doesn't have any leadership basically. But I think it's hard for these other L1s and stuff to really compete in this marketplace if there's not some strong leadership. And so this is the question I think I have for stuff like Ethan. It's possible that Seoul actually has a similar outcome. I think to Ethan just doesn't outperform BTC in the next cycle. We'll see. I'm going to keep monitoring this, but I'd rather own the apps. Right. And we have exposure to these ecosystems but we're just in apps and other. We're just expressing that in a different way.
- [45:13]
B
That's a good explanation, Mike. I think that's what people were looking for. So really you need to see a story of the ETH bitcoin ratio and the sole bitcoin ratio and why those two should outperform bitcoin before you enter in a position. But as we've seen before, you've changed your mind on things when the facts and fundamentals change. So we'll, we'll, we'll keep updated as, as we go through the rest of this bear market. Would you call it late stage bear market, which feels kind of sunny. I would remind folks though, just because it's the late stage bear market, that just means at some point in the late stage the bottom is in. We still have a, a long slog through recovery as well to get through. So we've got many months ahead of the DEFI report and I will say now is the time. Of course, as they say, it's not diversification that builds wealth, it's concentration. That's what you're building on. The watch list is concentrated positions. I've been enjoying it a lot. I've actually entered some positions as a result of the watch list here recently. So if you want access to that and you are not a TDR Pro member, you should go do that. You should look at Mike's take on what positions he's concentrating in and see if that aligns with where you want to take this. There's a link in the show notes. I think there's still a one month free trial.
- [46:29]
A
One month free trial. We're still offering that. And also 20% off the annual plan, which is like $16.67 a month.
- [46:36]
B
So lock in price is going to go up. Free trial could end at any time. Of course. Got to let you know, none of this has been financial advice. This is an investor journal. We're just on the journey alongside you. So until next week, stay cur.