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Our weekly show is hosted by Michael Nadeau (The DeFi Report) and Ryan Sean Adams (Bankless). Each week, we discuss how we approach managing our own portfolio and the data, research, and analytical frameworks that inform those decisions — for educational and informational purposes.
Ryan Sean Adams:
[0:10] 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 24th, 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.
Ryan Sean Adams:
[0:34] 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 cycle 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 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 the cycle. So.
Ryan Sean Adams:
[1:43] 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. And 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. But 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?
Michael Nadeau:
[2:58] Well, I do think there is still some mystery left to this. It is a very fascinating phenomenon, this idea that you can 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 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 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, 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.
Ryan Sean Adams:
[4:18] 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, 1.6 gigawatts of power. They are a publicly traded company, one of crypto's finest. You can find them at GLXY.
Ryan Sean Adams:
[5:09] 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,
Ryan Sean Adams:
[5:18] 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're at, what, $61K and dropping down about 2% on the last 24 hours. Let me just look at the seven day because it's been a little bit since, oh, down 6%. I'll see you next time. 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?
Michael Nadeau:
[6:03] 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 the, 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 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 bear markets. And during the bull market, what tends to happen is 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, speculation, like 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 premium. And when you get to the top of the market, there's a certain structure that forms that
Michael Nadeau:
[7:14] Will sort of cause me to say, okay, 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 stable coins. It's about, you know, demand 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.
Ryan Sean Adams:
[8:01] 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, is about $1 trillion, right? Round it 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 as realized price, realized cost, and the value that we saw where Bitcoin went to $2.5 trillion.
Ryan Sean Adams:
[8:35] 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 the purple bar is still above the capital-based blue bar. The capital-based 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. So in previous markets, we have during the 18-2018 bear market, you're right, 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 of the idea of why you track realized yield price, as a core KPI when we get on 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, It's a faith asset, right? You categorize that as it's a store of value asset, okay?
Michael Nadeau:
[10:03] Yeah.
Ryan Sean Adams:
[10:03] 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. Why could it not significantly, go below the realized cost capital base? Make that part make sense.
Michael Nadeau:
[10:25] Yeah. 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.
Ryan Sean Adams:
[10:39] Which is what? Which is what Bitcoin price gets us there to translate that?
Michael Nadeau:
[10:43] 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 mimetic 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, OK, is it trading like below the value of all the assets? And 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 capital base does work.
Michael Nadeau:
[11:35] 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 pretty good indicator of especially in bear 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 part of the story here is you do have to realize that this is a belief asset. And I think right now, if I'm thinking about why is it a belief asset right now, I'm looking out 6-12 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.
Ryan Sean Adams:
[12:41] 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 trickle of liquidity, the scarcity story of Bitcoin just absorbs it. So long as it survives. And that seems to be what has to happen during each four-year cycle, just has to survive. But this amount here, the 1.1 trillion, when just to refresh us 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 like 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, you know, like $1.1 trillion and just market purchased Bitcoin at some phase. Obviously, some got in higher, some got in lower. Yeah.
Michael Nadeau:
[13:48] Yeah, the way I think of it is it's basically the capital that's getting vested over time. And the way that you would see that that capital base get increased is if, let's say, you bought Bitcoin at $100, you end up selling it to somebody at $200. Their cost basis is now $200, but you created $100 of realized cap because of that person just increased the amount of capital. You put in $100, 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 $200,000. Someone selling at a loss and you're sort of destroying that. And so that's kind of how I think about it. 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 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.
Ryan Sean Adams:
[15:00] Okay. So let's then talk about 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 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 stable coins in existence increases. Now, it's not intuitive to me as to why stable coin supply feeds credit and leverage for Bitcoin. Can you explain that?
Michael Nadeau:
[16:13] Yeah, so, and I'm referring kind of broadly to the crypto markets in this case. I would say stable coin 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, stable coins 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.
Michael Nadeau:
[17:03] And so and for, you know, when you think about sort of what happens in DeFi with kind of looping strategy, even those are 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'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 flatlining. 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 stable coins and sort of dollar access, you know, versus just being used for trading and things like that.
Ryan Sean Adams:
[18:01] It's a genius act too. I mean, that was a huge catalyst.
Michael Nadeau:
[18:04] And I think people, you know, I think in the early days of stable coins, they're 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 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 stable coins 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. We lost the two most prolific systems for stablecoin settlement, 24-7 settlement. This was something that the exchanges, 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 Chokepoint 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 all this.
Michael Nadeau:
[19:15] 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. And actually, stablecoin supply kept dropping even as Bitcoin started to recover in the last bear market. So it'll be interesting to see. 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 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
Michael Nadeau:
[20:02] overall liquidity conditions and what comes after, after stable coin supply increases.
Ryan Sean Adams:
[20:08] How about VC capital? So here's a chart clearly showing a 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 pullback now, This is a form of credit and leverage?
Michael Nadeau:
[20:27] 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 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 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.
Michael Nadeau:
[21:08] 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 on 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.
Michael Nadeau:
[22:05] 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 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 up, kick things off on the, in the Salon ecosystem. I could see, I could envision that type of scenario, but just something generally to kind of keep an eye on, um, 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.
Ryan Sean Adams:
[22:47] 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.
Ryan Sean Adams:
[23:02] Once you have token wealth, you're off to the races because that propels 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.
Michael Nadeau:
[23:32] Yeah. So this is active loans. This is Ethereum ecosystem only. And we've just got kind of the top four in there. So we've got Aave, Morpho, Spark, and Compound. And what we can see is like, you know, active loans, you know, 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 amount of active loans out there. We're down about 57% right now. So definitely you 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 d5 protocols will run incentive programs to boost yields
Michael Nadeau:
[24:41] Um and attract capital and that's sort of like a bank you know lowering its lending standards to when there's lots of demand in the market so it kind of has a similar look to it um and we tend to see this you know as as the markets kind of kick into gear this is now you know somewhat you most of these loans are over collateralized still
Michael Nadeau:
[25:04] 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 like really coming back on chain. Right.
Ryan Sean Adams:
[25:19] 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,
Ryan Sean Adams:
[26:04] 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?
Michael Nadeau:
[26:16] 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 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 debts, which we'll get to here. But I think what happened is... So you have like these quite a few doubts that came out for Bitcoin. Also, we saw it on a longer tail of ETH and other altcoins. That is like a price agnostic buyer that just comes in and just spot buy. So 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 basically boosting you.
Ryan Sean Adams:
[27:27] Tom Lee said he was going to buy 5% last summer, right? Like you put some perps on that.
Michael Nadeau:
[27:32] 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 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 debts 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 again, but something to pay attention to. And again, we think the air is mostly out of the majors right now.
Ryan Sean Adams:
[28:11] 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.
Michael Nadeau:
[28:29] Yeah. So, you know, I think if we just kind of focus on strategy in this example, what they've been able to do is, you know, use the volatility of Bitcoin to go out, raise capital via convertible debt in the markets. So that was kind of the strategy that Sailor was doing early on, mostly 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, 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 MSDR shares, issuing these new preferred, you know, part of the capital stack with the SDRC products and others.
Michael Nadeau:
[29:32] But this is kind of like, just another way to like, to create money to go buy Bitcoin. And that's really what this whole story is about, It's 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 debts on within Ethereum, Solana, even, you know, further down the risk curve. So this was a this played a big role, I think. Going forward here, it's really just like, is
Michael Nadeau:
[30:17] There more pain to come to pay for these sins? Because if you go back to that period, 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 didn't last that long. It was 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.
Michael Nadeau:
[30:48] They did come out, you know, so 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 preferred products. So they've got $1.4 billion on their balance sheet now to pay that. So they raised $300 million, good sign. And I think if they can get to the $2 billion mark, that probably kind of calms things down. Maybe they have roughly 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 weak today. And it looks like the STRC product is trading down again. And so this story may, you know, this might be 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 strategy have to basically, you know, shore up its balance sheet? Is the market going to force that as the kind of final domino? We'll see.
Ryan Sean Adams:
[31:53] 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? It was all these funds.
Michael Nadeau:
[32:08] BlockFi and Celsius.
Ryan Sean Adams:
[32:10] 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, you know, 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, you know, 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 we were asking the question of like, well, have we seen the dead bodies rise to the top yet? It looks around, 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.
Michael Nadeau:
[33:10] Right, and I think you're hitting on something there, which when you get later into these bear markets, 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 who's, FTX was a dead body in June of 2022 that didn't surface until November of 2022. That's true. So they already had a hole in their balance sheet. As more leverage was being sucked out of the market, that's what exposed that. It made it impossible for them to paper over that anymore. So you have to wonder, 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.
Ryan Sean Adams:
[33:58] It's also the case that some of them could be right on the cusp, but it 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 and solve it at that time. You know what 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. He's probably levering up for like an even bigger catastrophe later. But like firms could be on the
Ryan Sean Adams:
[34:24] cusp, but not yet go under the watermark to kind of cause this cascade. The last driver you say is a minor financing, which feels like a story that, many have talked about throughout all of these cycles. 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?
Michael Nadeau:
[34:49] Yeah, I mean, I think the way I think of the miners is they're kind of like leveraged producers of like 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 do 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 bull markets, when, you know, they've got really strong margins and the Bitcoin price 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 what we have historically seen is once the bear markets come down. 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 largest miners actually get bigger and you're actually centralizing the miners.
Ryan Sean Adams:
[36:13] It strikes me, Mike, this could be one of the core reasons why we see a cycle playing out every four years, because 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 the 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?
Michael Nadeau:
[36:52] Yeah. Yeah, it is. It is. It's all tied together and it's, you know, you could 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.
Ryan Sean Adams:
[37:13] I love how you put it, 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 leverage and 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?
Michael Nadeau:
[37:54] I don't know. I mean, there's obviously no clock here. There's no law at play.
Michael Nadeau:
[38:00] 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 like the way I sort of deal with this is like, 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. Um, 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, uh, 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, um, 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.
Michael Nadeau:
[39:29] 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.
Ryan Sean Adams:
[39:45] 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,
Ryan Sean Adams:
[40:04] 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 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 soul. 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.
Michael Nadeau:
[41:01] Yeah, and I've been getting some questions on this. There has been a little bit of a narrative forming around Seoul, I think, a little bit right now. Maybe real world asset activity. My sort of thinking on this right now is, you know, I was more exposed to Eden Sol. Sol 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 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 um
Michael Nadeau:
[42:19] And i think that's a fair that's a fair strategy um you know i i think eath eath in particular you know did not outperform and we still we do own a little bit of eath it's a small it's a small percentage of the portfolio um that we just didn't sell last cycle um
Michael Nadeau:
[42:37] The the The challenge for ETH, I guess, is, is it going to outperform Bitcoin? And this is like 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 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 is the benchmark. I got to outperform Bitcoin 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 uh bitcoin in the last cycle um but if you look at these charts it's starting to look similar to the eth btc chart for soul and i think the question for soul whether it's going to outperform bitcoin kind of comes back to token economics.
Michael Nadeau:
[43:46] We're going to be covering, we're going to do some quarterly updates here in the watch list in the next few weeks. And I'm looking at just, is Solana leadership going to step up? And are we going to see some interesting stuff with token economics and things, real world asset activity? We need to see some interesting stuff happening there. And then can Sol sort of compete with something like Hype, right? Or can ETH compete with something like Hype that has better token economics. Like you have to think that, I think this is where the market is going. And so I have less conviction 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.
Michael Nadeau:
[44:29] 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 anything. 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 they're not, 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 Sol 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.
Ryan Sean Adams:
[45:13] 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 keep updated 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 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.
Michael Nadeau:
[46:29] One-month free trial. We're still offering that and also 20% off the annual plan, which is like $16.67 a month.
Ryan Sean Adams:
[46:36] 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 curious.