Update on Cryptocurrencies January 16th, 2023 By, Nolan Loxton

If you would like to read this article in a downloadable pdf format, click here.

In 2021, the S&P Cryptocurrency Broad Digital Market (BDM) Index (Ticker: SPCBDM) launched with the objective of being a broad investable digital asset universe benchmark. The index launched on July 13, 2021 and has a 10-year history based on the index methodology on the launch date.

The index had a notable peak in May 2021 of 5,547 and then dropped significantly until July 2021. It set a new high of 6,215.99 on November 9th, 2021, and then slid down to November 2022 with new lows at 1,331.38. In December 2022 it failed to fail further and is up 31% since then. Happy new year!

You can see the recent price action below in the YTD chart. The index failed to accept lower prices and swiftly moved up into the prior sideways channel.

Market Summary

a) Market Type

Bitcoin (BTC) hit a new all-time high of $68,789.63 on November 10th, 2021, but has had a sharp downturn all the way down to $15,555 on November 9^th, 2022.

We are in a “Neutral Normal” market at the moment, following the break up in the Market SQN score.

In the last update, we were in a “Bear Normal” market in which the least surprising move would be further weakness. Statistically, the market took the most surprising path, rallying into “Neutral”. Time to act Swiss and make bank on further surprises?

Also notice the last six months took volatility from extremely volatile to extremely quiet and has recently returned to “Normal” as the BTC rally kicked.

Is this the end of one cycle and the beginning of a new cycle? The Super Trader Bitcoin System indicates it is at least a possibility. More on that below.

Bitcoin ended the 2022 calendar year down 64%—the second worst drawdown since 2010. 2018 is still in the lead with a 72% drawdown.

A visually (unweighted by market cap) picture for the 2022 calendar year illustrates BTC’s performance still represents the overall market.

So far, the visual for January 2023 is a lot greener. If you threw a random dart now, what color would you most likely hit?

b) Super Trader Bitcoin System

The objective of the system is to outperform a bitcoin buy-to-hold while sleeping easy.

The system entered a new long position at the close price of $17,935 on January 11th, 2023 with the current stop at $16,547.00.

What I find particularly interesting is how the “Quiet” volatility period accelerated the entry forward. I’ll keep you updated on how the Van plan unfolds in the February 2023 update. The areas around $25k and $30k look like resistance.

For a while I lived in a village on a tiny island off the coast of Borneo (also known as Kalimantan). You could walk around the whole island in 20 minutes and there wasn’t much to do except fish, dive and ponder life.

The only dive master was a local gentleman called Itsu. Itsu was 100% Indonesian and didn’t speak even a single word of English.

He had snorkeled, fished and dived these waters since he was able to walk and was intimately aware of the awe, wonder and heartache that accompanies the fisherman’s life.

Communication with Itsu was a little challenging but we were united by a passion for diving, dive sign language and a strong collective desire to not lose our fingers to the huge shoals of Barracuda frequenting the Celebes Sea.

I spent many joyful hours snorkeling jelly fish lakes, drifting along with leatherhead and green turtles and catching currents with Manta rays as I simply admired the beauty and balance of creatures and critters of the deep blue ocean.

But the most exciting dives by far were the Barracudas.

It was a bumpy 60-minute journey in a very small (too small in hindsight!) fishing boat to a reef with strong currents and then the usual steps:

Step 1: Dive down hard to the reef and hook a rope into rock.

Step 2: Breath as little as possible for as long as possible while dangling in the currents waiting.

Step 3: DO NOT POINT at Barracudas if you love your fingers. If the Barracudas become overly curious, hide your nose in the coral.

There is no doubt when the Barracudas finally arrive from the deep. It’s the moment when the whole ocean becomes darker due to the sheer numbers of the shoal swirling on all sides.

Somebody Lost Their Hand…

Sadly, in the crypto ecosystem, the “Do not point at Barracudas” rule wasn’t closely applied, partly because some Barracudas were very well camouflaged.

A lot of people have lost a lot of fingers. Some have lost both hands, and a fair few have even lost their faces, including the Winklevoss twins.

(Photo Right) Itsu breaking the golden rule: DO NOT POINT at Barracudas, it’s impolite.

The Sheriff is out fishing big time, and he has caught some big Barracudas while others are still on the run in the deep blue.

The regulatory pendulum never stops in the middle so we expect some kind of over-reaction and over-reach.

It begs the question: If you were the Sheriff, what are you seeing in the fishing waters?

A clever Sheriff uses a “fish finder”. A good fish finder starts with cash flows. Cash is king after all, even in crypto.

At a high level there are three points of cash flows:

1. Day 0: The origin of the blockchain to support the stated objective of the blockchain. It sounds like the primary market.
2. The final day of the investment: This is effectively the day the investment is sold by the existing holder to a new holder—the secondary market.
3. Ongoing cash flow: This is the day-to-day existence of the chain.

Let’s apply these three cash flows to BTC and ETH and see what “substance over form” smells like.

The Stated Objectives:

BTC: To create a trustless electronic transactions system which solves the problem of double spending coins.

• Sheriff: No fish here.

ETH: To create an open-ended architecture, deriving value from its programmability by attracting developers who build useful applications, driving demand for Ethereum network and its native token, Ether.

• Sheriff: Mm, so the objective is gains through the price rises of a token? Sounds fishy.

Day 0 cash flow aka the Primary market

BTC: No fund raising. Satoshi (who ever he/she/they may be) effectively used his/her/their own resources to build and mine the first coins. Then, and only then, was the world at large invited to mine BTC.

• Sheriff: No funds, no IPO, no fish.

ETH: Raised approximately $18.3 million in BTC (important: not USD) through an initial coin offering with an effective price of $0.31 in 2014 to then build the ETH network which was launched in 2015.

• Sheriff: Mm, sounds like a software company IPO but thank goodness it didn’t use USD for fund raising. Glass fish?

Final day of investment aka the Secondary market

BTC: Miner sells mined BTC via an exchange where price is driven by supply and demand and receives USD from the BTC buyer. Sounds a lot like gold or corn.

Sheriff: Some big fish here.

• Fiat is my town. Fiat changed hands. The usual “Know your client” and anti-money laundering shall apply.
• Who are these exchanges anyway and what are they doing to keep client money safe and segregated?
• Price sounds like it could be manipulated?

ETH: Initial investor sells money to new investor. Price influenced by supply and demand as well as “burn ratio” to constrain ongoing supply.  

Sheriff:

• All of the big fish mentioned above. And also, burning sounds like share buy backs without the inconvenience of cash outflows. Big fisherman tales through price exaggeration and manipulation? I smell Sushi.

Ongoing cashflow: 

Both BTC and ETH ownership have 0 cash flow intrinsically on the blockchain. Cash flow could be available if you staked with a counterparty, but then you have counterparty risk.

Sheriff:

• Counterparties sound a lot like big Barracudas?
• Cash flow for staking? Sounds like Barracuda banking.

Sheriffs’ Conclusion?

SOMEBODY SOMEWHERE IS GOING TO HAVE TO DO SOMETHING!

Which potentially translates into EVERYBODY EVERYWHERE IS GOING TO BE DOING EVERYTHING.

Here is a recent example:

Helped your grandpa transfer his BTC to his cold wallet?

Congratulations. You are now a “broker” in terms of the Infrastructure Investment and Jobs Act of 2021.

The devil is clearly in the detail and the details will likely be overlapping.

A lot of crypto will die a well-deserved death. But not all crypto.

When I look at substance over form, to me, BTC smells like a functional commodity and a store of value—a kind of golden coffee bean if you like. I own it in the same way that I own gold.

If civilization has a major solar flare, I trust a couple of nodes will survive somewhere and will eventually come online again in the same way that gold survives a house burnt to the ground.

ETH on the other hand, smells like a software company. I understand it is valuable. I understand it is life changing and somehow connected to the future. I understand I want to own a piece of it in a portfolio for the long run. I also understand Van’s principle of “buy stuff that goes up”.

If ETH is forced to pivot into a NYSE listed company to integrate into a highly regulated crypto world and it is going up in price, that wouldn’t stop me from owning a piece.

d) News Map

Context is all important and to add some context around recent news events we will focus our attention on the five main types of players and the games they play in the crypto space.

We are leaning on a key Tharp Think principle here: “The map is not the territory. The better my map represents the territory, the better I will function in the world.”

We are not trying to explain the extremely complex non-linear open crypto system but rather we are looking for a useful lens to identify what may be important changes affecting the ecosystem and, ultimately, supply and demand.

What is “useful” for a trader? Tools that help make money.

On our map the main players and games are:

The HODLers:

These are mostly retail speculators with no trading systems or buy-and-holds with no stoploss. The early adopter HODLers have done quite well and with many who are still whales today. Many whales pivoted into other categories. The late adopters haven’t fared quite so well, they may be whales but their average BTC cost is underwater. For HODLers, 1 unit of risk (1R) represents their total capital committed—it’s basically an all-in bet. HODLers have no cash flow day to day without selling/staking the holdings.

The Traders:

These are large speculators such as hedge funds as well as the systematized disciplined retail traders. Their cash flow is dependent on the gains/losses in the underlying positions on positive expectancy systems. The common denominator amongst traders is a position sizing approach to capital allocation as well as a risk to reward approach at a trading strategy level (usually a minimum of 2:1 risk reward). For this reason, private equity and venture capital is also included in the Trader category as they have definite entries and exits as well as strict position sizing rules.

Business, Big and Small:

This includes the major commercial players who design blockchain infrastructure, have already adopted blockchain or are actively in the process of integrating blockchain and its related products and opportunities into their business models. Their cash flow originates from their usual business activity. Blockchain offers operational efficiencies improving cash flow and customer experiences.

For the small business, blockchain offers the opportunity to level the playing field (or should we say “paying” field) to unlock cash flow.

The Market & Makers:

This represents the market makers, brokers & exchanges (both traditional and DeFi), banks and asset managers. Cash flow is ongoing from volume in its various shapes of trading, spreads, commissions, assets under management and even order flow payments.

The Sheriff & Co.

This represents governments as well as any free market interventions in its various shapes, sizes and forms. The profit of all other players is their tax base and therefore cashflow plus or minus the impact a couple of trillion depending on the state of the printing presses.Crypto Update – Main Players

Now that we have our main players categorized, let’s look at some noteworthy news items by category.

HODLers:

• A new breed of HODLers may be emerging as El Salvador passed a crypto bill paving the way for BTC-backed bonds. El Salvador is hoping to raise cash to pay down sovereign debt as well as build a special economic zone.

Traders:

• Ondo Finance, started by a pair of former Goldman Sachs employees, launched a fund allowing investment via stablecoins USDC, USDT and DAI into US treasuries and bonds held via Blackrock. This gives the crypto environment access to traditional capital markets and is an important step in making cash management safer and less costly.
• The 14 top-performing ETFs this year are all tied to crypto in some way, shape or form.
• CryptoQuant stats noted their three volume-based indicators were not reflecting institutional buying in the run up to $21k for BTC.

Market Makers:

• Institutional traders can now trade on Binance without needing to have collateral on Binance directly. Instead, collateral is posted with Binance Custody, a legal entity registered in Lithuania. On the face of it, custody by a Lithuanian entity doesn’t sound really inspiring to me.
• Binance bought Voyager Digital’s assets after the bankruptcy court approved.
• Peer-to-peer crypto marketplace Paxful removed Ethereum (ETH) from its platform, with CEO Ray Youssef writing on Twitter, “We finally kicked Ethereum off our marketplace. 11.6m humans safer. Integrity over revenue.” His statement cited several concerns about the project, such as a lack of security and decentralization.
• Binance’s institutional arm, catering to trading firms, hedge funds and family offices increased new clients by 17.4% in Q4. More January juice to come?

Business, Big and Small:

• Twitter added price indexes for BTC, ETH and 50 other coins to its search function. Doge obviously made the cut.
• Genesis Global Capital owes creditors more than $3 billion in the wake of FTX. It’s parent company, Digital Currency Group (who also owns Grayscale Investments), is forced to raise cash through asset sales.

• Core Scientific Inc, a major bitcoin miner in Texas, filed for chapter 11 bankruptcy.
• It is estimated that Web3 lost $4 billion to fraudsters through hacks and scams in 2022.
• Tepco, Japan’s biggest power provider, is planning to use surplus renewable electricity to mine BTC and altcoins.
• Silvergate Bank had a run on the bank due to the FTX collapse. The bank had to sell $8.1 billion worth of assets at a loss and lay off 40% of staff. This has not gone unnoticed by US regulators.
• Nexo, the crypto lender operating in over 200 jurisdictions, was raided for alleged money laundering in Bulgaria, leading to large scale withdrawals. They are in the process of withdrawing from the USA already.

The Sheriff & Co:

• Gemini, the self-proclaimed adults in the room, along with Genesis Global Capital are being charged by the SEC with offering unregistered securities through Gemini’s Earn program.

• Japan prodded the US and EU to join forces on regulating crypto firms in a bank-like manner.
• The Bahama central bank is actively marketing the benefits of their two-year-old central digital currency, the “Sand dollar”, which is pegged to the US dollar. Demand remains sluggish.

• The Commodity Futures Trading Commission filed a lawsuit against Avraham Eisenberg for “a manipulative and deceptive scheme” which inflated the prices of swaps on the DEFI exchange Mango Markets, costing traders $147 million and netting Eisenberg $50 million in profits. Eisenberg was arrested in Puerto Rico.
• Scam Bankman-Fried was released on a $250 million appearance bond—one of the largest in US history.

e) Market in Pictures 

The Market SQN picture is improving with BTC up from Bearish to Neutral. Of the 100 coins we monitor, a big proportion moved from Bearish to Neutral.

The best and worse coins rated by Market SQN scores are as follows:

Will the crypto market continue to build signal or are we just in the new year noise?

Overall Commentary

This is a free newsletter to the VTI community. It’s not about making any recommendations for what to buy or sell. Instead, it’s about understanding how money is made in crypto assets.

Until next time,

Enjoy your own game!