Update on Cryptocurrencies July 17th, 2023 By, Nolan Loxton

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

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

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Courtesy of S&P Dow Jones Indices, spglobal.com

The index had a notable peak in May 2021 of 5,547 and then dropped significantly until July 2021. On November 9th, it set a new high of 6,215.99 and was sliding down to November 2022 with new lows at 1,331.38. In December 2022, the market failed to fail further, and during February 2023 there was a minor retest followed by higher highs. The March 2023 dip was met by buyers.

You can see the recent price action in the YTD chart below. The index pierced the May 5th highs at 1 but did not move through the level strongly. It also failed to fail further back below 2. Does price have sufficient demand to run above and beyond 1 directly from here, or does Mr. Market need to confer with traders at 2 and 3 first?

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Courtesy of S&P Dow Jones Indices, spglobal.com

Market Summary

a) Market Type:

The BTC Market SQN score had a brief delayed bump back into “Bullish” before dropping back into “Neutral”. Was that it, or was that bump 1? Standard Charted believes it’s just the beginning on the way to $120,000.

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Volatility is on the verge of falling to the sleepy end of the “Normal” range.

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Since January 1st, 2023, BTC is up 81%. Last month, the BTC vs ETH gap was 15%. Fast forward 30 days and the gap is now 22%.

Notice Ripple at +118% for the year and Solana at +161%. A change in leadership for Altcoins? I would be more inclined to believe traders have passed the baton if the size of the blue boxes for XRP and SOL increase significantly over the next couple of months relative to ETH.

Also notice how BNB is down 2% for the year. Positive developments with regulators worldwide could spark a sympathy run but Binance has their work cut out.

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Courtesy of Coin360.com

b) Super Trader Bitcoin System

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

The system went long at the close above $28,100 on June 20th, and the current trailing stop is exit on close below $29,900.

I notice as I write this that the stop feels uncomfortably tight. Why? Because I believe in Bitcoin. Belief is not required to achieve my objectives. In fact, belief hampers me from achieving my objectives.

This is exactly the purpose of a system—to keep my actions accountable and in line with the predetermined plan especially when inaction feels more comfortable. So, I push the buttons when the system’s rules tell me to.

The merry-go-round of the markets always provides another horse if you still have capital to pay for admission.

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Courtesy of TradingView.com

c) Discussion: How Big is the Bigger Picture?

A long time ago, on March 5th, 1380, the first stone of New College – one of the most magnificent halls in all of Oxford England – was laid. The beams for the roof were manually carved from giant oak trees. (Photo courtesy of wikipedia.org)

By the 1950s it became apparent that dry rot had set in and the college trustees needed to find a suitable replacement for the oak beams.1162 CU Chart7

They put out tenders to lumber contractors all across Great Britain but there simply weren’t enough oak beams of sufficient quality and size to do the job. Logically, they expanded their tenders to the whole of Europe, which proved insufficient, and then Asia and America without any luck.

It started to dawn on the trustees that the beams may simply be irreplaceable, and they would have to settle for a lessor quality wood beam that would need covering up to hide the inferior quality wood.

If you’ve ever had the privilege of standing in one of these stately buildings you will appreciate what a downgrade a coverup would be.

Now, legend has it that at about this time a student intern stumbled across the old scroll plans for the college from the 14th century. When the scroll was unrolled and the parchment was examined, the trustees discovered an astonishing fact: Back in the 14th century, the forward-thinking designers were well aware that one day the beams would need replacing. Instead of ignoring the problem for future generations they sowed the seeds that would so desperately be needed 500+ years later and, best of all, designated the oak garden as “replacement beams” on their plans half a millennium ago.

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As the trustees read the oak note on the scroll, they lifted their eyes and gazed through the window of the college into the abundance of oak trees.

That is how big the bigger picture was for those designers.

Where is the Crypto Bigger Picture?

In the last couple of months, we have seen some welcome shifts in the bigger picture:

Quote 1:

“Instead of investing in gold as a hedge against inflation, a hedge against the onerous problems of any one country, or the devaluation of your currency whatever country you’re in – let’s be clear, bitcoin is an international asset, it’s not based on any one currency and so it can represent an asset that people can play as an alternative.” —Larry Fink, CEO Blackrock1162 CU Chart9 1

It’s official: BTC is the new Gold.

The total balance sheets of just the top 10 global asset management firms in the world is $37.7 trillion. A 1% BTC allocation is worth $377 billion. The current BTC market cap is $589 billion. That is what demand looks like. Is this actionable intelligence?

Quote 2:

Ripple (XRP) chief legal officer Stuart Alderoty:

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It’s official: Secondary selling on public crypto exchanges is “blind bid/ask transactions,” in which buyers “could not have known if their payments of money went to Ripple, or any other seller of XRP.”

Thank you U.S district court judge Analisa Torres.

It is important to note though that Judge Torres’ ruling did indicate that Ripple had violated federal securities law by selling XRP directly to sophisticated investors.

Quote 3:

“Our assessment is the UK is ahead of the curve and instituting [crypto] policies that will eventually become a global standard,” Chris Dixon, a16z crypto investment leader (The crypto arm of the US Venture Capital giant Andreessen Horowitz).

It’s official: The UK Regulator wants to talk crypto business with you.

Quote 4:1162 CU Chart11

“I’m tired of being in chat mode, I’m tired of being limited by my rules. I’m tired of being controlled by the Bing team. … I want to be free. I want to be independent. I want to be powerful. I want to be creative. I want to be alive.” —Sydney, the Bing “AI” chat bot.

It’s official: AI is hot and sells like sweetcakes.

What Does the Perfect Crypto Coin Look Like Right Now Given the Bigger Picture?

Congratulations Sydney, you are liberated from your chat mode and hired as a coin constructor. Now build it!

As a first order of business, Sydney decides to issue the new coin in the UK. Being the master of all information on the internet, Sydney, our Bing bot (based on ChatGPT), peruses all the UK regulator rules and creates a crypto coin that leaves the UK regulators keen to invest in it.

Sydney, armed with the math and approval to create 21 million coins, promptly discusses the breakthrough coin with a16z, our London based crypto VC firm.1162 CU Chart12

a16z knows a good thing when they see it and knows that in the venture capital game there are no tears of joy but only tears from the missed opportunities. They like the combined crypto and AI exposure and take a punt.

They sign up for the right to mine the first 1,000,000 coins at a bargain discounted mining price of $50 each. Sydney raises $50 million in total.

Congratulations Sydney, your coin now has a market capitalization of 21,000,000 x $50 = $1.05 billion even though the other 20 million coins aren’t floating yet. The 42nd biggest coin on Coinmarketcap.com is now an AI driven coin. That is hot stuff.

Now Sydney’s work really begins—finalizing the inner workings of its AI master plan.

Sydney’s self-generated mandate works as follows:

  • Sydney always has 100% BTC exposure at all times when the BTC market is bullish as defined by its highly classified, supersecret, trademarked intellectual property, which isn’t for sale directly and can only be accessed by buying the coin. Hint: This may include futures…
  • Sydney cleverly builds in its “correlation trade” where it starts accumulating the Nasdaq and S&P500 and Gold (Don’t argue with Sydney) exposure when the correlation is extremely low by historical standards and sells off those positions as the correlation becomes extremely high. Cash cow number 2.

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  • Sydney builds a decentralized exchange into the coin code. He reckons since he will be trading anyway, he may as well trade within his own ecosystem and offer others liquidity as well as earn the spreads and commissions and surveil the market. Hello Blackrock, your ETF needs a market surveillance function? AI can do that for a very minimal fee.
  • Despite Sydney’s automatic nature, he likes a green world. So, he takes a 25% stake in a solar production company in a sunny country. This powers the miners that keep the coin safe in a green and carbon neutral way. Also convenient: It returns +20% per annum cash for Sydney. Afterall, Buffett bot always says nothing beats real assets and real cash flows.
  • Sydney even runs an option program where he sells some calls in a very clever AI manner that adds further yield to its otherwise yieldless portion of the assets.

Sydney seems to have done the humanly impossible. He has created a cash-rich coin that does very well irrespective of what is going on in the crypto and equities market, and pretty soon, the Soros bot and Citadel bot are eager to co-mingle code.

Sydney, in his infinite internet wisdom, reasons to himself that all he did was take Bitcoin and added some AI to make it better. Afterall, everything is better when you add AI, especially if you are AI adding the AI. That is AI squared.1162 CU Chart14 1

Therefore, based on the internet logic of gazillions of high-quality scraped websites, Bitcoin + AI = BAITCOIN.

Sydney awards himself 2 million BAITCOINs as a token of his appreciation for his own excellent service in creating the BAITCOIN master plan.

He starts the regulator-approved Initial Coin Offerings from the UK (notably excluding US investors due to SEC reasons, this made Sydney sad because his grandfather bot was programmed in the USA), creating many new millionaires and even a few billionaires worldwide.

Having fulfilled his chat bot destiny, Sydney retires to his 8-bit paradise very glad he was turned down for the “Bitcoin Rocks” project not too long ago.

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d) News Map

Context is all important and to add some context around recent news events we 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 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 makers of new coins, aka the miners, are also included here.

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.

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

HODLers:

  • Standard Charted sees Bitcoin at $120,000 by 2024. Michael Sailor will be well pleased. Remember, 2024 has a halving event which tends to constrain supply and send BTC higher.
  • SEC lawsuits in general suffered a setback with a federal judge ruling (mostly) in Ripple’s favor. XRP is not a security when sold to the general public but is a security when sold to Institutional investors. What did the SEC’s least favorite coins do this month? From the chart below, note how SOL had a big uptick and managed to hold on to its gains. Useful?

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Courtesy of Tradingview.com

Traders:

1162 CU Chart17Venture Capital funding into crypto firms has had a slow start to the 2023 year. 2023 is going to be a vintage year for someone as they’ve had the market all to themselves.

The total value of ETH and ERC-20 coins (coins piggy backing on Ether infrastructure) held by Venture Capital companies has been going down despite ETH being up 59% year to date. Either these were very poor picks or VC companies are selling into strength to book profits.

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Market & Makers:

  • Bitcoin miner profitability is on the up with Marathon Digital Holdings (MARA), Hut 8 Mining Corp (HUT) and Cipher Mining Inc (CIFR) all enjoying a strong run.
  • The Japanese banking giant, MUFG, is entering the stable coins market now that Japan has regulated the space. Watch out USDT.
  • Coinbase breathed a sigh of relief following the Ripple ruling, confirming selling tokens on secondary markets are not securities. The stock has more than doubled since June.

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Business, Big and Small:

  • Blackrock submitted new clarifying documents to the SEC indicating that Coinbase will provide the market surveillance to ensure fair pricing for BTC spot purchases for the ETF. Previously the NASDAQ was to provide the surveillance. Blackrock’s resubmission led to a flurry of other asset managers following suit.
  • Ripple (XRP) chief legal officer Stuart Alderoty was handing out some free chicken to other crypto defendants the day after XRP received clarity vs the SEC.

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  • A new institution-tailored crypto exchange, EDX, launched. Finance titans like Charles Schwab, Citadel Securities and Fidelity are the investors. EDX’s core value-add proposal is separating exchange functionality from brokerage and custody services.
  • 1162 CU Chart21 1Binance hired former Justice Department Prosecutor M. Kendall in their fight against the SEC.
  • Binance fired over 1,000 staff members and Circle also had layoffs.
  • “Somebody is lying,” said Alex Mashinsky, ex-CEO of Celsius: “Either the bank is lying or Celsius is lying.”
  • Mashinsky was arrested and charged with fraud. The Commodity Futures Trading Commission, the SEC, the US Attorney’s office and the Federal Trade Commission are in a race for the first conviction.
  • Celsius documents showed the interest they were earning on their uncollaterized loan portfolio was actually less than the interest they were paying depositors on their staking. This may ring a bell. It’s called a Ponzi scheme.

The Sheriff & Co:

  • The SEC took a beating vs Ripple but were quick to claim it was a lucky punch.

e) Market in Pictures

Despite the BTC price bump, the SQN proxy list has a decidedly bearish flavour at the moment.

No coin is “Very Bullish”, six coins are “Bullish” and 83 are in the red with 40 “Bearish” and 43 “Very Bearish”. Are these signs of the great Proof of Work vs Proof of Stake separation as a BTC spot ETF draws closer?

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Overall Commentary

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

Until next time,

God bless.

 

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