Update on Cryptocurrencies: May 15th, 2023 By, Nolan Loxton

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

In July 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.

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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 slid 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 below in the YTD chart. The index moved higher from March 9th, 2023 and tested the August 2022 highs at 1. Price failed to maintain momentum above the August 2022 high. Does price have unfinished business higher at the June 2022 high or would Mr. Market like to spend the summer at 2 and 3?

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

Market Summary

a) Market Type

The BTC Market SQN model spent the last month dropping from a “Strong Bull Normal” SQN into a “Neutral” SQN reading. This suggests large players sold at least some, if not all, of their positions into strength at point number 1 on the chart below. That’s not unexpected. What would happen if those large players were offered a discount? Do they build their medium to longer-term core positions again or at least take a short-term punt?

The Market SQN model has a tendency to find support in the “Neutral” zone following a “Strong Bull” excursion. We’ve just reentered the “Neutral” zone at 2. Statistically, the least surprising move would be a bounce, even a small one. A lack of a bounce where we expect one is the market giving us clues. Keep your eyes wide open.

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Volatility continued to ebb and flow in the “Normal” range.

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So far, 2023 has provided stellar performance with BTC up 66%. In the last month, however, the heat map below shows a red wave with ETH down 13% vs BTC down 10%.

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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 while sleeping easy.

The system entered a new long position on March 16th, 2023 at $24,829 with an initial stop at $20,187 and was stopped out on April 21st at $27,140 for a 0.5R gain.

A break above $30k would reopen long exposure. I’ll keep you updated in the next newsletter.

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Courtesy of TradingView.com

 

c) Discussion: Money for Nothing and Limits for Free

A long time ago I made a very serious decision. I retired early from snowboarding.1153 CU Chart7 2

The reason? Kitesurfing.

The logic? Kitesurfing is three times the fun with only 25% of the injuries. You jump higher, you fly further and, most importantly, you land considerably softer. Fewer cliffs, more sunshine. What’s not to like?

Sure, sharks aren’t a concern on the slopes but you have to manage the risk that you must take.

The roadmap to kitesurfing mastery is a wonderful example of exponential progress. If you’ve not had the privilege of experiencing it allow me to shed some light on the road to (semi) mastery.

The process has three basic stages:

The first stage is much like owning Bitcoin. You are in the water HODLing (holding on for dear life) to a rather large and volatile kite.

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The objective is to work on your kite control. Paradoxically, you improve your ability to control the kite by being dragged out of control along the ocean breakers. And every now and again being airlifted, mostly when not expecting it, only to splash down wide eyed 6 to 16 feet further down the coastline.

The less you become airborne unexpectedly the more you are demonstrating mastery.

Viewed from the perspective of creatures that lurk below the ocean surface, you appear to be food plonking down every now and again at random places…almost like a giant fly-fishing operation.

The good news is that you are only proxy fish bait for two days maximum.

In the second stage, the rubber meets the road and is where most would-be adventurers give up.1153 CU Chart9

By now, you have enough proficiency to fly your kite and you have to add a board into the equation. This is tough. When you are drifting in the water, trying to hold a 30-square-foot kite above your head with one hand while trying to get a four-foot board on your feet with the other hand, things appear quite hopeless.

At some point, you master “Operation Get Everything in Place” and your focus turns to making the kite work for you. This is a wonderful step. You stand up like a newborn gazelle and glide erratically downwind at a rapidly increasing speed, whilst simultaneously realizing you have no way to slow down.

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Eventually, you realize your face is the emergency brake, and soon after this a-ha moment you involuntarily activate the break. This represents round one.

In order to reset to round two, you need to walk backward through knee-deep slimy seaweed water while keeping the kite in a neutral position above your head and carrying the board in your other hand.

This takes around 15 minutes to get back to the starting point and then 30 seconds to complete the next round. My learning curve looked like a cardiogram—short spikes of learning, spectacular dismount crashes and then 15-minute backward walks.

I did countless rounds. At some point, it became clear that a marathon would be less demanding on my calf muscles and lower back.1153 CU Chart11 1

For 10 days I built experience 30 seconds at a time…

One may be tempted to say that part of the process is a horrible grind. But the truth is when I focused on the process and not the outcome, the experience was glorious—the Kenyan sun drumming on my back, the roaring wind in my ears and the raw power of the wind in my kite.

The thing with experience is that it adds up. When you persist for 30 seconds per round, the rounds eventually tally up to one hour….and then you are well on your way to mastery, somewhere around 10,000 hours.

Welcome to stage three. You have mastered the skill of riding back upwind instead of walking back down the shore at snail’s pace. This critical skill activated your exponential learning curve.1153 CU Chart12

Why? You converted the 15-minute walking-back period into riding time! You are now fitting in 30 extra rounds (15 minutes divided by 30 seconds) in the same amount of time it previously took you to reset a round of learning. Boom!

You promptly forget about all the hard work, indulge in a triple scoop ice cream, and start working on tricks. Your tricks are limited only by your own fear of speed and height!

Limits

Every smashed limit then gets replaced by a new limit at the next level of the game. This serves as a natural safeguard for sustainable development, even for tricks!

Take the US debt limit as an example. You could argue (Van would make this case) that the debt limit is entirely made up—a disruptive distraction that could be made redundant. Theoretically, that argument has some valid points but as Yogi Berra pointed out, “In theory, there is no difference between theory and practice – in practice there is.”

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As a process, you don’t propose a $31.4 trillion debt limit on day one. You need to start small. You need to wade backward through a lot of slimy green seaweed to build up your own stamina, and you need to cultivate the stamina of the rest of the world. At some point you might realize: Wow. We’ve raised or suspended the debt limit 78 times since the 1960s and we’re still going along just fine.

We are masters under full sail! What could possibly go wrong?

The Golden Rule Could Go Wrong: No Pay, No Play.1153 CU Chart14 1

The reward of persistent payments crowned a king of credit. The king’s currency bestowed a special privilege. The king was able to choose his own credit limit and sell virtually unlimited amounts of treasuries to friends and foes alike as long as he footed the monthly bill.

1153 CU Chart15 1Today, the king proposes that the “Treasury mint a $1Tn coin which would be used to satisfy the government’s obligations.” The king also undertakes to provide every loyal subject with a basket in which to carry their voluminous fiat dollars.

Spoiler alert: The Roman Empire, Weimar Germany and even Zimbabwe tried this trick…it doesn’t work.

Death by Default

1153 CU Chart16 2The king is dead. Long live the king? (King $PEPE & Ordinals, courtesy of Twitter.com)

Maybe Mr. Market could revive the king with a good old dose of double-digit interest rates? Supply and demand always find a level. Just ask Argentina with their 78% interest rate.

Who would love to be the new king? A few characters come to mind.1153 CU Chart17

What currency would a would-be new king like to bank in? Euro? Yuan maybe? Perhaps a gold-backed Central Bank Digital Currency?

Who is talking about a gold-backed currency? BRICS.

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A recent Bloomberg survey on US default hedges ranked gold in the top spot and Bitcoin in third position, ahead of some old favorites.

A CBDC “backed” by gold could never be the equivalent of gold or Bitcoin but it’s not hard to see the marketing opportunities it affords a kingly contender who would like to impose rules on a deceased king’s estate.

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Courtesy of Bloomberg.com

There is $24.3 trillion of outstanding US Treasuries. The World Gold Council estimated in 2017 the total value of all gold ever mined was around $7.5 trillion.

Bitcoin has a total market cap of $530 billion.

Bitcoin has a tamper-proof supply.

What would the Bitcoin price do if just $500bn moved from Treasuries into BTC between now and early June?

The sails are full and holding for the moment, but the wind is howling…Are you ready?

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 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 of 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:

  • Google Authenticator updated how its two-factor authentication codes are stored. Your codes are now stored in the cloud, therefore, your security is compromised. Make sure to change your settings to “Use without an account” to avoid handing over your codes to hackers, only to discover this years later.

Traders:1153 CU Chart20 1

  • The TerraUSD & Luna founder, Do Kwon, was caught in Montenegro. His algorithm caused token holders to lose $40bn. He wants to be extradited to South Korea but the US has claimed first dibs.1153 CU Chart21 1
  • Bitcoin Ordinals are providing traders with a new speculative frenzy. PepeCoin (Is it a frog? Is it a toad? It’s a Super NFT!) is a prime example, but if you are hearing about this for the first time here, the pump and dump is probably already over.
  • What are Bitcoin Ordinals? Quite simply, it’s data being attached to individual Satoshis on the Bitcoin Blockchain to create an NFT. Pretty pictures at high prices. NFTs on the Ethereum network only point to a server in much the same way a website points to a server. But Ordinal NFTs actually have the picture embedded in the BTC blockchain.

A former Coinbase employee was sentenced to two years in prison in the first-ever insider-trading case involving cryptocurrency. His information netted a brother and a friend a $1.5m profit.

Market Makers:

  • Binance US terminated their agreement to buy Voyager Digital Holdings Ltd a week after federal regulators approved the deal. Binance issued a statement citing, “The hostile and uncertain regulatory climate in the United States has introduced an unpredictable operating environment impacting the entire American business community.
  • Binance trading volume was down 50% for April.
  • Coinbase has sued the SEC alleging the regulator has failed to respond promptly to its rule-making request. It is maintaining that the tokens traded on its platform are not securities and have stated it as “a well-resourced adversary that will necessarily be motivated to exhaust all avenues.”
  • Analysts at Jefferies estimate 35% of Coinbase’s revenue is at risk.
  • Bittrex filed for bankruptcy.
  • A general trend has been for big crypto firms to move outside of the US.
  1. Coinbase launched an international derivative exchange in Bermuda.
  2. Gemini launched a similar platform focused on 30 jurisdictions worldwide including Singapore, Hong Kong and El Salvador.
  3. Jane Street and Jump Crypto pulled back from digital assets.
  • 1153 CU Chart22 2US crypto exchanges have gone back to the payment intermediary model…It’s like it’s 2015 all over again.
  • BTC hash rates hit all-time highs courtesy of Ordinals. It’s a good time to be a miner.

Business, Big and Small:

    • BTC processed more transactions in a single day this month than it had processed on any single day in its 14-year history.
    • Red Granite Pictures (it holds the Wolf of Wall Street film rights) is launching a series of NFTs to monetize their fan base. Jordan Belfort just found a new way to sell the pen.

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  • Twenty-five video game characters completely controlled by AI bots are playing their way through day-to-day “life” in a 16-bit Virtual Town. Maybe virtual real estate will make a comeback due to AI demand?
  • Ethereum experienced a 25-minute glitch on the Mainnet. Transactions appeared to users to be going through, but the Mainnet was only proposing blocks while no blocks were finalized. This means that for 25 minutes transactions were at risk of being altered because of the malfunction. Thankfully, Marty McFly and the DeLorean time machine weren’t needed this time.

The Sheriff & Co.:

  • The Hong Kong regulator is taking advantage of the active de-banking of US crypto exchanges by reminding crypto firms that Hong Kong banks are open for crypto business. Doesn’t it feel like just yesterday when China cracked down on crypto? Let’s see how this move plays out.1153 CU Chart24
  • UK tax authorities proposed new tax rules for DeFi lending and staking. The regulator is engaging crypto stakeholders for an eight-week consultation period to develop a comprehensive framework that “fits the asset class”.
  • The New York Attorney General proposed a state law to tighten rules over cryptocurrency companies.
  • The U.S. Department of Justice is pursuing DeFi hackers as high-priority targets due to concerns that North Korean state-sponsored hackers are significant players in the DeFi hacking space.
  • Zimbabwe, a proxy for a desperate central bank, launched a Central Bank Digital Currency backed by 140kg of gold ($9m) in a bid to stabilize the country’s currency on international currency markets. Although Zimbabwe’s Central Bank doesn’t operate at a G20 scale, their marketing promise is worthy of noting—A CBDC will solve all your problems. The fine print omits the fact that the CBDC solution is offered by the same authority responsible for creating the monetary problems originally.

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 is made in crypto assets.

Until next time,

God bless.

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