Update on Cryptocurrencies: November 14th, 2022 By, Nolan Loxton

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

On July 13, 2021, the S&P Cryptocurrency Broad Digital Market (BDM) Index (Ticker: SPCBDM) launched with the objective of 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 on November 9th at 6,215.99 and was sliding down until June and July where it found some steady ground at 2,000. Last week it broke down to new lows at 1,402.22.

You can see the recent price action below in the YTD chart. A quick rejection back into the red box would bode well here but a continued break would likely move into the 800-1,000 area.

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 since then, erasing all the gains back to November 2020.

We are in a “Bear Normal” market at the moment and had one brief excursion into Strong Bear Volatile on November 9th, 2022—a day short of the BTC all-time high anniversary from 2021. Is the best/worst yet to come?

The heatmap below breaks down the calendar year-to-date performance by market capitalization. Bitcoin’s 65.8 YTD drawdown is now the 2nd worst crypto Bear market since 2010. In 2018 the market corrected 72% and in 2014 corrected 62%.

In the past month, BTC has been the big loser with the FTX implosion. Despite FTX there are some tokens in the green. Note the deep green for Doge – a Musk favorite – up 50% for the month.

b) Super Trader Bitcoin System

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

The system entered a long BTC position on October 26,2022 at $20,775 and was stopped out on November 8th at $ 19,053, for a 1R loss.

A re-entry is currently around $21,300. I’ll keep you updated in the December newsletter.

c) Discussion: Burgled Bridges

I’ve been burgled… I couldn’t believe it. Bizarrely burgled…

I walked around the outer perimeter to see where he/she had gained entry to the premises. In the back of my mind, I already knew where it would be. After all, I had done the math when I had the wall built.

I had painstakingly taken the measurements myself for the distance from the beautiful old oak tree to where the fence would be built. Then, reluctantly used Pythagoras’ a2+b2=c2 because in my heart I already knew ‘c’ wouldn’t be enough. The wind blew gently through the leaves of the oak tree and it was almost like the great Greek mathematician himself was whispering words in my ear. “Low probability, black swan, only a ninja could do that.” So, I ignored the math, settled for sweet whispers and went on with my life…until now.

I turned the corner fully expecting to find some kind evidence of ninja activity left behind but there was nothing. No footprints, no damage, nothing obvious at the weakest point of the security. In fact, the only footprints I could find were through the front gate—a place you needed a key or permission to enter.

I reported the burglary to the police. This was somewhat like a bizarre Peak Performance 101 Workshop reframing exercise…

Me: “Officer, I’ve been burgled by a ninja.”

Officer: “You mean your house has been burgled. Can you describe the ninja?”

Me: “No, I didn’t see him.”

Officer: “How do you know it was a ninja?”

Me: “Ummm…I don’t.” (This seemed more appropriate than saying, “Pythagoras told me”.)

Officer: “Any valuables missing?”

Me: “No. Actually, the strange thing is I never had a key for the walk-in safe. The seller of the house could never find it. And, after the burglary, the safe door was open with the key in it.”

Officer: “Right. So, your house was entered by a ninja who fixed your safe?”

It dawned on me, despite the unnerving case of breaking and entering, that I did seem be a partial winner in this ninja interaction.

What is a “Bridge”?

A bridge is like a front door of the blockchain. If you ring the bell and say, “Delivery” but you have no parcel and are wearing a ninja suit, then the idea is that the bridge will not permit any further interaction with that specific blockchain.

Why?

Simply because the written rule of the bridge says, “No ninjas without parcels shall enter”.

Here’s an example. You own $100 Ethereum and you want to interact with the Binance blockchain without having to buy another token. You go to a bridge where the rules say, “We exchange ETH for Binance Smart Chain ETH”. If you don’t have ETH, you simply cannot enter this bridge. If you do have ETH, you send your $100 worth of ETH into the bridge’s address and it sends $100 worth of Ethereum on the Binance Smart Chain back to you automatically, in line with the rules, without the possibility of the bridge not fulfilling the other half of its automated code obligation.

But as we know, not all rules are created equal.

What is a “bizarrely burgled bridge”?

Binance, the world’s biggest exchange, recently experienced what must surely be the most bizarre bridge “hack” in the history of crypto. You don’t become the biggest exchange in the world without knowing your risks, doing a lot of math and having some of the better rule writers. Yet the reason for the hack was put down as a bug in a smart contract.

A clever ninja – well versed in the rules Binance themselves –walked in through the front door, created (YES, CREATED!) two million BNB tokens out of thin air (+-$570m). Then walked out again presumably in the uniform that retired ninjas wear on tropical islands.

Officer: “Any valuables missing?”

Binance: “Ninja creates +$570m, ninja withdraws -$570m = 0. No, officer.”

Understandably, Binance didn’t like this and they shut down their blockchain asking all validators to stop validating. Long story short, it looks like the ninja only got away with $100m and even that may be hard to spend.

We’ll end this section with some tweets. January 7, 2022 (nine major hacks ago): Tweet from Vitalek Buterin with his bridge thoughts.

The bridge hacking scoreboard:

d) News Map

Context is all-important. So, 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 with which 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).

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

HODLers:

• Michael Saylor from MicroStrategy reconfirmed that MicroStrategy will hold their position and have sufficient BTC collateral to service their loans as long as the BTC price stays above $3,562. Even then they could post other assets as collateral.

Traders:

• FTX came under scrutiny following a CoinDesk report that found the balance sheet of Alameda Research, a crypto trading and arbitrage firm owned by Sam Bankman-Fried, who also owned FTX, was full of FTX’s native FTT tokens. This meant that Alameda rested on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto. This should ring a bell because it is very similar to how Terra Luna imploded.
• Following the Binance FTX drama the stablecoin tether (USDT) changed hands at nearly 97 cents, down 3% from its intended $1 peg, as traders considered contagion risks. USDT fell as low as 93 cents briefly on Kraken—a good day at the office for arbitrage traders with balance sheets.

Market Makers:

• The CryptoCompare (CryptoCompare is an FCA-authorized benchmark administrator and leading institutional digital asset data provider in the UK) October 2022 Exchange Benchmark report was published on October 20, 2022 just in time for some fireworks. Note the FTX rating below.

• CryptoCompare rated the “quality/diversity of assets” of FTX at a 5—top notch.
• FTX was one of the world’s biggest exchanges, valued at $32B earlier the year.
• FTX then had a “run on the bank” due to reporting on potential shady assets and found themselves in a cash flow crunch with a cash shortfall estimated at around $8B.
• In a bid to secure funding, they circulated their balance sheet to venture capitalists. This balance sheet was a spreadsheet with two tokens: SRM for $5.4B and FTT for $5.9B, that they had essentially created out of thin air. Understandably, everyone politely passed on the opportunity.
• Binance entered the fray, agreed on a nonbinding deal with FTX, then backed out of the bailout one day later due to issues uncovered during their corporate due diligence process.
• After filing for chapter 11, FTX was “hacked” as well.
• As we pointed out during last month’s review, counterparty risk is significant. Even when you use the bastions of crypto for transactions, always stick to Jesse Powell’s (former Kraken CEO) mantra of never storing digital assets on an exchange. Offline, in your own wallet.
• Crypto.com had a particularly ill-timed error, sending $405M to Gate.io (another crypto exchange) by accident when trying to move funds offline to cold storage. Oops! This follows a December 2021 blunder where Crypto.com sent a $10.5M refund to an Australian woman expecting a $100 refund. The Crypto.com native token CRO was punished for the mistake, trading down 24%.
• Only 21% of exchanges are now deemed to have inadequate KYC (know your customer) practices according to CipherTrace—a significant improvement from 35% in April 2022.

Business, Big and Small:

• Cathie Wood’s fund took a stake with Elon Musk in Twitter, anticipating that Twitter is heading toward a super-app future like WeChat, which acts as an all-in-one platform where you can instant message and order food at the same time. Given Musk’s crypto affinity, it may provide a super market place to buy and spend crypto as well. Doge is up 50% already.
• Bankrupt Lebanon, who is stuck in hyperinflation, is opting to transact and store wealth in crypto. Yes, a Bear Normal crypto market is actually a hyperinflation hedge. Inflation is that bad.

• Tiger Woods’ and Rory McIlroy’s sports venture, TMRW, has given us some insights into the Metaverse future of golf, where games are played on virtual indoor courses that provide real time stats and eliminate worries about the weather. Call me old fashioned but I’ll stick to worrying about the weather!
• A one-of-a-kind NFT of the Birkenstocks sandals worn by Apple co-founder Steve Jobs at various times during his life has sold for $218,750 at a Julien’s Auctions auction. The real sandals were also included. A true testimony to Jobs’ ability to create value?

• Crypto executives widely asked for clearer US regulatory policy after the FTX collapse.

The Sheriff & Co:

• Do Kwon, the founder of Terra, tweeted, “Strangely, these last few weeks have been one of the most creative periods of my life”. His arrest warrant and Interpol notice remains active. Location was not active on the tweet.
• James Zhong of Gainesville, Georgia, pleaded guilty to wire fraud in the theft of $3.36B bitcoin, stolen from the illegal Silk Road marketplace which the FBI shut down in 2013.
• England and Wales property law proposed a new, never-before-seen category in property. The “data object”, aimed at cryptocurrency and regulating the digital future.

e) Market in Pictures

The chart below is what the price of Coinbase, a transparent Nasdaq listed company, looks like. It listed on April 12th, 2021, made an all time high the same day of $429.54 and made an all time low on May 9th, 2022 at $40.83.

Notice that it did not make a new low on the FTX news. Potential base or a pause before the next collapse?

Imagine the pressures related to this price movement on Coinbase management.

Now, imagine the pressures less well-regulated companies are subjected to at this moment and what potential solutions they have available: Spreadsheets, balance sheets, own issued tokens and client funds.

Then, if you don’t own a Trezor or a Ledger, order one now and withdraw all your coins from any exchanges and hold them offline.

Let’s shift our focus to stablecoins in the next chart. The combined market cap of the three largest stablecoins (Tether, USDC and BUSD) is currently above 15%. It is no surprise that it recently made a new high due to the FTX collapse.

The table below shows the best and worst cryptos in terms of Market SQN. Of the 100 that we track, 23 are bearish, 61 are very bearish and 14 are neutral. Notice out of the top 15 there is just 1 bullish.

The overall market remains bearish and has SQN scores have deteriorated significantly from last month. Safety goggles required.

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!