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.
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. Then it set a new high on November 9th last year of 6,215.99 but slid down until June/July 2022 where it found some steady ground at 2,000. Last month on November 21st, however, the index broke down to new lows at 1,331.38 where it has stayed flat since then.
You can see the recent price action below in the YTD chart—a new low followed by failure to fail further despite all the noise about the FTX implosion. Failure to fail further is information.
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 type at the moment, using Van’s Market SQN methodology. In “Bear Normal” markets the least surprising move is a failure. The Market SQN would need to clear the box for noise to become a signal on the long side.
The heatmap below breaks down the calendar year to date performance by market capitalization. Bitcoin’s 62.77% YTD drawdown is now the 2nd worst crypto bear market since 2010 although it rallied by 3% since last month.
The old Wall Street saying is “Buy when there is blood is in the streets”. Is this enough blood in the Blockchain?
Courtesy of Coin360.com
b) Super Trader Bitcoin System
The objective of this system is to outperform a Bitcoin buy-to-hold strategy while sleeping easy. The system is in cash and an entry signal would be around $21,200 if BTC were to head up from here. I’ll keep you updated in the January newsletter.
Courtesy of TradingView.com
c) Discussion: The Red List of Threatened Species
What makes BTC valuable? In a word, “scarcity”.
But isn’t “digital” technology the complete opposite of “scarcity”? Can’t you just copy/paste, copy/paste?
Paradoxically, a single digital object can be abundant and scarce at the very same time.
Let me take you back to a time when I dreamed of being a game-changing game ranger. While at university, I met a professor of green economics. He discovered vast options and business cases for nature conservation so he wrote a book on the process, “Restoring Natural Capital”.
He was an inspirational and practical chap—a rare combination. Our shared enthusiasm for practical conservation ended up in an unexpected job offer for me.
My mission, which I chose to accept, was to price some of the scarcest mammals in Africa, as determined by the IUCN Red List of Threatened species.
Why? To populate our theoretical safari park right next to the world-famous Kruger National Park. Yes, I was paper trading mammals.
Trying to buy wild mammals for an area roughly the size of Great Smoky Mountains National Park involves a lot of accounting.
Each herd has its own herd dynamics. For example, you can’t just buy one Kudu bull and one Kudu cow. You need at least four cows for every bull and for consistent growth, you’ll need around 20 herds. Thank you Bill Gates for MS Excel! (A perfect example of a non-scarce digital product.)
Once I had my mammal shopping list and the right credentials I started the fun part—attending wildlife auctions.
Which brings us to the point: How can scarce be abundant at the same time?
Take my namesake as an example—the Loxodonto Africana (African Elephant). Based on the Red List, these animals are theoretically endangered. In practice, however, when you are in the market to buy some elephants, you quickly realize two things:
- Some national parks have a highly concentrated abundance of elephants. In conservation, this over-population has devastating effects.
- Transporting an elephant is prohibitively expensive.
I told the Chief Game Warden, from a certain national park that was blessed with an extraordinary concentration of elephants, that I was going to need two elephants bulls and 20 cows. His straight-faced response was, “If you can have the trucks here by 8 AM tomorrow you can have them for free”.
Conclusion:
Bitcoin was a breakthrough in the digital world because, for the first time in the digital age, it actually made a digital object scarce.
How? Math has limited the supply of Bitcoins to 21 million, full stop. No negotiations, no changes by management and no intervention by government. No copy paste. When you send a BTC to someone else, it is no longer in your account. It is in a different account even though it is digital.
This is the equivalent of me not being able to type the number 4 on my MS Excel anymore because someone else is now the owner of number 4, making number 4 a commodity and severely disrupting the Decimal system.
Every other digital product out there is working extremely hard to create the appearance of scarcity when in fact the actual digital product has little or no cost to copy/paste. Digital objects should be a deflationary force for the consumer and society as a whole.
Ponder these examples:
- ETH and BNB “burn” their tokens to create the appearance of scarcity because of a self-styled scarcity policy.
- FTX built an empire based on the illusion of the scarcity of their own tokens.
- Microsoft and all other software companies scale their product to you at almost no incremental cost to the company yet still earn the full revenue with annual inflationary increases.
- An ETH Non-Fungible Token (NFT) is basically a web URL pointing to a JPG sitting on a server somewhere that someone controls. That someone cannot duplicate your web URL but they could still press “CTRL + C” to make a copy of that monkey JPG whether it sold for $1 million or not.
If you can think of one digital product that is truly scarce other than BTC I would like to hear from you!
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, supply and demand, and ultimately, price.
What is “useful” for traders? Tools that help them 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:
- Grayscale, the world’s largest bitcoin fund, refused to share proof of reserves during a tumultuous month in crypto, citing “security concerns” and testing HODLers nerves. The fund traded at a 45% discount vs. Bitcoin spot prices.
- November showed the largest ever BTC withdrawals from exchanges as assets fled to cold storage.
Traders:
- Interviews with defunct crypto players like 3 Arrows Capital have shone a light on how imprecise language and abundance of capital contributed to the crash. Here are some examples:
- 3 Arrows Capital perceived itself as a hedge fund taking risks with other peoples’ money. They were, in fact, supposed to be a proprietary trading firm taking risk with their own capital.
- At the same time, exchanges and lenders were raising billions through staking by paying high returns to raise capital but not having a clear objective for the capital. Instead of returning funds to clients, they choose to lend the capital to “safe” havens like 3 Arrows Capital and FTX to lock in the interest differential for their own gain. In these transactions, one party thought this was a safe loan and the other party thought the money had been provided for taking high risk. Do you see the problem here?
- The “classic” (regulatory technicality) arbitrage for many players was on the Grayscale one-year lock-up period where traders would deliver $1 million of BTC to Grayscale and in exchange, receive $1.5 million worth of shares which could only be redeemed one year later. This warped into altcoin investments with five-year+ lockup periods where many players were betting the farm (which they mortgaged to make the bet).
There is nothing wrong with betting your own farm. But, betting someone else’s farm, without their permission, while pretending you are engaged in pursuing risk-free returns does not get you on Santa’s list.
Market Makers:
- Binance launched a “bail out” fund to the value of $1 billion for distressed crypto firms with another $1 billion to become available if the need arises. Presumably, firms won’t be “bailed out” with BNB which customers have staked.
- Binance and Christiano Ronaldo are creating a NFT collection.
- “It is kind of a no-brainer for Twitter to have payments, both fiat and crypto.” —Elon Musk, CEO of Twitter. Is he creating a new marketplace?
- Kraken cut staff, across the board, by 30%.
- Former FTX CEO, Scam Bankman-Fried, was named in eight (so far) class action lawsuits and was arrested.
Business, Big and Small:
- Goldman Sachs is seeing well-priced opportunities in the crypto space and is busy with due diligence on some crypto companies. Watch this space.
- Circle, the issuer of USDC, terminated its SPAC merger with Concord which would have effectively made it a publicly-traded company. They will likely go public in future when the crypto market type returns to Bull Quiet.
- Cathie Wood’s ARKK fund is loading up on Coinbase shares.
- New York bans Proof of Work mining for two years. Firms mining with 100% renewable energy are the exception to the new New York rule.
Courtesy of Reddit
The Sheriff & Co:
- The Bank of England is exploring a digital currency. Given their swap lines with other Central Banks, this may be a wonderful opportunity to also issue an “inverse pound” as part of digital innovation.
- SEC rejected the Grayscale’s ETF application for a spot BTC issue, citing concerns about market manipulation.
- “We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” SEC Chair Gary Gensler said in a statement.
- Kraken self-declared a sanctions violation with Iran after discovering that it did not have a proper system in place to ban certain IP addresses. They settled a $362k fine with the United States Office of Foreign Assets Control (OFAC).
- A court in China ruled that NFTs are considered virtual property and are protected by law.
e) Market in Pictures
There is not a single feel-good crypto chart for bulls this month. Those are all reserved for 2023.
Whatever your spiritual tradition, I pray the hope, love and joy of this season will be with you and your families. May you have a happy and prosperous New Year!
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!