Update on Cryptocurrencies February 19th, 2023 By, Nolan Loxton

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In 2021 the S&P launched their Cryptocurrency Broad Digital Market (BDM) Index (Ticker: SPCBDM) with the objective of being a broad investable digital asset universe benchmark. Even though the index launched on July 13, 2021, the methodology allows values for the calculated value.

The index had a notable peak in May of 2021 at 5,547 and then dropped significantly until July 2021. It set a new high on November 9th 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.

You can see the recent price action below in the YTD chart. The index continued to accept higher prices into the prior sideways channel making higher highs and higher lows along the way. A move above the green line is required to signal the emergence of a larger rally.

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 9th, 2022.

BTC is in a Strong Bull Normal market direction at the moment, following the Market SQN retest and bounce from the Neutral zone.

Volatility remains in the Normal range.

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

2023 is off to a strong start with BTC up 50% and ahead of ETH by 9% so far.

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 initial stop at $16,547.00.

The current stop is at $21,651, locking in a 2.6R profit. The next target is in the $30k resistance.

c) Discussion: The Butterfly Effect

A while ago I found myself in a “vintage” Land Rover Series 1 on a mission.

Now if you’ve never been on a Land Rover safari don’t expect a fancy vehicle!

The beauty of the Land Rover is its pure practicality. It originated in 1948 after the 2nd World War—a season characterized by the post-war steel shortage and an aluminum surplus.

The Rover company did what any practical entrepreneur would do: Play it as it lies! They opted for non-rusting aluminum bodies painted with five beautiful shades of military surplus green. Cheap, available and, by a happy coincidence, a great car life expectancy!

How long a life span? Well, in 1992 it was estimated that 70% of all the Land Rovers ever built from 1948 were still in use!

And there is no better place to find these beloved green beasts on display than the African safari circuit!

Confidential – Mission Specifics

Now, on this day in question, our Green Beast had a very specific mission (which, admittedly, I had made up purely for the purpose of enjoying God’s green earth).

There were rumors that African migrant butterflies had started their migration and I was to determine if there were just some random butterflies pottering about or if it was indeed the butterfly wave ready to sweep across Botswana.

The mission objectives were clear:

• Objective 1: Find a kaleidoscope of butterflies.
• Objective 2: Gather information from said butterflies.

So how exactly do you extract information from butterflies?

Words don’t work particularly well so interviews are out.

Even if butterflies did interview well, I am not convinced their individual butterfly opinions, interesting as they could be, would have much predictive value.

That left me with my powers of observation…

What is the difference in flight patterns of “stay at home” butterflies vs “see the world” butterflies you ask?

It turns out, if you take the time to sit back and observe the individual butterflies, you eventually get lost in the twirling and swirling of the collective butterfly. And once you’ve entered the world of the collective butterfly, you can undeniably see its dancing in a westerly direction.

• Objective 3: Make a data driven conclusion.

By closely watching the butterfly wing action there was little doubt in my mind that the migration had started and would become more spectacular by the hour.

What’s the relevance to the crypto market?

If we are clearly observing market price action, the Market SQN becomes a suitable proxy for our collective butterfly.

What has the SQN butterfly been doing over the last four months? Look closely and you’ll note that it migrated from the cold depths of “Very Bearish” to the more comfortable summer of “Bullish”.

Is that a guarantee of what will happen in future months? No.

Does it have predictive value? Yes.

Butterflies are fragile. They catch colds, they get blown away by hurricanes, they get eaten by birds, they get caught by sticky inflation.

And yet, amazingly, there are multiple species that migrate successfully for a living.

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.

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

HODLers:

• Bitcoin Block sizes continue to increase as “Inscriptions” become more popular. What is an Inscription? Essentially, it’s the BTC equivalent of an NFT but the key difference is the file is contained within the BTC blockchain, thereby creating digital scarcity and a secure link. An NFT on the ETH network is basically a link to a file held on a server somewhere. Think of a $1 million Bored Ape JPG image. It’s worth much more if the image file is actually embedded in the blockchain, guarded by Satoshi’s useful math, as opposed to being a link to a server situated in the middle of a hurricane.

• MicroStrategy, our leveraged HODLer proxy, continues to stay Bullish on its BTC bet despite a Q4 ’22 loss of $197.6 million from its investment strategy. Will Q1 ’23 be a different story?
• BTC addresses at non-zero balances continue to rise, indicating sustained BTC buying.
• 49% of BTC addresses haven’t moved in the last two years. That’s either a lot of HODLers or a lot of lost “passwords”.

Traders:

• ETH’s Shanghai upgrade is due in March. This is probably a much better reason to buy ETH than YOLO (You Only Live Once) meme stock trading.
• The Coinbase (COIN) stock price has more than doubled since January 1st, 2023.
• ChatGPT’s digital web crawling soup, proudly blended by NVDA processing power, has the following advice to budding young traders.

Market Makers:

• Kraken was fined by the SEC for their staking services.
• Paxos is facing legal action from the SEC for issuing the BUSD stablecoin and has been ordered to halt minting BUSD by the New York Department of Financial Services.
• Former FTX customers sued Sequoia Capital, Toma Bravo and Paradigm, accusing them of giving FTX an “air of legitimacy” before it went bust.

Business, Big and Small:

• The Super Bowl had zero representation from crypto company advertising this year. Quite the change from 12 months ago.
• Lebanon’s banks collapsed, leaving crypto, gold and silver as the functional means of exchange for the economy.
• The US had it’s first-ever NFT related trademark case. The landmark ruling on the MetaBirkins NFT collection said if it looks like a Birkin, it is a Birkin. It was too hard to apply the smell and taste test.

• Meta Platforms (Facebook and Instagram) is now offering a monthly paid service for $11.99 offering “proactive account protection” among other things.
• This is pretty amusing seeing that the presupposition which Meta is built on is the proactive protection of your data, which enables you to share any data in the first place. Given advances in the NFT space, I wonder if Meta will make NFTs of your memories and other data (which they effectively own) and sell that off. “For $11.99 you could remember what happened on this day 7 years ago.” And they say Twitter is dead.

The Sheriff & Co:

• California’s DMV is experimenting with on-chain car titles.
• SEC Commissioner Hester Peirce criticized the SEC for its own actions against Kraken. Umm?
• Authorities in general seem to have stepped up their crypto crackdown over the last month. The SEC is even going after Terraform Labs. Remember Terra Luna?
• Sam Bankman-Fried faces new restrictions to his internet access in order to reign back “A technologically sophisticated individual”. He claims he used his VPN service to watch a football game.

e) Market in Pictures

The Market SQN picture for the broader crypto market has improved significantly from Neutral to Bullish. Of the 100 coins we monitor, 14 are now Strongly Bullish.

The best and worse coins rated by the Market SQN are:

Will our butterfly continue to flutter by in the sunshine or are we in the eye of the interest rate storm?

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!