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

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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 13th, 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. 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 below in the YTD chart. The index rejected lower prices on March 9th, 2023 and has moved sharply higher since. The red levels are natural places to take partial profits. Let’s see if prices get a sharp rejection or continue to glide higher. Both outcomes are footprints in the snow.

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.

We are in a “Strong Bull Normal” market at the moment, following the SQN retest and bounce from the “Bull” zone.

The blue circle is where buyers stepped in and tells us a lot about who is buying. These are big boys executing in a professional way. The objective of the most recent entry is to add to existing longs that are in a handsome profit already.

Ask yourself some questions:

• If I were this Alternative Asset hedge fund, where would I have started buying?
• What would I like to see happen?
• What would I not like to see happen?
• Where would I like to make bank?
• And the pivotal question: What do I need to do to protect my year-end bonus?

One flight path may have looked like the Market SQN chart below. At circle 1 there was a speculative long cashing out no later than 2. At 3, the failure to fail further opens the door for a speculative long back to the “neutral zone”. Point 4 is your bread and butter long—you make bank on some but not all profits in the “neutral zone”. Points 5 and 6 are opportunities to add back exposure and build the long further.

On the retest of the high at 7 you’ve exceeded your yearly budget. Everyone has noticed the BTC rally and you are more than willing to offload 50% or more of your position to them, sit on a reduced longer timeframe swing position and lock in your annual bonus (the classic agency problem). You reasonably expect a retest below 6 where you would buy from weak hands who bought the high against their stoploss at the prior low. This is the power of the Market SQN signal approach.

Volatility has moved up steadily from “quiet” and is sitting at the 50-yard line of “normal”. Expect the usual ebb and flow from the great silver stream of human emotion.

Bitcoin ended the 2022 calendar year down 64%—the second worst drawdown since 2010. 2018 is still the worst drawdown of the decade at 72%.

2023 is off to a strong start with BTC, the counterparty-risk-free trade, up 70%. ETH Securities Inc is up by 48%.

Note USDC, it’s not at $1. Is this an arbitrage opportunity or is it something more sinister? USDC has $3.3B tied up at Silicon Valley Bank and a total circulation of about $36B. The worst-case scenario has USDC fair value at approximately $0.90.

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 market closed below the stop of $21,718 on March 9th, 2023, exiting with a 2.6R profit.

The strong price rejection put the system long again on March 16th, 2023 at $24,829 with an initial stop at $20,187.

The next target is in the $30k resistance.

c) Discussion: Propulsion Profits & Free Energy

President Biden has proposed a 30% tax on BTC mining, even for firms that are using their own off-grid green energy solutions. If passed, would this constitute a useful action?

To answer this question, lets apply the “Albatross test”.

An Albatross is a remarkable bird. They’ve been known to travel up to 10,000 miles in a single journey and to circumnavigate the globe in 46 days.

Wow, that must be a hungry bird you say.

Even more noteworthy is that the Albatross completes these journeys without flapping its wings. The first law of thermodynamics in Albatross speak is “No flap, no energy trap.”

Can anything really fly for free?

The Albatross has two avian edges:

• It knows its niche conditions and never deviates from it. It only flies where zones 1 and 2 overlap.

Zone 1: No higher than 65 feet from the sea surface.

Zone 2: The southern latitudes between the Antarctic and South Africa and the Northern Pacific between Hawaii, Japan, Alaska and California.

• Specialized equipment: The Albatross has a shoulder-lock system that allows it to keep its wings open without any muscular efforts.

Once the niche conditions are present, it employs a simple four step dance: Climb head on up into the wind, curve from upwind to downwind at peak altitude, dive hard with the downwind and finally, reverse close to the sea surface. Mission accomplished.

The sum of the energy produced by one dance cycle is greater than the energy cost of dancing and so Mother Nature rewards the bird with a “propulsion profit” and it soars for free around the globe.

A mathematically verifiable free ride to infinity and beyond….one dance cycle at a time.

What creates a free energy edge in society?

Mother Nature rewarded the right bird in the niche conditions.

Now zoom out to the big picture of your own life, in whatever country you find yourself on God’s green earth, and answer these questions:

What are “niche conditions” for society? The lucky few can answer. It’s a free vote in a free-market economy, enshrined by a Constitution and/or Bill of Rights.

What is the equipment? Time.

A high proportion of people take their time and exchange it for money. Enter income tax. A sizeable chunk of your money is now the governments’ money but you still get to spend the rest whichever way you please.

While you weigh your responsible investment decisions you store your time minus taxes in a safe place, like a bank. Out of the blue, a banking crisis evolves because interest rates were, shall we say, “slightly” manipulated.

You assess the facts. You notice comforting words like “no depositor will suffer losses”, “no taxpayer’s funds will be used.” You realize the “government game” only works when you exchange your time for money. If you don’t work, nobody gets a clip of the ticket.

You feel your feelings when you wonder, “What if all of my time gets lost in the bank?”

And then you discover this thing called BTC. You notice how the blockchain is an open book, no interest rates to manipulate or prices to control centrally, no accounting tricks on treasuries, no derivatives to implode. Just pure math. You check your charts and notice it’s up 68% in the same time the U.S Regional banks (Symbol: IAT proxy) is down 28%.

68% + 28% = 96%.

Wow, you say. I am going to buy some of this BTC to protect my time.

Even better, I am going to mine some of this BTC. This way I can get hold of a positive propulsion bird at a discount! Who doesn’t like a discount? Not only am I protecting my time, but I am actually making more time with which I can do more of the things I love to do—The Pursuit of Happiness you may call it.

It’s a free country innit?

Enter the 30% tax on mining BTC. The government proposes that you may only use 70% of your time to mine BTC. Government further proposes that 30% of your time (which has already been taxed) is theirs. Will anyone second the motion?

In one fell swoop, niche conditions are destroyed and time is lost. Not only is the dance done, but the free bird has also drowned at sea.

This reminds me of a three penny per pound tea tax. Who liked that tax? Government forces symbolized by King George III and Parliament.

Who didn’t like that tax? George Washington, Thomas Jefferson, John Adams, Benjamin Franklin, Alexander Hamilton, John Jay and James Madison.

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:

• MicroStrategy confirmed Silvergate Bank’s failure has no impact on their ability to HODL or the safe custody of their holdings.

Traders:

• Former Barclays bond traders Ovie Faruq and Mike Anderson sold 72 Bored Ape Yacht Club NFTs for $9.25M. The initial investment was $1.14M. No more monkey business.
• ETH is now officially a security but we all knew that.
• Venture Capital firms are helping blockchain companies find new banking partners, with Cross River Bank emerging as a favorite. Another option being considered is a community-run credit union that could receive deposits and make loans. Normally, “make bank” means take profit. This time it’s literally make (a) bank.
• Crypto VC funding volumes declined by 75% during quarter 4 of 2022.
• The Silicon Valley Bank collapse directly impacted Circle, Proof and BlockFi. USDC briefly traded down to $0.90 for about 30 minutes before arbitrageurs took the plunge.

• BTC and ETH continued their decreasing correlation with US stocks.

Market Makers:

• The postmortem of FTX continues to highlight an exceptionally poorly run business:

FTX could not actually open a business bank for client deposits in its own name. It solved this problem by advising clients to deposit their funds with Alameda, it’s trading arm.

Alameda simply lent funds onward to FTX. Alameda failed to mention this arrangement to their bankers and didn’t keep any records of who actually deposited what funds with them.

Essentially, Alameda accounted for the incoming cash as donations, no strings attached. That may explain why FTX made such lavish donations to third parties themselves.

Conspiracy to commit bank fraud and conspiracy to operate an unlicensed money-transmitting business has been added to the long list of FTX transgressions.

• Coinbase launched their own layer-2 chain. Quick recap: Layer-1 produces blocks and verifies transactions. Layer-2 chains are scaling solutions that aim to make things quicker and cheaper without compromising security. Think BTC Lightning Network—safe but fast.
• Coinbase earned an unexpected windfall profit of $182M in Q4 ’22. The source? Interest! Circle, the issuers of USDC, takes the USD it receives when minting new coins and invests it in good old US Treasuries to maintain the 1:1 peg with the USD. Holders of USDC aren’t entitled to the interest though. To put it another way, Circle and its partners are earning interest on your capital. Vote with your money and demand your interest on your USDC!
• Binance has been exchanging love letters with the US senators regarding money laundering, weak KYC checks and entangling Binance. US with Binance international. Two words: Cold storage.

Business, Big and Small:

• Tim Berners-Lee, the creator of the internet, has launched a new venture called Inrupt. He notes control of the internet has become captured by major corporations. His mission is to get your data from their hands and insulate it individually with AI defending against it. This will be quite a clash with web3 developers who routinely monetize your data.
• Kraken’s plans to launch its own bank are moving ahead despite regulatory uncertainty.
• Rolls Royce has received funding from the UK Space Agency to build a nuclear reactor on the moon. Is BTC mining going to the moon?

The Sheriff & Co:

• Dapperlabs vs SEC: Using emojis relating to rocket ships, stock charts, and money bags could be classified as investment advice, according to the court ruling in the NBA Top Shot Moments NFTs.

• Central Bank Digital Currencies (CBDC) continue to make headlines.

NOTE: I cannot overstate how big a risk CBDCs pose for civil liberties. CBDC may be the single biggest threat the free world has ever faced.

Rep. Tom Emmer has introduced legislation that seeks to limit the Fed’s ability to issue a digital currency without additional oversight.

• Signature Bank was nationalized by the US Government and it is now known as Signature Bridge Bank. Former U.S Rep. Barney Frank, who helped draft the landmark Dodd-Frank Act after the 2008 financial crisis, said there was “no real objective reason” that Signature Bank had to be seized. “I think part of what happened was that regulators wanted to send a very strong anti-crypto message”, Frank said. “We became the poster boy because there was no insolvency based on the fundamentals.”
• NY Attorney general declares ETH a security.

e) Market in Pictures

The Market SQN picture for cryptos has weakened somewhat from last month. Overall, 45 coins remain in the bullish territory vs 58 last month.

Soak in the bigger picture for a moment. The 2008 financial crises arguably gave birth to BTC. BTC has rallied so far on the 2023 turmoil. Ask yourself, what is a true store of value if banks really went belly up?

What would your neighbour accept as payment for his excess pumpkins when you were desperate for food? Ask people from Lebanon, Zimbabwe, Venezuela, El Salvador, Ukraine what happened when their time got stuck or lost in banks?

Then let’s look at what Central Banks are thinking, even if they aren’t saying much about it.

Pure gold is virtually indestructible. It could be dissolved with a mix of hydrochloric and nitric acids but it still exists, only in a more widely dispersed form. Hmmm, sounds a bit like a certain decentralized proof of work ledger…

Here is the list of recent Market SQN movers. 29 “would be securities” blown by the jetstream of the one pure digital gold?

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!