Update on Cryptocurrencies: July 15th, 2022 By, Nolan Loxton

If you’re like us, you have really missed Van’s astute mid-month assessment of the cryptocurrency market. We took some time to evaluate who might be best to step into Van’s shoes on this topic and we are happy that our most recent Super Trader Program Graduate – Nolan Loxton agreed to help. Van regularly asked Nolan for his perspective on crypto market topics because Nolan has traded cryptos on a daily basis for several years. Prior to going through the Super Trader Program, Nolan had a distinguished institutional career in the financial markets. He now trades for himself. Thank you, Nolan.

In May 2018, Bloomberg announced that they had formed a cryptocurrency index called the Bloomberg Galaxy Crypto Index. Since Bloomberg only caters to institutional clients, an index of this nature was one of the first steps toward widespread institutional involvement. The index composition changes regularly but we will just show the graph because so many institutional investors follow it.

Looking at the five-year chart, the index started in May 2018 at 1,000. It reached a new peak in May 2021 of 3,504, dropped significantly until June 2021, and then set a new high, on November 12th, of 3,715 which it failed to follow through on and has been sliding down ever since. As of writing it is below 1,000 in giving back almost two years’ worth of gains.

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. From the charts below, the market type is strong bear normal, with volatility recently returning to the high end of normal from very volatile.

The following table shows the BTC change per year since January 2010. It’s had three losing years so far although the jury is still out on 2022.

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 position in late March which was exited at a 22% loss within a month. The system has been in cash since then, missing the continued drop in May and June. If the price stays in the low $20Ks for the next two to three weeks, the system will generate a buy signal at about $23K. We’ll let you know if the system finds an entry in the mid-August update.

c)    News Map:

Context is all-important. 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 stop loss. The early adopter HODLers have done quite well and with many 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, one unit of risk (1R) represents their total capital committed, it’s almost an all-in bet. The HODLer has no cash flow day to day without selling/staking the holdings.

The Traders:

These are large speculators such as hedge funds and 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 here 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 are 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, 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 government 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 categories let’s look at some noteworthy news items by category.

HODLers:

• MicroStrategy (The BTC ETF proxy company) continued to buy BTC as it dips below their average purchase price of approximately USD 30,700 effectively applying a Martingale position sizing strategy. Michael Saylor indicated the BTC price would need to fall below $3,500 for the MicroStrategy balance sheet to be forced to exit the position. Let’s think about this for a moment in a Tharp Think context:

At the all-time high of $68,789 MicroStrategy was 1.24R in hand, in fiat approximately $4.9bn profit, which has subsequently turned into a losing position of about $2.7bn. Saylor expects the BTC price to soar to $1m per coin.

Traders:

• Crypto hedge fund Three Arrows filed for US bankruptcy and subsequently the founders disappeared. Leverage is the reason behind the collapse.
• Blockchain Coinvestors, an early adopter venture capital outfit, reported 28 new blockchain enterprise unicorns (privately held startup companies valued at over $1bn) at midyear 2022. From a statistical point of view, well-capitalized venture capitalists are the immediate benefactors from downturns as frothy valuations drop and deals get locked in while other players are on defense.

Market Makers:

• Widespread job cuts were announced ranging between 10% – 20% at exchanges including Coinbase, BlockFi, Crypto.com and Gemini.
• The Terra/LUNA algorithmic stable coin went defunct. Despite being a “stable coin” the TerraUSD (symbol: UST) had no fiat reserves. The legal entity (Luna Foundation Guard) tasked with defending its US dollar peg sold 80,081 BTC to mount its defense from May 7^th to May 16^th for an estimated cash flow of $2.5bn. Considering the UST market cap was $18.6bn on May 8^th the stable coin only had crypto reserves of 13%. Not a bad ratio for a fractional reserve bank but as the market demonstrated insufficient for a stable coin. What other stable coins smell of shadow banking?
• Celsius lost $120m in DeFi hack which led to suspending client withdrawals. This combined with “extremely difficult conditions” led to chapter 11 bankruptcy protection filing.
• Voyager Digital, Vauld and numerous others also suspended client withdrawals. Voyager Digital since filed for bankruptcy.
• Robin Hood kicked off commission-free crypto trading

Business, big and small:

• Tesla BTC holdings was underwater with an average purchase price of USD 31,620.
• Bridges (connections between different blockchains) continued to be hacker targets. The Horizon bridge was hacked losing $100m.
• Axie Infinity’s Ronin bridge is back online after three months following it’s $625m DeFi heist.
• BitPay now boasts a list of 250+ companies accepting online and in-store crypto payments.
• OpenSea, the world’s biggest NFT marketplace, reported a large data breach.
• NFTs exchange volumes and floor prices were down significantly.
• Cristiano Ronaldo, soccer legend, strikes a deal with Binance for a series of NFT collections.

The Sheriff & Co:

• The Fed continued to raise rates putting pressure on demand for everything including crypto.
• SEC commissioner Hester Peirce noted in an interview that the US had dropped the ball on crypto regulation.
• EU took a significant regulatory step forward with MiCA law (Markets in Crypto-Assets), a comprehensive regulatory framework for digital assets. Interestingly, NFTs were not covered by the new law.

d)    Market in numbers

The table below tracks the price of five major crypto assets across three generations of the technology now along with Bloomberg’s Index:

•  Bitcoin, a 1^st generation crypto asset,
• ETH and NEO, 2^nd generation cryptos,
• Iota, a 3^rd generation crypto,
• Holo (HOT), and
• BGCI Index.

Notice the acceleration in the decline in the last couple of months and then a deceleration leading up to July 15th, most notably in Ethereum. Also, interestingly, the much broader BGC index is higher than a month ago. Is it finding a bottom or is the pain train pausing before a next leg down? No one knows.

What we do know is this: there are only three directional outcomes (up, down and sideways) and we can be prepared for all three potential outcomes ahead of time. To quote master trader Ken Long: “From abnormal conditions come abnormal returns”.

The following table tracks the amount of money in stablecoins in the top 100 which have a market cap of over $100 million. Their percentage of the total crypto market cap indicates one measure of health for the crypto market.

At the moment about 16% of the total market cap is in stable coins. This is historically high and likely a flight to safety in the bear market. It may also be an indication of how the ecosystem is maturing and offering more options within the crypto world during downturns rather than a flight to fiat.

The following table includes the total crypto market cap, along with the percentage of the market cap that belongs to Bitcoin, as well as the percent market cap of the top five cryptos. The percentage of total market cap for Bitcoin and the top five can give an indication of the overall health of the crypto market.

Bitcoin has been ranging between 33.7% to 69.7% of the total crypto market cap for the last five years. At the moment it’s 42% which is on the lower end. There are now over 20,000 cryptocurrencies and the number keeps going up. The top five coins represent 65.6% of market cap and the 546 coins with a market cap above $25m represents 99% of the total market. That leaves 19,709 coins in the remaining $9.4bn of market cap with an average market cap of $477k per coin. The innovators are vastly outpaced by the “innopasters” (Token code copy pasters).

The table below shows the best and worst cryptos in terms of the SQN 100. Of the 100 that we track, 14 are bearish and 83 are very bearish. Notice out of the top 15 only three are positive. We see only a single green, two yellows, and the rest are negative. That’s pretty weak and speaks to the condition of the entire asset class. The worst score on the list is topped by a -3.18 SQN and we have numerous -2 SQN scores…those are incredibly negative.

On a 12-month rolling basis the Metaverse coins have been the best of a bad bunch but even they have not escaped the selloff in the last 100 days as evidenced by their SQN 100 below. CEEK has been a notable exception and one I’ll keep an eye on for my early leaders list as the market continues to unfold.

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!