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As cryptocurrencies move up, is a long term catalyst needed to drive prices higher?

As cryptocurrencies move up, is a long term catalyst needed to drive prices higher?

WHITE NOISE

“War is Peace. Freedom is Slavery. Ignorance is Strength.”

— George Orwell |1984

1-2-3 clear. On the 2nd of April 2019, two paddles were applied to the crypto market’s chest. Instead of voltage, volume kicked started the cryptocurrency market, and it wasn’t just Bitcoin, only four of the top 100 ranked coins are down over the last seven days.

What a difference a reported $100 million transaction makes, and the headline writers are having a ball.

A headline from this week:

“$50,000 Crypto Guru Reveals Dizzying Crypto Price Target.”

Here’s another:

"Crypto Markets Surge Higher as Bitcoin Continues Upward Ascent."

It’s not so easy to ignore the hype and see through the white noise.

Read on…


Sixth Sense

Walk into a high street retail store, especially a store that sells tech — like computers, and, while you browse row after row of laptops, something strange begins to happen.

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After reading the specifications of each machine, the memory — 8 or 16GB, the storage, traditional hard drive, or SSD, the screen resolution, the display type, how many nits?… and boom, if the store has done its job, you’ve just been primed for maximum sales pliability.

Even the beats of the music are chosen on purpose. Everything is displayed, not in a random fashion, but in ways that manipulate your senses. Electronics and apparel stores play music with high BMP (beats per minute), hoping to speed up your decision making processes as you sync up with the background beat. Faster beats, faster decisions. As you get in sync, the more likely you are to bypass your decision barriers. If you’ve ever said “why not” and gone for it in a store, then, most probably, you’ve been subliminally manipulated.

And it’s not just sound. Smell is used too. Why is the sense of smell important? Because the part of the brain that processes smell is right next to the part of the brain that processes long term memory. There is a “bleed” between the two.

Touch, sight, smell, taste, and sound, are all used to manipulate people into taking action.

So what? What have our senses — touch, sight and sound, taste and smell, got to do with cryptocurrencies?

It’s because you don’t physically have to be in a store for your senses to be hacked. The same effect can be achieved using words — just words. Best selling authors know this, as do A list copywriters. But, others know it too. Headline writers of cryptocurrency articles.

Target:Moon

While the 95%, the group of inconsistent investors and speculators pile into the crypto markets, randomly entering without any thought of risk, and buoyed by the news of a huge $100 million buy order, the 5% don’t. Rather than blindly take a position on a guru’s say-so, the 5% understand that consistent profits come from analysing not future profit, but future risk.

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Between February 6th and November 14th 2018, Bitcoin traded in a sideways pattern. As prices were accumulated, buyers stepped in around the $5,750-$6,000 price zone, and as demand exceeded supply at this level, price rose. This changed on November 14th, when Bitcoin dropped down through this range on high volume, 600% greater than normal, stopping the decline one month and $2,600 later.

Using the low of $3,122 (BitStamp data) as the floor, and the previous area of support and now resistance around $5,800 as a ceiling, massive volume hit the tape at 61.8% of this range. Fibonacci traders will be salivating with excitement, but with the rise of algorithmic trading and crypto hedge funds, this 61.8% level between ceiling and floor coincides with three previous highs.

Trading algorithms are designed to work one of two ways, using directional, or trend following strategies, or directionless, or delta-neutral strategies.

The 5% use a rule of thumb: When volatility is low, expect high volatility, and when volatility is high, expect low volatility.

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For anyone who knew what to look for, the move from extremely low volatility to high volatility was expected. How low was the vol in Bitcoin? The lowest since before the final run-up in prices from $4,000 to $19,000. The important thing to understand is that volatility does not tell you the direction, only that a high magnitude move is highly likely in the near future.

The 95% don’t do their own research, but, if you do the work, you will see how often extreme low volatility leads to an explosion in price, both up and down. If you take a look at the Vix, an index that shows the volatility of the SP500 stock index, you’ll see what has historically happened when the Vix index is at the lowest levels seen over the last few months or years.

The 5%, the group of consistent investors and speculators, are in the risk management business. Not the count paper profits business.

Instead of reacting to an article headline, designed, if written by a skilled writer, to hack into your brain, like a large high street retailer, confusing you with high bmp music, the 5% use points of reference to position against.

A point of reference could be an emotion bar, a wide range bar with 300% plus volume, that’s reversed off its low and closed in the top half of the range, or it could be an area of overhead supply or areas of previous demand.

The 5% build positions close to areas where, if prices are breached, they are proved wrong in their assumptions, and they exit, with a small relative loss, and regroup to reassess the background conditions.

All it took was a non-confirmed $100 million position by a crypto whale to set off the Bitcoin $50,000 then the moon brigade.

Cryptocurrency might now be in a new bull market, but no one knows for sure. Only with the benefit of hindsight will you know the answer to that question.

Successful speculation is not about taking blind risks on the say-so of others. It’s about taking a position around points of reference and managing risk.

What is your opinion on the future of cryptocurrencies? Is the long term geopolitical and regulatory environment likely to be conducive for the mass adoption of blockchains and cryptocurrencies?

Is Bitcoin and the rest of the cryptocurrency market, as the headline writer suggests, taking a trip to the moon, or is this week’s move a test launch about to plunge back to earth?


Cryptocurrency Taxonomy

One of the issues when investing in cryptocurrencies is when they go up, they all, (Bitcoin and the top-ranked coins) go up. And it’s the same story when they go down.

Cryptocurrencies are highly correlated, but they don’t have an organised taxonomy like the stock market.

If you want to know the direction of the entire US stock market, how would you go about it? You could use fundamental analysis and analyse thousands of different companies, or you could use quant skills and build an algorithm to look for a pattern, or you could just study the top ten most expensive stocks in the Dow Jones Industrial Average.

The ten highest price stocks in the Dow represent around 65% of the entire Dow Jones Index price movements, and because the Dow is highly correlated to the SP500, the broader market cap weighted index, you can effectively estimate the probabilities and likelihoods of the direction of the entire US stock market by studying ten stocks.

Stock markets are organised. Stocks are grouped not only by sector but also my sub-sector. Matching not only their function but also on whether or not the stock is defined as cyclical or non-cyclical, depending on how synchronised its business is with the ebbs and flows of the economy.

You’ll have probably heard of FANG stocks. Facebook, Amazon, Netflix, and Google, and if you add Apple, these stocks account for 25% of the movement of the entire Nasdaq index, and because of their influence they can be used as proxies for the overall market.

ETFs can be used too. Why? Because they account for so much of the daily traded volume on the US exchanges. Stock markets usually don’t rally too far without financials or tech. If you want a proxy on the health of these sectors, then use the XLF, and XLK ETFs and find out the highest weighted stocks in these ETF products. The highest weighted shares can be used as proxies for sectors, and in turn, because of sector influence, the entire market.

In the same way, if you wanted a proxy for the entire cryptocurrency market, you don’t have the luxury of highly organised sectors and subsectors, ETFs, and indexes that are influenced by a small number of stocks.

Yes, periodic tables grouping different classes of cryptocurrencies are available, but can any groups of coins and tokens be used as proxies for the entire crypto universe?

Bitcoin still makes up half the cryptocurrency market, where last week, according to CoinMarketCap, over $22 billion of volume was recorded in Bitcoin transactions in twenty four hours.

Bitcoin, because of the volume dominance, can be used as a crude cryptocurrency strength and weakness indicator for now, but the crypto market is changing. As cryptocurrencies were losing 80-95% of their value between December 2017 and December 2018, behind the scenes governments and big companies were trying to make sense of the crypto paradigm.

Grouping cryptocurrency is possible. For now, think of Bitcoin as the hydrogen of cryptocurrencies. Around Bitcoin, cryptocurrency coins and tokens can be grouped by function: Payments and Currency — Platforms — Fintech — Data Management — Gaming, Media, and Social — Protocols, Exchanges, and Interoperability — Business and Enterprise — Privacy.

Governments have been scrambling to make sense of cryptocurrencies, especially so, since they exploded into the mainstream two years ago.

Government’s main contribution (so far) is regulation. First, they needed to control the demand side. They favoured the blunt instrument approach. They banned it. Next, they took control of the gates, implementing KYC (know your customer) and AML (anti-money laundering) checks.

Then, once the outflows had been temporarily covered with a bandaid, they began the process of how to classify it, asking what kind of assets cryptocurrencies are. This is important from a regulatory point of view because they have to figure out the most effective way to tax it.

Big companies, like Facebook and Google, also came down hard on cryptocurrencies, banning or heavily restricting cryptocurrency advertising.

With the public demand killed, the negative campaigns began. But, quietly behind the scenes, governments and the big companies got busy.

But how can you use this information? Can government regulation and company activity, in the absence of organised taxonomies, be used to analyse the strengths and weaknesses of the cryptocurrency market?


Blue Horseshoe

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In the movie Wall Street, Bud Fox is out to impress Gordon Gekko. Bud decides to get creative and follow (literally) corporate raider Larry Wildman. By tracking Wildman’s activities, who he has lunch meetings with and which cities he travels to, Bud is able to figure out the company Wildman is attempting to take over.

Gekko, acting on the information supplied by Bud, starts buying shares in the target company stock. As demand from Gekko’s buying overwhelms supply, prices go up, forcing Wildman to pay Gekko a higher price to buy back the shares.

The crypto markets ECG had a violent upsurge this week, but is this a blip, requiring a second or third shot of the defibrillator, or is this move for real?

The 5% take positions around points of reference, allowing them to use the market itself to prove their ideas right or wrong. The 95%, in contrast, react to the news, entering, most of the time, late, and out of position.

If trading over the short term, all the 5% need to know are the points of reference, but, if taking a longer-term view, it helps to build an understanding of the background conditions.

The 95% read a headline like “Bitcoin: $50,000,” and take action, but the 5%, realising a move to $50,000 will require favourable long term conditions, study and weight the variables while building up their long term opinion.

Like Bud Fox tracking Larry Wildman, the process of building a long term view requires some creative thinking.

As an example, if you were asked to build a long term view of a tech startup company, unlike the tactics deployed by Bud Fox and Gordon Gekko, how could you do it legally and ethically?

Most people, who want to invest for the long term, take someone else’s advice, or they use technical analysis.

While technical analysis is useful as a trigger, and as a way to quickly and visually represent supply and demand in the short term, it falls short when asking questions about background conditions.

Some investors use fundamental analysis, using jumps in the quarterly and yearly growth rates of sales and earnings.

But, sales and earnings can be manipulated, and, unless you have a reasonable level of skill, analysis of a set of company accounts will be challenging and time-consuming.

Is there a creative way to do the same thing? Jobs are sticky. Unlike earnings or sales which can be revised with a pen, jobs tend to be persistent. One simple and effective way of figuring out the future plans and goals of a company is to track the number of employees.

Take Facebook, while they shut down their customers advertising in cryptocurrencies, were they hiring experts in blockchains? You might be thinking it’s difficult to find this information, and, unlike Bud Fox, you might also think you’ll have to go to Menlo Park and hang out in cafes in disguise.

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It’s easier than that. You could go to the Facebook career page and search for blockchain related careers and start taking note of the number of available jobs, or you could do something even easier. Call Facebook investor relations.

Why track the number of employees? Because an increase in employees is a proxy for, and precedes typically, an increase in business activity, which shows up eventually, if the company is well managed, in the sales and profits.

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Information overload. All cryptocurrency news is pure speculation as it relates to future prices. The lightning network, atomic swaps, smart contracts, cross border payment systems, SEC (Securities and Exchange Commission) regulation, fake volume, OTC off-exchange wheeling and dealing by the crypto whales, and, moving down the slope into individual cryptocurrency issues, Ethereum hard forks, XRP rollout, and on and on.

Unless you have a technical background, a deep dive into how cryptocurrencies actually work will probably be an exercise somewhere between complete lack of understanding and boredom. And the good news is, you don’t need a technical background.

For now, with the general public largely absent from the cryptocurrency market, tech readers get excited about the minutia, but understanding how a blockchain works is secondary to understanding the implications of the changes the technology will make to society.

Go back in time to 1987 and imagine yourself as a successful IT consultant who is fluent in the nuts and bolts of X86 processors, understanding their workings at an assembly language level. But, even if you were a highly skilled engineer, you would not be able to generate anywhere near the financial returns of the technically unskilled investor who realised the implications of the technology behind your skills.

$12,750 invested in Microsoft at IPO is worth over $15 million today, but it’s also worth over a quarter of a million a year in dividends too — all earned passively. You have to be a very successful engineer indeed to have matched these numbers, and even if you did, you’d have to work for it. But, as discussed in Magic Stick, betting on the future of Microsoft in 1986 wasn’t a guarantee of success. It was a risk.

Future wealth in cryptocurrencies will be made by those who understand the implications of the technology. Whether or not you know how it actually works.

Global mega-companies quietly positioning in blockchain knowhow is one thing, but if you took a snapshot of the cryptocurrency market from 50,000 feet one significant problem that needs to be resolved is regulation.


Ministry of Plenty

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In Orwell’s 1984, the Ministry of Truth was responsible for mind-control, using propaganda, disseminating lies as truth, but it was the Ministry of Plenty that was responsible for the economy.

Bitcoin and Ethereum transactions are not private. Services like Chainalysis are being used by the IRS to police Bitcoin, Bitcoin Cash, Ethereum, and Litecoin transactions, and search for tax avoiders as well as check for KYC (Know your customer) and AML (anti-money laundering) compliance. The use of this kind of policing service is on the rise, building profiles of wallet addresses using statistical analysis. Monitoring the volume transacted in privacy coins, along with privacy coin prices, might be a way to build an opinion of how the cryptocurrency market is reacting to new compliance legislation.

At this point, you might be thinking so what?

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In early 2018, Channel 4 news and the Guardian newspaper broke a story about a British company, Cambridge Analytica, and its in-depth profiling of 50 million Facebook accounts without the customers permission. The implications were that profiling was used to subtly influence the decisions of Facebook users. The problem was the decisions weren’t trivial, like which toothpaste brand they should use, but instead alleged the profiles were used to influence democratic elections by using the user’s Facebook data profile as a psychological warfare tool — And, if this was true, the collection and profiling of big data could be a potential threat to democracy itself.

Governments, usually slow to react, quickly formed a committee and the jawboning began.

As the usage of cryptocurrencies, especially cryptocurrencies designed to be used as digital cash and payment systems increases, governments may have been given a free case study on the power of data profiling.

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It’s no secret that governments are considering cashless societies with some countries closer to this goal than others. In Sweden, for example, it’s estimated that less than 15% of all transactions involve cash.

If governments adopt cryptocurrency and blockchains as the base carrier technology for cashless societies, it could be a massive catalyst for the mass adoption of blockchain technology. The coin based on the blockchain used will soar, creating millions for early investors.

Of course, picking the technology in realtime is not easy. Maybe an existing blockchain will be adapted, or perhaps something new is already being developed.

One thing though is clear, if governments use blockchains as the technology for cashless societies, because of the ability to track and trace every single transaction you make, the influence and profiling done by Cambridge Analytica will look like child’s play, compared to the picture the government will have of not just you, but of every citizen in your country.

Of course, at this point in time, this is just conjecture. History will make it seem obvious, but in realtime long term conditions and likelihoods are factored in as fragments of the puzzle coalesce in real time.

 Is picking tomorrow’s cryptocurrency winners luck or are there tools that can help?

Is picking tomorrow’s cryptocurrency winners luck or are there tools that can help?

Could the next driver of blockchain adoption be central bank backed digital cash?

Could the next driver of blockchain adoption be central bank backed digital cash?