Not understanding background conditions is like walking across a freeway blindfolded.


“On deadlock terrain, even if the enemy offers bait, do not move. Lure him — then retreat. When half his troops are out, that is the moment to strike.”

— Sun-Tzu

The majority of market participants over complicate their interactions with the cryptocurrency market, searching for tips, looking for articles that tell them it’s ok to take action.

In Long Tail, we discussed a useful (and simple) technique to quickly scan the cryptocurrency markets for coins that show signs of being accumulated.

Go to and view all coins. By default, the list is sorted by market capitalisation. Sort instead by 7-day percentage move. Higher priced coins with a larger market cap, have a tendency to have much smaller percentage gains. When you see a coin with a high market cap ranking, (after sorting the list by 7-day percentage move), near the top of the list, ask yourself why is this coin performing so well in percentage terms?

Seeing a coin out of place in the list does not mean that the coin is a buy — far from it, but it’s an efficient method of checking what is going on outside of the top 50 coins.

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A coin out of place is something to be noted. The next step is to check out the volume. A few weeks ago, a coin, PayPie, with a rank of 65 out of over 2,000 coins, was appearing near the top of the 7-day percentage move list. If you checked the volume, you’d see the move was most likely a trap. PayPie surged from 7 cents to 71 cents, a 914% move, but the volume behind the move was just $256.

By adding coins appearing out of place in the 7-day percentage move list to a watchlist, and by checking, every day, the rolling 7-day percentage move list, along with the associated volume, you will, over time, gain some insight into whether or not the coin is being systematically accumulated.

PayPie’s move had no volume behind it. And just a few weeks later, PayPie has gone from 71 cents back down to 9 cents.

The cryptocurrency market is in a downtrend, no prizes there, and while the majority of participants search for clues, reading the opinions of others, taking tips, and following gurus on social media, the 5%, the most consistent and successful participants, look dormant on the surface and appear to be doing nothing.

Their trap is set.

Read on…


85:15 is not a time error, it’s a ratio.

If you check the leading coins on, you’ll see around 85% of all cryptocurrency volume takes place in the top ten coins.

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Standing by a railway track, looking at an oncoming freight train. That’s what the 95% are doing if they are entering the cryptocurrency markets in early 2019 with a long term view.

Cryptocurrencies are highly correlated, and most of the trading takes place in a handful of coins with the highest market cap. This means the direction of the market is dictated by the leading coins, and as the direction of the leading coins is down, this means the sentiment in the cryptocurrency market is also down.

If 85% of all the turnover is pushing prices lower, and if the market is highly correlated, which the cryptocurrency market is, the other 15% of the turnover, spread across thousands of coins, is going to be fighting the negative sentiment.

The majority, the 95%, the group of traders and speculators who are consistently unsuccessful, see the train approaching and step onto the tracks. Does this sound like fun? It’s not, yet this is how the 95% take positions, not just in the cryptocurrency markets, but across all traded markets.

The 5%, the group of consistency successful investors and speculators, understand a trend in motion has a higher probability of continuing than reversing. Speculation is full of aphorisms like, “the trend is your friend,” but how does this help you? Especially as some traders have tacked on, “until it ends” to the end of the phrase.

If the 95%’s habit of attempting to enter into a long term bullish position when the trend is down is the equivalent of standing in front of a moving train; then, ask yourself if anyone is leading them on to the tracks?

Customer’s Yachts

One summer’s day a broker was showing a client around the marina at Rhode Island. The yachts were owned by Wall Street’s most successful brokers.

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After strolling along the beautiful marina, admiring the yachts, the customer looked at the broker and asked, “Yes, they are beautiful, but where are the customer’s yachts?”

If you take the time to look, you’ll find plenty of advice (and books) on the subject of trend following. It seems easy, but not so fast. One of the problems newer traders face is the plethora of information available to them.

Most new traders start their journey into speculation and investment using technical analysis. Why? Because of all the methods used to speculate, it’s the easiest to learn, and it’s very “teachable.”

Generally, the two most common methods of finding investment opportunities are technical analysis and fundamental analysis. It’s much easier to onboard a new trader using technical analysis than it is using a fundamental approach.

The reason is simple. Technical analysis can be learnt fast, compared to any of the alternatives.

Another huge business that attracts a large number of people is online marketing. Like trading, it’s possible to drop thousands of dollars attending seminars teaching easy to use tactics on how to sell products to the masses.

Similar to the convenient methods taught in technical analysis courses that teach you how to master the financial markets, online advertising courses show you how to build a successful business by setting up a website page and running ad campaigns.

These skills are soft skills. Skills you can learn by rote, but skills that have a finite shelf life. For example, if you use Facebook, you’ll know how often Facebook changes the way you interact with the platform. This means, if you learn something today, then, most likely, a few months or a year from now, the routine you use on that platform will either not be available, changed to work a different way, (by forces outside of your control), or moved to a different place on the platform, causing you to have to change your routine, even if the feature has not been removed.

Like technical analysis, advertising on Facebook is very “teachable.” What isn’t teachable, over a weekend, is the underlying business skill.

In the online marketing business, the ability to write sales copy, the ability to craft headlines that convert, and the ability to do all this to an audience with a problem — a problem you know how to find, talk to and solve, are the hard skills.

For example, top copywriters earn six figures a year, they get paid upfront to research and write a sales letter, and if that becomes the control, the version that pulls in the most sales, they earn a commission from those sales, commissions that add to millions per year in income.

Hard skills like this are not learnt in a weekend, and unless your name is NEO and you've found a way to upload the experiences into your brain, it takes years. But if you’re selling the dream of building an online business using Facebook, how do you get around this inconvenient fact? Easy. You are given a “swipe” file.

Instead of you having to learn the skills of writing copy, you can conveniently adapt the swipe file content to suit your needs. This leads to two problems. First, you are not using your “voice.” You are using someone else’s, and just like sensing the facial expression of the person on the other end of the phone, readers can detect when a voice sounds wrong and is disjointed. The second problem is plagiarism.

Marketers, selling the dream of building a successful online business, use one desire to sell their products.


They sell you the soft skills and give you a swipe file, as a quick way to remove what they know will be a sticking point for almost all of their customers, because the inconvenient fact is most of their students will not have the hard skills required.

And so it is with technical analysis. It’s the soft skill, easily teachable, the carrot to lure you in. Technical analysis is alluring because it’s easy to make decisions that are made in hindsight and look effortless. But it’s an illusion, a powerful seduction.

The inconvenient truth: Most people new to the world of speculation and trading start defining trends with indicators and signals from the past. They don’t take the time to learn why trends begin, how trends move through time, and how they end.

Technical analysis is often used to show how easy it is to be successful in hindsight; however, the reality, for most, is different when they attempt to use a TA system in real time.

Before you pull the trigger ask yourself, like the customer being wowed by the Wall Street broker, where are the customer’s yachts?

30% Chance of Rain

The most successful speculators and investors, the 5%, do use technical analysis, but as a trigger to enter into a position when the background conditions are favourable.

Think of it like this. If it’s sunny on a winter’s morning, it is more likely to cloud over and rain. If it’s the middle of summer, it’s more likely to stay fine all day.

The 95%, in contrast, pay little attention to background conditions. A background condition to the 95% is a 50-day moving average, crossing over a 200-day moving average.

The 5% realise background conditions are important. The problem for the 95% is that it takes some work and experience to be able to use this type of analysis. It is not something that can be taught at a weekend seminar.

For example in Games without Frontiers, we discussed the Trilemma.

As a reminder, this is the international relations trilemma from the world economic forum website.

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Capital Movement : Democracy : International Order

In a trilemma, you can have only two of the three available conditions or choices. The world is bound together in a complex system of supply chains. The cell phone you hold in your hand is made up of parts from all over the world.

An iPhone 7 has components from eight different countries, the United States, UK, Netherlands, Germany, China, Taiwan, Japan, and South Korea. Parts from these countries are complete, things like the LED backlight Retina display driver from the US, the A9 processor, from South Korea, the accelerometer from Germany, and the battery from China.

Go down a level to the raw materials that make up these components like the iron ore from Australia shipped to China, and the complexity reveals itself.

Because of the interconnectedness of global supply chains, the Capital Movement choice on the trilemma is likely to be persistent and sticky. This means it is unlikely to change quickly.

Since 2010, there has been a shift towards International Order. Countries are withdrawing into themselves. Nationalism is on the rise. Politics is swinging from the liberal centre out to the extremes, both left and right.

In this environment, where capital movement is not likely to change, and international order is shifting, the third choice, democracy, is most likely to suffer.

With a decline in democratic values comes a decline in trust. And a decline in trust, while bad from democracy, is positive for any technology that can neutralise the declining levels of trust.

Enter blockchains.

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Using this type of reasoning, the 5% figure out the likelihood of blockchains becoming mainstream, replacing existing systems within supply chains and international finance, and they use inferential statistics to help place a probability on their analysis.

Straw Hats

When asked about the secret to his success, Bernard Baruch replied, “I buy my straw hats in wintertime.”

Baruch was, of course, referring to buying into his positions when they were cheap relative to their value, but do you buy blindly or do you wait for a change in background conditions?

After the 2008-2009 financial crisis, the world’s central banks decided on a program of quantitative easing. The central banks injected money into the system by buying securities or bonds, from its member banks. Governments also issue debt in the form of bonds, and the central bank bought them. The central bank’s action had the effect of driving down the price of bond yields. As the banks mopped up the available supply of bonds, the price of the bonds started to go up. As the price of bonds goes up, the yield on the bonds goes down.

The QE programs initiated by the world’s central banks drove yields down to levels so low that in a few cases the yields became negative.

This created favourable conditions for the stock market.


As yields were driven to near zero, and in some cases below zero, investment money was forced to look elsewhere for returns, creating a perfect environment for money to flow into stocks.

The US Federal Reserve announced its first QE program on November 25, 2008. The low in the stock market came on March 6, 2009. As money flowed into stocks, the supply and demand balance changed. When new demand, buying, absorbs and overwhelms overhead supply, selling, prices rise.

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It looks easy in hindsight. But it’s not. The default long term trend indicator, used by the 95%, is the 200 day moving average. During the week of the low, in early March 2008, the 200-day average was 60% above the low price of 666.

The SP500, the 500 largest companies in the US by market capitalisation, didn’t close above the 200-day moving average until June 2009. Four months after the low. Those who knew the QE program provided favourable conditions for the stock market going forward had an edge.

Not only that, the QE program gave stock investors another less obvious edge. Interest rates, held at not decade lows, or even century lows, but at 300-year lows, incentivised companies to buy back their own stock.

(Eagle-eyed readers will realise this transports us back to 1709, so the 300 year low pertains to the Bank of England.)

When a company buys back its own stock, it reduces the number of shares in issue. As the number of shares decreases the earnings per share increases without any further growth by the company. A company could borrow at 300 year low rates buy and back its stock, inflating its earnings. Any readers new to financial markets may be thinking this is illegal. It isn’t. Not only that, it’s a tactic used by the most respected and successful blue-chip companies.

As the number of shares in issue fell across market-leading companies, the earnings per share rose, leading to a fall in the Price to Earnings ratio. The P/E ratio is the driver of global stock prices. It’s the price you pay today for tomorrow earnings.

But wait, there’s more. Share buybacks appear on a company cash flow statement, right next to dividends.

So what?

Investing greats, like Warren Buffett, talk about investing in a company, and when you do, you become a part owner of a business.

What kind of return would you think was available to investors buying shares of companies who had been buying back their own shares?

Two percent — four? What about 8%? If you compare 8% to the near zero return available by investing in bonds, you’ll see why QE provided such a favourable environment for the stock market.

What will shock most, even those who own stocks, is the percentage of returns that have been available to investors over the last ten years.

The vast majority of investors buy directly using tips from a broker or newsletter, or they use technical analysis as their only tool, typically using a moving average, RSI, or MACD to time their entries and exits.

The reason why they use TA is that it’s easy to understand. Anyone can learn how to use it over a weekend. You can teach a ten-year-old how to use moving average crossovers — is the green line above the red line — buy — is the red line below the green line — sell.

But investors who use TA as a trigger for entry only when they have favourable background conditions have an advantage over the rest because they understand the longevity of the situation.

On its own, what does a moving average crossover mean? What does it signify?

In 2015, with alternative investment returns at near zero, an 8% return was unheard of. Imagine walking into your bank, in 2015, and asking for 8% interest on your saving account.

The 5% look for favourable background conditions. Take Microsoft. In 2015, the Microsoft income statement looked like this.

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The numbers are in millions, so a gross profit of $60,542 means Microsoft made $60.5 billion gross profit.

The Microsoft cash flow statement from the same year looked like this.

Microsoft cash flow

Microsoft cash flow

Microsoft spent $14,443 or $14.4 billion buying back their shares, and they spent $9,882 or $9.8 billion paying out dividends to shareholders.

If you owned Microsoft shares, you would have benefited from the $24.2 ($14.4 + $9.8) billion Microsoft paid out in share buybacks and dividends.

With $60.5 billion in gross profit and $24.2 billion in buybacks and dividends, Microsoft was effectively paying out 40% of the total gross profit it earned in 2015 to shareholders.

Not zero, not 2, or 4, or even 8%. How about 40%.

This is what happened when the rest of the market caught on.

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This condition was made possible by QE. It’s the self-reinforcing positive feedback loop behind the 341% stock market rally since 2009.

To the majority, these conditions were hidden in plain sight, but they were available to all if you knew where to look. The 5% did, the 95% did not.

Cryptocurrencies are not stocks. The fundamental driver of the stock market is earnings. The question is, what is the fundamental economic driver of the cryptocurrency market?

In the absence of an economic driver, like stock earnings, is there a metric that could be used as the fundamental driver for cryptocurrencies?

For coins that use a proof of work model, one possible driver is mining cost, but how can this be used to uncover unrealised value? For proof of stake, an unrealised value may be discovered as legacy systems are replaced by blockchains.

In 2019, ten years after Bitcoin launched, cryptocurrencies are held back because large scale institutional money is still trying to figure out what cryptocurrencies are. There’s political risk and regulatory risk. How should cryptocurrencies be taxed? There are governance issues too. What effect does a hard fork have? And on and on.

In the absence of agreed economic drivers, the 5% look for favourable conditions, like QE in the stock market, that will act as a long term driver.

One tool, in use by the 5% is the trilemma. Others are the price cycle and the hype cycle.

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The price cycle uses supply and demand to place a cryptocurrency in either, a downtrend, a sideways accumulation pattern, an uptrend, or a sideways distribution pattern.

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The hype cycle is used to frame where on the journey from the initial trigger to mainstream use best fits the prevailing conditions.

Instead of reading balance sheets, income, and cash flow statements, the 5% read the white papers and roadmaps of the leading coins. They study supply and demand and the emotion levels of the crowd.

In contrast, the 95% make cryptocurrency buy and sell decisions using technical analysis, other peoples opinions, or their gut. They are the Fauves, the wild beasts, of the cryptocurrency markets.

In late 2017, it was clear, by anyone who took the time to look, animal spirits were well ahead of the technical development. This is the signature of the end of stage two of the hype cycle — the peak of inflated expectations.

Reading the white papers, watching the supply and demand, looking for the emotional signature of the crowd, the 5% place cryptocurrencies in stage 3 of the hype cycle — the trough of disillusionment.

When the 95%, the majority, run prices up in this environment, the 5%, like Sun-Tzu are not being lured by the enemies bait; instead, they wait until the 95% are half out, before selling into any rallies. For now, the 5% are playing a short term game.

Like the 40% return paid out by Microsoft on its gross profit in 2015, the 5% know a catalyst will come, but for now, they wait, preferring to prey on the overcommitted majority who buy for the long term in downtrends.