BEAR MARKET BLUES (and greens)
Beyond risk and money management, the essence of trading is correctly juxtaposing price and time. As traders, we’re constantly refining our actions based on what we expect in the future because of what we know about the past and present. Mostly, this means we use our own experience and education and ignore the voracious industry feeding off investors and financial advisors.
August, a month when the rest of the crypto markets were down double digits. That also says plenty. Once you get past the pretenders, scam accounts, the FOMO, the armchair Twitter geniuses, that general cacophony, use this nugget as your North Star:
Having navigated markets for 25+ years, my best advice about these pitchmen and their products is — proceed with caution. Most of them make a living selling products, not returns. They blow up my Twitter and other feeds every day, claiming they’re crushing it in binary options, forex or mining Bitcoin. But they don’t pass the sniff test. Their profiles are plastered with doctored photos of luxury cars, bricks of cash, and beauty bought by the hour. That says plenty. Anyone who has dipped a toe recently knows these are difficult markets with “Swim At Your Own Risk” clearly posted. The waters here are for real professionals only, so you must either have a basic level of competence, or you need to piggyback with someone who does, like the pros in Crypto.IQ’s Trade Room. They were up double digits in
Bear markets are about capital preservation, period. Yes, there are traders who are still making money on the occasional long. Yes, there are some shorts making money — and, depending on the instrument, a short here is whacking a beehive — but the rule of thumb is longs AND shorts get smoked in bear markets. Sometimes, the best thing to do is nothing. continue...
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BEAR MARKET BLUES
At IQ, we’ve been positioned very defensively for some time. Yes, our alt portfolio has been hit — just like every alt portfolio — but by being Bitcoin first people (pragmatists, not maximalists), we’ve maintained a higher portion of our portfolio in the one coin we think not only survives this market but also thrives in markets to come and has a significant chance of becoming a global reserve currency. If Bitcoin isn’t the “One Coin to Rule Them All,” it should at least become a transnational currency benchmark or, at minimum, a store of value. As I warned in March, the most painful market would be a cascade of false breakouts and false breakdowns that chew through trader capital. Markets after a boom/bubble rarely give people an easy time. Alts were in a bubble. Bitcoin was in a boom. There’s a difference. Learn it. These markets tend to frustrate the maximum number of people, only ending after exhaustive capitulation based on either price or time. This bear market reminds me of 2002 and 2009, and those two unearthly beatings taught me that — in bear markets like this one — you don’t worry about making money. You worry about making it out alive. Those who survive will reap the dividend on the other side of the mayhem because it’s not the victor who draws the spoils in bear markets. It’s the survivors. Capital preservation is the be all, end all in a market like this. Each day, more people throw in the towel or even worse, get the tap on the shoulder — a day and a dollar too late. In 2002 and 2009, I was running significant money, and while both years were inordinately painful, those who survived saw 5, 10 and even 20x gains in the subsequent 2-3 years. But you had to be alive to capture those gains. And chasing rallies and punting stop loss dips will erode your capital quicker than an Upper East Side girl strolling Fifth Avenue with your Black card.
So, play defense and despair not. For while this certainly has been the Summer of our Discontent for alts, there are more reasons than ever to be bullish about Bitcoin now. Among these:
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THE BITGO CUSTODY SOLUTION
2
FIDELITY COMMITTING TO CRYPTO PRODUCTS
3
JP MORGAN AND MICROSOFT BLESSING ICE’S BAKKT PLATFORM
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BITCOIN CASH BEING IN A DEATH SPIRAL
5
ACCEPTANCE BY STATE ACTORS LIKE THE EUROPEAN COMMISSION, SWITZERLAND, SOUTH KOREA AND CANADA, AMONG OTHERS.
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LAUNCH OF THE GEMINI DOLLAR STABLECOIN
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CITIGROUP EXPLORING CRYPTO CUSTODY
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NASDAQ BUILDING CRYPTO DATA SETS INTO ITS ANALYTICS TOOL
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COINBASE EXPLORING THE LAUNCH OF A CRYPTO ETF IN PARTNERSHIP WITH BLACKROCK THAT HAS $6 TRILLION IN ASSETS
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THE BIGGEST COMPANIES IN CRYPTO JOINING FORCES TO LOBBY WASHINGTON LAWMAKERS WITH THE NEW BLOCKCHAIN ASSOCIATION.
BEAR MARKET BLUES
“
BITCOIN AT $6200 IS CHEAPER THAN BITCOIN AT $250 WHEN I WAS BUYING IT IN 2014, OR EVEN WHEN IT WAS $32 IN 2013.”
In fact, I’m going to make a highly controversial statement, and I am prepared to debate this with anyone. “Bitcoin at $6200 is cheaper than Bitcoin at $250 when I was buying it in 2014, or even when it was $32 in 2013.” But wait, how can that be? Is this the new government math? Dynamic scoring? Alexandra Ocasio’s calculator? Cheap and expensive and value aren’t absolute terms. They’re relative and stand in conjunction with everything else out there that makes a market: supply, demand, price, time, expectations, elasticity, psychology, etc. In 2013 when Bitcoin was $30, it was not only possible but highly probable that this truly was internet magic money, a brief and fantastic social experiment that wouldn’t last; that it would get forgotten, hacked away, shut down by the government the way Silk Road was in 2013, or replaced by a competitor. So buying Bitcoin at $30 when it had a greater than 50% chance of being a zero, or that it would merely muddle along and not draw the necessary developer, consumer, or merchant interest to be a viable protocol actually made Bitcoin much more expensive and a much riskier buy than it is today at $6000. In light of just some of the bullish news I’ve mentioned along with the increasingly widespread corporate/consumer acceptance and adoption means Bitcoin is downright cheap — certainly a better value today at $6200 than it was at $250 a few years ago. Add in the recent improvements on the custodial front, the increasing central bank printing addiction, and the spreading currency and tariff wars, and as one of the better-known Twitter personalities likes to say, the virus will spread. Bitcoin just might be the best hedge you can find against global socio-economic chaos. From an asset protection standpoint, you’d have a hard time doing better than a mix of gold, bonds, real estate, francs, and Bitcoin as a rainy decade portfolio. And remember, you can’t send gold or real estate, and you certainly can’t smuggle $5 million in gold or real estate up your ass if you need to get out of China, Venezuela or anywhere that becomes inhospitable to personal and property rights.
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BEAR MARKET BLUES
THE PAST MATTERS BUT NOT NEARLY TO THE DEGREE YOU THINK
And let’s not even venture down the hallway and mention how the strongest economy of our lifetimes (Yes, thank you President Trump) is paired with the strongest labor markets of our lifetimes, and even with tax receipts at record highs, the deficit continues to blow out and explode. Ask yourself (and your financial advisor, and your political representative) what happens when things slow down or there’s a correction? What do you think happens to the deficit then (and eventually the dollar since the only way remotely possible to pay down our gargantuan debt is to print baby print and inflate it away)? In that environment, nothing does better than hard money, and, to be blunt, Bitcoin is gold on Viagra. Just remember markets are discounting mechanisms, so when it becomes obvious that Bitcoin will be Digital Gold 2.0 (or a global currency benchmark), it won’t be trading at $6000 anymore. Just like Amazon wasn’t trading at $4 anymore once we stopped calling it Amazon Dot Bomb and mocking the idea of using a credit card on the internet. By the time it seeped in that Amazon “might be onto something,” the stock price was 100x higher. So, it will be with Bitcoin.
One Final Note: These days, the point I hear more on Twitter and Telegram is the NASDAQ bear market analog or Bitcoin 2015 or some other bear market as a road map. If you garner anything from the above, it should be this: the past matters but not nearly to the degree you think. Charts and the past matter mostly because people think they matter, and that becomes a self-fulfilling prophecy based on support and resistance focus points. But in the end, it’s illusory. If you think Bitcoin can’t rally because of this chart or that chart, or because the 2013 bear market analog still has time to play out, then you’re missing the point. When it comes to Bitcoin, history doesn’t really matter. If history was what mattered, historians would all be billionaires. This is a new paradigm, a new era. So, I’ll plant my flag here, voice and defend four of the most dangerous words in investing: “This time it’s different.” Because this time it is. Be a holder. Be a survivor, and be ready to buy more.
5
Intersection of
AI & Blockchain
I
f we gushed about a technology that promises to produce radical and revolutionary changes for the good of all humanity, you would be forgiven for thinking that we're talking about blockchain technology. It's actually artificial intelligence.
The potential applications of blockchain across nearly all industries is staggering, but the only technology which we could see eventually surpassing the importance of blockchain technology is AI. It completes a multi-decade trifecta of world-changing technologies that began with the internet in the 1990's, continues with blockchain today, and will extend to the 2030's and beyond with AI. Each technology builds on, interacts with, and magnifies the impact of the last, and it's this interaction and synergy between the technologies that has explosive potential. Futurist Ray Kurzweil is perhaps the biggest proponent of AI and is known for his concept of the Singularity — the point at which AI can match and exceed human intelligence. According to Kurzweil, the Singularity is still decades away, but already blockchain applications for AI are presenting themselves at a breakneck pace.
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INTERSECTION OF AI & BLOCKCHAIN
Examples of blockchain projects beginning to apply AI: SingularityNET (AGI) A marketplace for AI algorithms, machine learning tools, and data sets. Effect.ai (EFX) A decentralized platform that provides services for the AI market. AlphaNetworks Uses IBM's Watson AI to analyze user interactions within its media and advertising network. Numerai (NMR) Stock market predictions with AI from data scientists. DeepBrainChain (DBC) Distributed AI computing power.
Not to belittle the impact of AI, but these and other early applications of AI are mostly limited to specific tasks. With a more holistic application of AI to the blockchain, the two technologies may be able to work together to produce a whole that is greater than the sum of its parts. Some blockchain visionaries believe that blockchain can democratize AI the way it can democratize money. But the biggest benefits of the application of AI to blockchain may arise unforeseen. Some of the most revolutionary innovations are discovered when technologies and techniques from different fields are combined. This is known as interdisciplinarity, the approach at the core of Kurzweil's own Singularity University. What then will we find at the intersection of blockchain and AI technology? Blockchain technology is still early and AI is even more nascent, so the greatest advances are likely years away. Interestingly though, even without the application of AI, blockchain technology already exhibits organizational characteristics that resemble real biological neural structures. Think of the structure of a blockchain and how it is distributed between many nodes that are all communicating in a vast self-maintained network. It is strikingly similar to a neural network. The decentralizing nature of blockchain technology seems to have generated an organizational structure that mimics nature's own solution for efficient information processing. Shouldn't this structure be ideally suited to the application of AI, not just at the task level but at a level fundamental to the entire system?
In these terms, Ethereum's description as a 'world computer' takes on new meaning. But there are other projects that mirror this idea and expand upon it even further. For example, Dfinity is building a platform similar to Ethereum and claims vastly improved performance and unlimited capacity. Dfinity even describes their blockchain's organizational structure as the Blockchain Nervous System, a brain-like array of nodes that makes decisions for the network. It's a decentralized crowd intelligence that is bound and moderated by code. It looks like blockchain technology is naturally evolving toward more complex, intelligence-bearing structures, whether that intelligence is human-directed or artificially directed. When AI begins to be applied holistically to such structures, we're willing to bet the pace of innovation in both technologies and the impact they will have on business and society will accelerate exponentially. This is exactly Kurzweil's conclusion when applied more broadly to AI technology. He describes a future scenario of rapidly accelerating technological advances culminating with the Singularity. When AI then surpasses human intelligence, he postulates a future for humanity that can't even be imagined today, a positive one unlike some others who warn of a dystopian clash with AI. Since blockchain technology itself is evolving toward ever more brain-like structures, it seems like the perfect complement for the application of AI. This sounds almost as much science fiction as it does reality. But if any of Kurzweil's predictions come true, and if any of our predictions regarding blockchain technology come true, then the intersection of blockchain and AI technology ought to be spectacular. 7
Stock-to-Flow R a t i o A Simple Yet Powerful Figure to Value Bitcoin
T
here’s no shortage of economic analyses to determine Bitcoin’s proper valuation. Some use technical analysis often on a short-term basis, but this provides little insight into why individuals invest their money. Similarly, fundamental analysis is an effective indicator of a cryptoasset’s potential to thrive but is only theoretical in its predictions. As Bitcoin’s nascent economic and psychological implications have yet to materialize, investors must ask themselves important questions about money, value, and function. The most fundamental of these is, why do we invest in the first place? It seems obvious to many that the answer is so the value of the investment increases over time. But for some, it might be to protect decreasing purchasing power due to inflation. Others might invest to clinch a specific utility. Asking these questions helps clarify why some might want to take money out of fiat money and put it into other assets.
STOCK-TO-FLOW RATIO
While many champion Bitcoin’s scarcity as justification for its value, they often speak about it too broadly. The stock-to-flow ratio goes one step further. It is at once simple to understand and an extremely informative metric to justify the value of a particular good. The stock of a good is the existing supply while the flow is the amount of the good that will be produced in the next given time period (usually one year). Dividing the stock by the flow gives you the stock-to-flow ratio. Put simply, the stock-to-flow ratio is just the inverse rate of supply inflation each year.
stock flow
=
existing supply annual production
The stock-to-flow ratio can provide insight into any commodity, good, or money. When looking at the value of money specifically, the ratio between stock and flow provides a trustworthy interpretation of money’s hardness — how difficult it is to meaningfully increase production of new units relative to the existing supply. Conversely, easy money is money that can have its total supply increased relatively easily. As such, a hard money would have a high stock-to-flow ratio while an easy money would have a low stock-to-flow ratio. The more annual production affects the total supply, the more flow impacts the stock, the easier the money. Gold, whose stock-to-flow ratio is quite high, is often considered the hardest form of money because the flow doesn’t impact the stock to a significant degree. By one estimate in 2017, gold’s global stock was around 190,000 tons. And because pure gold is indestructible, that 190,000 tons accounts for almost all the gold that has ever been mined in human history. On average, global mining adds about 2500 tons to gold stocks each year. If we divide the stock of gold by its flow, we reach a figure of 76.
( ) stock flow
of gold =
190,000 tons 2,500 tons
= 76
Comparatively, many consider fiat such as USD easy money because it has a much lower stock-to-flow ratio than gold does. According to the Federal Reserve’s own figures, the United States added $600 billion to the total supply of USD in 2017. By the end of last year, the U.S. reported $13 trillion for its money supply. With these figures, we see that the stock-flow ratio of USD is about 21.6, indicating that USD is not nearly as hard as gold. And by taking the inverse of their stock-to-flow ratios, we see that gold’s supply inflation is 1.3 percent while USD’s is about 4.6 percent.
( ) stock flow
of USD =
$13 trillion USD $600 billion USD
= 21.6
STOCK-TO-FLOW RATIO
From numbers alone, it’s clear that USD’s flow significantly affects its stock. But what truly shows USD’s lack of hardness is not just 2017 numbers but the nature of its supply increases. It’s not costly for the U.S. government to increase flow of USD. Theoretically, if a government wants to increase supplies of fiat money in a given year, the capital cost to do so would be trivial. With gold, however, producers would have to leverage significant amounts of capital to affect that change. Miners have to increase production by investing their own capital. Because capital is at stake, increasing the yearly supply is by nature more difficult and will always be more difficult. Some view Bitcoin’s energy expenditure and proof-of-work consensus in a similar light. With easy money like fiat currency, increasing the flow has no significant capital costs of production. Economist Saifedean Ammous has argued that,
If a money is used as a store of value, it will have its supply increased. And if its supply is easy to increase, the value of that money as a store of value will erode. Ammous calls this the easy money trap. Even if increasing the monetary supply might have short-term benefits to an economy, the lack of capital barriers and temptation to increase the monetary supply will erode value, he argues. Conversely, if it’s difficult to increase supply of a store of value, the money’s value will be resistant to that erosion.
like gold has never experienced a 30 percent increase to total supply in human history. When the only limiting factor in adding to the monetary supply is politics, governments will, in the long run, find a way to sidestep those limitations. As the monetary supply increases by such large figures year after year, the value per unit decreases accordingly — monetary devaluation. While there are valid Keynesian supports for controlling the money supply — navigating business cycles, rebuilding after natural disasters, and war — history has proven that governments do not control government money responsibly. Applied John Hopkins economists Steve Hanke and Erik Bostrom reported in 2017 that there have been 58 instances of hyperinflation in history, 57 of them appearing after World War I, which not coincidentally is when governments decided to leave the gold standard en masse. The only other instance was France’s hyperinflation in 1790 when the French National Assembly agreed to issue paper currency called assignats. In only five years, the National Assembly printed 19.7 billion notes while the assignat lost almost 100 percent of its purchasing power. This data shows that fiat currency is exclusively associated with hyperinflation. When hyperinflation plagues a country, citizens liquidate their native currency in favor of commodities, gold, and international reserve currencies such as the dollar, euro, yen, and Swiss franc. They are fairly ubiquitous worldwide and have great stability relative to the devalued currencies. “The reason for that becomes apparent when one examines the rates of growth of their supply, which have been relatively low overtime,” Ammous writes in his 2018 book, The Bitcoin Standard.
Global statistics corroborate Ammous’ claim. According to the World Bank, between 1960-2015, global broad money’s average annual growth rate for 167 countries grew over 30 percent per year per country. Comparatively, hard money
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STOCK-TO-FLOW RATIO
Hard money is sound money while easy money is subject to debasement. Instances of hyperinflation suggest that money is rather unappealing as a store of value due to inflation of the money supply. Comparatively, history shows that gold holds value well over long time periods. Gold, however, lacks easy portability and divisibility, which some say are two major barriers to its being an efficient medium of exchange in today’s global economy. Enter Bitcoin. Not beholden to any single entity, group of individuals, or government, Bitcoin cannot be debased. It cannot have its supply manipulated, and its code cannot be altered by any government’s action. While most of this is not new to Bitcoin enthusiasts, looking at Bitcoin through its stock-to-flow ratio gives us enormous insight into why its value is not just justified, but also why its value will likely continue to rise significantly in the years to come. As calculated earlier, the stock to flow ratio of gold is 76. Today in 2018, we can calculate Bitcoin’s ratio by taking the current supply (stock) and dividing it by the supply added in the past year (flow). According to figures from Blockchain.com, there were about 697,000 bitcoins added to a current circulating supply of 17,270,000 bitcoins. By calculating the stock-to-flow ratio of Bitcoin in September of 2018, we arrive at a figure of 24.8.
( ) stock flow
of bitcoin in 2018 =
17,270,000 BTC 697,000 BTC
= 24.8
Even today, Bitcoin’s stock to flow ratio is a little higher than that of USD. And in its nine years of existence, Bitcoin has proven to be the better store of value, performing better every single year except 2014. Through the interplay between hash power and difficulty adjustments, we can reliably extrapolate what the stock to flow ratio of Bitcoin will be for years to come. In 2024, the yearly added supply (flow) of bitcoins will drop from 328,125 per year to 164,062 per year. Bitcoin’s controlled supply predicts there will be 19,851,562 in circulation at that time. As such, we can calculate the stock-to-flow ratio in 2024. We arrive at a stock to flow ratio of 121, higher than any commodity or currency in human history. By 2024, even gold won’t have that high of a stock-to-flow ratio.
( ) stock flow
of bitcoin in 2024 =
19,851,562 BTC 164,062 BTC
= 121
The stock to flow ratio is what justifies a money as worthy of holding its value, of informing whether a money is easy money or hard money. When there exists a truly hard money, it becomes difficult to eradicate its value. Thousands of years of gold’s high stock to flow ratio have illustrated its hardness and ability to store value. No one knows for sure if Bitcoin will follow the same path, if the entire Bitcoin experiment will succeed. But in nine years of existence, Bitcoin has proven its resilience. It has held its value, and its stock to flow ratio has dramatically increased. When Bitcoin surpasses gold’s stock to flow ratio, it will be a milestone in monetary history, and Bitcoin might be exponentially more valuable than it is today.
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HARD MONEY IS SOUND MONEY WHILE EASY MONEY IS SUBJECT TO DEBASEMENT
IT’S ALIVE It was born Jan. 3, 2009 and would’ve been easy enough to snuff out of existence in its earliest days. Just a tiny bit of government interference, a few well-placed computer viruses, maybe an apartment fire or two or three, and Bitcoin would never made it out of infancy. But the people who should have recognized a sleeping giant rumbling to life never thought it would amount to much — if they thought about it at all. No. The few Wall Street and banker types who’d heard of Bitcoin ignored it, assumed it was inside baseball for a sad set of isolated cypherpunks. They laughed at the notion of a digital currency.
But when Bitcoin continued to thrive, the laughter got a little nervous. Maybe, finally, there was recognition of the threat Bitcoin posed to the existing power structure. That’s when the bankster types finally decided it was time to fight back, to kill the baby in its crib. But by then it was too late. Bitcoin had become, if not a living thing, something like it, and it was a beast that was long past being anything easy to kill. If you look at Bitcoin in terms of the traits that define life, you could make an argument that Bitcoin does have something like life. continue...
IT’S ALIVE
A living thing is responsive to the environment, experiences growth and change, has the ability to reproduce, has a metabolism, is made of cells, passes traits to its offspring, and maintains homeostasis, that is to say it keeps chugging along, resisting threats and adapting to change as needed. Now let’s look at these characteristics as they apply to Bitcoin. 1 GROWTH AND CHANGE Clearly Bitcoin experiences growth and change. At one time there was no Bitcoin, so there had to be a time when there was a single Bitcoin. Now there are millions. And Bitcoin Improvement Plans, BIPs, are proof that Bitcoin changes. And it happens in ways that enhance its chances for survival in a world awash with those who’d be happy to see Bitcoin die. 2 ABILITY TO REPRODUCE Until every Bitcoin that will ever be mined has been mined, there will be reproduction of Bitcoin. And even when that’s finished, there will be forks of Bitcoin which one could consider mutated continuations of the line.
4 IS MADE UP OF CELLS If you ignore the fact that the Bitcoin network is comprised of a growing chain of blocks, which could be considered Bitcoin’s “cells,” you’d still be left with the fact that the network itself carries the “DNA” of Bitcoin in its code. Not only that, but as we talk about in our “Intersection of AI and Blockchain” story, “blockchain technology already exhibits organizational characteristics that resemble real biological neural structures. Think of the structure of a blockchain and how it is distributed between many nodes that are all communicating in a vast self-maintained network. It is strikingly similar to a neural network.” 5 PA S S I N G T R A I T S O N TO O F F S P R I N G Through its code, its DNA so to speak, each Bitcoin is just like every Bitcoin that came before. 6 M A I N TA I N H O M E O S TA S I S Homeostasis is the tendency of something to maintain equilibrium. Despite all the threats it faces, Bitcoin does that through the use of math and cryptography. This means that Bitcoin, in some way, can sense changes to its environment and react to them whether they are threats or opportunities. continue...
But if you set that aside and think about the fact that miners will always exist to sustain and secure Bitcoin through proof of work, Bitcoin won’t need reproduction to stay alive over generations. Live will be sustained through miners verifying transactions through the entirety of Bitcoin’s future. But this is a continuation of “life” nonetheless, which is what reproduction is all about. 3 H AV E A M E TA B O L I S M A N D B R E AT H E We know this is a bit of a stretch, but we think mining operations have a form of respiration in that they take in one thing, change it and spit out something different. This happens on multiple levels, but at the most basic one, energy usage accounts for a kind of metabolism and respiration. Not only that, but miners take in hashes, change them with the addition of new information, and spit out completely new hashes.
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IT’S ALIVE
“
It is the longest-lived, most secure, most tested blockchain in existence.”
It’s not chemically organic in nature, but what Anthony Pompliano says in this Tweet sums up what a lot of people inside Bitcoin feel at a visceral level. Pompliano Tweets, “One of the greatest strengths of the crypto industry is the “Crypto vs The World” mentality that so many people have. Nothing builds community and resiliency faster than a group of people taking on a common opponent.” A good example of this is the Bitcoin/Bitcoin Cash debate that recently had supporters from the two sides taking a short trip to fist city at crypto events. And as Bitcoin luminary Jameson Lopp also recently Tweeted, “It turns out that having a longstanding strong reputation in Bitcoin does not aid you in changing it contrary to consensus. Bitcoin's immune system shows no mercy.” And that’s a big part of what makes Bitcoin a “living” thing. It has the ability to respond like one. This happens at many levels, with white hat bug bounty hackers going after code to find vulnerabilities before the black hat hackers can. Governments attack it with regulations that are too harsh or that ban cryptocurrency altogether. And they attack indirectly through failing to take the actions and make the policies that are necessary for mass adoption. They attack it with FUD, almost daily media stories, and almost always in the mainstream press, that talk about Bitcoin’s imminent demise, about how the sector is wracked by fraud and filled with criminals. But despite the best efforts of powerful and smart people who have a stake in the old ways of money, Bitcoin continues on as if oblivious to those who would see it dead. It’s has sidestepped regulations designed to kill it. It has weathered bear markets and near daily announcements of its demise. Only to thrive. Like a living thing that has survived some kind of evolution, Bitcoin is resilient or, as some would say, antifragile. It is the longest-lived, most secure, most tested blockchain in existence. And it has helpers, an active and talented development community that is committed to helping it thrive.
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A Look at
Trading Bots in Cryptocurrency
I
n a fast-paced world gone digital, hurtling towards a head to head collision between man and machine, it would seem there has to be a smarter and more efficient way to go about trading a market that moves 24 hours a day, seven days a week.
Artificial intelligence, which has begun its integration into the majority of industries today, has, of course, infiltrated something as numbers-driven as trading. Anyone who has paid attention to the price action of Bitcoin over the past few months may have noticed an unfamiliar pattern in which price moves in a sudden surge upward only to move sideways for hours with close to zero volatility or price change, only to dump the entirety of the previous move. Traders have dubbed this price movement the “Bart pattern� due to its likeness to the famous cartoon character Bart Simpson. This is likely the footprint of what is known as a High Frequency Trading bot, or HFT, running a momentum ignition algorithm.
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INTERSECTION OF AI & BLOCKCHAIN
Momentum Ignition Algorithm This strategy is designed to lure traders who are sidelined or have orders placed above or below price to enter a trade that will cause price to move rapidly in a certain direction. This then creates liquidity for larger players (who are likely the ones running the algorithm) to have their orders filled for the sake of accumulation or distribution. By being aware of this tactic, you can use it to your advantage and anticipate a certain directional movement in the opposite of what seemed like an unprovoked and low volume movement, or the beginning of a Bart. The only traders who are usually affected by this are low time frame day traders that lack patience and discipline and fall victim to the fear of missing out. There’s not much anyone can do to stop this practice from occurring so the best one can do is steer clear or attempt to take advantage of the pattern on the move in the other direction. These patterns usually stay within the frame of higher timeframe support and resistance levels as they are superficial and not fueled by organic growth. Mapping out horizontal levels will not only act as a general guide towards trading success but also shield you from the wrath of algorithms designed to shake the change from the retail trader’s pockets.
16
INTERSECTION OF AI & BLOCKCHAIN
Your Very Own Robo-Trader There are a few options that exist in the world for having a bot trade for you. These options include bots that help with arbitrage and simple trading signals and even bots that allow you to place a take profit and trailing stop loss on exchanges that don’t provide the option on their own. Of course, there are also bots that will do every step of the dirty work that trading consists of as well. These bots do come at a cost in terms of security, efficiency, and an upfront fee. By placing the controls of your account into the hands of a bot, you are also handing over your private keys, passwords, and email. This could lead to breaches in other areas of your life that may make the risk of using a trading bot not worth the lack luster reward that many say the bots generate. A series of polls run on Twitter from our Technical Analyst, @CryptoHornHairs, shows that out of the 412 people asked only 18% have used or are using a bot to trade crypto. Out of that 18%, only a third of those using a bot reported that they are profitable.
Many traders have also reported that bots fail to make a profit in certain market conditions as well. It turns out bots, like humans, also suffer drawdowns in extremely bearish conditions, as many have stated that bots perform significantly worse during downtrends. The majority of the bots that people will run on their own are successful due to their ability to trade at a rapid and a nonhuman pace. This is fine and dandy in the event your account is large enough to suffer the fees that are rapidly tacked on, trade after trade. But in the end, having a bot trade all day and make massive profits while you go about your life is likely going to be, for most, exactly what it sounds like: too good to be true. That said, as stated above there are a few bots that have use cases that many may indeed find helpful, especially on certain exchanges. 3commas, a bot that works with a large majority of crypto exchanges, allows traders to set trailing stop losses and take profit orders where you otherwise could not. This empowers you to capitalize on your very own personal trading ideas while benefiting from the power of technology. The dynamic for the future relationship between artificial intelligence and man will have to be one of synergy and cooperation, as both will rely on the other for survival. 3commas fits this idea and is an excellent option to consider as we near the return of a bull season in the world of cryptocurrency.
The The dynamic dynamic for for the the future future relationship relationship between between artificial artificial intelligence intelligence and and man will have man will have to to be be one one of of
synergy synergy & & cooperation cooperation 17
Proof of Brain
If you know crypto, you’ve heard of the all-important proofs, the consensus mechanisms that blockchains use to verify and secure data. The common ones are proof of work, proof of stake and the modified proof of stake, called delegated proof of stake, that
Steem uses. But there is another “proof” associated with Steem that no one talks much about. It's not a consensus mechanism per se, but Steem's proof-of-brain is what allows the blockchain to function as a consumer- and creator-driven content platform.
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PROOF OF BRAIN content, and the whole system functions in support of that goal. So, in proof of brain, the mining work is done by humans rather than energy devouring mining operations. This setup makes Steem and its proof-of-brain model the perfect vehicle for bringing written content and other media to a social setting. The Steemit blogging platform is the flagship application on the Steem blockchain, but it isn't the only one. Other applications using Steem include dtube.video, an ad-free YouTube alternative, and dsound.audio, an outlet for independent recording artists. More such applications are in the pipeline. Like so many industries, social media platforms are ripe for disruption. Consumers are recognizing the drawbacks of centralized, for-profit platforms like Facebook and YouTube. Ads increasingly intrude on their experience, but what’s even worse is how these platforms misuse and profit from their data. In contrast, platforms like Steemit offer a different model, one designed to benefit content creators and users by sharing rewards. And the decentralized nature of these platforms means content can't be censored. If solutions like the proof-of-brain model continue to grow in popularity, more content platforms will be socially-driven. The content produced will be validated by the community, or the platform will fail because either the content is undesirable or the rewards are unfairly distributed. Creators will naturally migrate to platforms where distribution is fairer. Their audiences will follow, and the power will shift from the centralized platforms to the consumers and creators. The Steem white paper describes proof-of-brain as having:
A pool of tokens dedicated to incentivizing content creation and curation called the "rewards pool" A voting system that leverages the wisdom of the crowd to assess the value of content and distribute tokens to it Steem's delegated proof of stake algorithm sends 75% of newly created coins to the rewards pool, and proof-of-brain provides the model for distributing those tokens. Content creators are rewarded based on the quality of their content and the aforementioned curators are also rewarded for upvoting worthwhile and meaningful content. Creators and consumers are encouraged to provide good
Consider that Steemit and Steem's other applications are still in beta. Like so much of the blockchain industry, there is a lot of room for growth. Steem is prepared for that. Steem’s Smart Media Tokens (SMTs), scheduled for release Q1 of 2019, will allow anyone to launch proof-of-brain style tokens on the Steem blockchain for almost no cost. This will mean even greater democratization of content production, a blossoming of consumer participation, and creator rewards that reflect the effort put into the work. According to Blocktivity, the Steem blockchain uses a small fraction of its total capacity, so these are the early days for proof of brain and how it will change the way people interact in the digital social sphere. Its validation on Steem, which is consistently one of the most active blockchains and regularly surpasses Bitcoin and Ethereum in number of transactions, hints at the promise of this underutilized model and its role in future iterations of social media apps. It’s reasonable to expect that innovators will find myriad new ways to apply proof-of-brain on the Steem blockchain and perhaps on others. Eventually, there will be a tipping point when the old models begin to fade and new ones built on proof of brain will emerge. 19
The Crypto Prisoner’s Dilemma T
he prisoner’s dilemma is a standard example of game theory that shows why two completely rational individuals might not cooperate, even if it appears it is in their best interest to do so. - Wikipedia
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THE CRYPTO PRISONER’S DILEMMA The allegory used to teach the prisoner's dilemma uses an example to two people being interrogated. Each person is incentivized to give information and go free, resulting in the other party receiving all of the punishment. The other choice is for both prisoners to remain silent and each receive equal punishment. Currently, both miners and hedge funds are prisoners of BTC price action. BTC doesn’t move much. Watching ETH, EOS, and BCH meltdown has to be disconcerting. In crypto, the prisoner’s dilemma is created or enhanced because of the time of year. BTC holders have to be aware of the massive tax loss selling that occur across the crypto universe in Q4. In a twisted irony, lower prices are actually better for the tax loss seller. The bigger the loss, the bigger the loss carry forward to offset gains from an eventual massive rally in the future. So, like the prisoners in the original example, miners and hedge funds have a choice. Miners can hedge the next six months of inventory and slam prices lower, or they can take the risk that 6000 holds and hedge funds aren’t forced to sell BTC. Hedge funds live with the same fear. Miners could start selling and crush price. Big individual holders (whales) could also sell in Q4 and look to buy back later. How did we come to this conclusion? We generated a homemade indicator to see if these two players were indeed
B T C D A I LY C L O S E
(LEF T AXI S)
prisoners of price action. First, we looked at the BTC hash rate (source: Blockchain.com). For the purposes of this exercise, the hash rate represents miners’ view of future prices. Second, we looked at BTC trading volume (source: Coinmarketcap.com). For the purposes of this exercise, volume represents professional investing community’s activity. We assume that high volume implies a positive outlook on future prices. Low volume reflects apathy or P&L destruction. To try to reflect ongoing changes in the various players mood toward the market, we looked at the Hash Rate divided by Volume and then calculated a rolling 30-day change of that ratio. In English, we set up the math to try to measure the change in the moods of the two groups. Looking at a graph, we plotted BTC’s daily close as line plot (black). We also plotted this vs. Dilemma Indicator. Recently, BTC rallies have generated no hope for miners. In fact, we look at the lack of hope as implying that both parties are frozen in the face of the dilemma. Bottom Line: Miners and big holders are holding their breath. If either party blinks and starts selling, it could start a massive negative chain reaction. In BTC, the prisoner’s dilemma and tax loss selling could incentivize selling even at very “low” prices for the balance of Q4.
VS. CIQ PRISONER’S DILEMMA INDICATOR
Source: Blockchain.com, Coinmarketcap.com Data as of 9/12/2018
(R I G H T AXI S )
Where did the money go? Investigating Financial Crimes in Cyberspace
M
constructed on algorithmic apparatus, cryptocurrencies owe their practicality argument to political ambitions.
That practical dimension, however, has nothing to do with money as we know it today. The medium for practical interaction and business could be anything, and cryptocurrencies have indeed hit the mark on that front.
This is the core friction of cyberspace. Unlike old coins that had a stamp on them to refer to the issuing regime, monarch, central bank, whatever, cryptocurrencies come with a mystic and invisible stamp that essentially says “In Math We Trust,” or “Long Live Rationalism.”
oney may seem like a distinctive issue, a practical tool for use in a society. And from a personal point of view, it surely is.
Practicality is a powerful argument in the context of encouraging the popular use of a particular type of money. Who could resist the argument of making things “easier?” However, just like all wars are started with the motivation and rhetoric to make peace, the practicality issue in the context of a financial medium of exchange is essentially a void concept. Despite the popular notion that cryptocurrencies are more moral, natural, and legitimate than other forms of money just because they are
Lack of such a political identity, a stamp or seal attached to cryptocurrency, is important. We’re talking about money here, a core tool of regimes securing their power. It’s why every government since the beginning of time has sought to control the currency of its people. And by making laws about money and criminalizing certain behaviors around it, the powerful have controlled money and the people using it. Until now. continued...
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WHERE DID THE MONEY GO
Some crypto-extremists, who often happen to be also extreme advocates of globalism, claim that there is no authority and no seat of power in the crypto-network. In their hasty fallacy, those extremists fail to consider the essence of power, the essence of criminality and thus also the essence of criminal investigations.
Many legacy law enforcement institutions are worried about the untraceability of cryptocurrencies. They are worried for a good reason because crypto could lead to an eroding of their own power to influence and regulate — and to investigate. Yet, the mythic crypto-regime offers a nice exit for those law enforcement types who are in need: a change of paradigm and embracing the core beliefs and preferences it upholds. It is in essence a Matrixian threat: “my way or the highway”. Two modern “towers of power” in this regard are artificial intelligence and machine learning. Yet, being erected without seals or flags, these towers aim to uphold a collapsing regime of power based on natural sciences, rationalism, and something that became known as “enlightenment.” This makes them the essential tools in criminal investigations. And this is why it is essential, that they show up themselves, among the public, as rational, natural and “just” — as a guillotine did way back when. The essential input or “ingredient” for the towers is data. Machine learning is a data-hungry process. Cryptocurrencies gather immense amounts of data, mostly pseudonymous, yet this is still valuable data. For machine learning, what matters, is patterns and interactions, not identities. This is the essence of profile-based drone-attacks as well. And this was the very case with the guillotine combined with the rule of law. Anonymous, effective, clean and terrifying, this old piece of technology was able to address profiles and crimes instead of persons and deliver accurate enforcement. In the minds of cyber-extremists, an algorithm, fed and satisfied with big data from the crypto-space, can similarly create amazing scenarios that mimic the interactions and behavior from the past. Thus, they can effectively, accurately, and justly address crimes in cyberspace — even before they happen. Just like drones, the guillotine, and the former rule of law. This is the essence of the paradigm shift of law and enforcement in cyberspace. That cyber-regime claims to be universal, yet it depends on data, big data, that it then has the potential to use to form the ultimate beast: a totalitarian state.
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Call f o r Your Tales from t h e Crypto At Crypto.IQ, we think of ourselves as more of a community than just a company. Office banter covers a lot of territory, but it often includes stories of how we got into crypto or things that we have experienced since we got here. We’re hoping some of you might be willing to share your stories as well because crypto is a siren song for many of us. So, tell us how you first encountered crypto and what the path was like that brought you here or something you’ve experienced in crypto that others might find useful, interesting, or funny. Our plan is to give you a byline in the
newsletter when we do publish your story. But we’re happy to publish these without using your name if that suits you better. The only parameters are that this is something of a family publication, so please keep that in mind, and please limit your story to 500 words or fewer. When we publish these, we’ll also sometimes include some of our stories as well, whether they’re how we got into crypto or something that happened to us since we became aware of this world. If you’re interested, drop us a line at cz@crypto.iq and tell us your “ Tales from the Crypto.”
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DISCLOSURE APPENDIX Crypto Insider, LLC, dba Crypto.IQ, is not an investment company, investment advisor or broker/dealer, and does not provide investment advice. The information contained in this report is not intended to be a source of advice or investment analysis with respect to the material presented, and the information contained in this report does not constitute investment advice. The information is intended to be used and must be used for informational purposes only. The information expressed in this report is our opinion and should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Readers should be aware that trading tokens and all other financial instruments involves risk. Past performance is no guarantee of future results, and we make no representation that any reader of this report or any other person will or is likely to achieve similar results. While we have made every attempt to ensure that the information contained in this report is correct, Crypto.IQ is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this report is provided "as is" and without warranty of any kind, express or implied. In no event shall Crypto.IQ be liable to you or anyone else for any decision made or action taken in reliance on the information in this report or for any special, direct, indirect, consequential, or incidental damages or any damages whatsoever, whether in an action of contract, negligence or other tort, arising out of or in connection with this report or the information contained in this report. Crypto.IQ reserves the right to make additions, deletions, or modifications to the contents of this report at any time without prior notice. Recipients of this report should assume that Crypto.IQ may receive compensation from the company or companies that are connected to the subject of this report. We and our affiliates, including persons involved in the preparation of this report, may, from time to time, buy or sell the tokens of the company that is the subject of this report, have a business relationship with and earn tokens or other compensation from the company that is the subject of this report; or have other potential conflicts of interests with respect to any recommendation and related information and opinions contained in this report. Any views or opinions represented in this report are personal and belong solely to Crypto.IQ and do not represent those of people or companies that Crypto.IQ and its affiliates may or may not be associated within a professional or personal capacity, unless explicitly stated. You may not modify or copy any part of this report. Inclusion of any part of this report in another work, whether in printed or electronic or other form, without the express permission of Crypto.IQ is prohibited. By accessing this report, you agree to be bound by and subject to the above disclosures. If you do not agree to be bound by and subject to the above disclosures, you are not authorized to access this report. Now that we’ve made our legal team very happy and gotten the above out of the way (and paid a he y price for it), let us put this in the plainest possible terms. Cryptos are extremely volatile. You can lose all of your investment. Do NOT invest more money than you can afford to lose. There are also a great many risks that are completely outside of our, or anybody else’s, control. Regulatory risk, tax risk, technological risk, act of God risk – you get the point. © 2018 Crypto Insider, LLC.