October 2021

life. money. probability.

PLUS

Make Your Own NFT Rock ‘n’ Roll & UFOs OCTOBER 2021

The FUTURE of the FUTURE of MONEY

It’s Time to Buy Crypto:

Here’s How

CHARLES HOSKINSON plots the next wave of digital currency disruption with CARDANO

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October 2021

The FUTURE of the FUTURE of MONEY 12 ILLUSTRATION: MARK MATCHO

16 Luckbox Leans in with Charles Hoskinson

On bitcoin’s entropy, cardano’s opportunity, the next generation of digital currencies and libertarian ideals.

20 Bitcoin Mining is Spewing Carbon

Producing bitcoins uses as much electricity as the nation of Argentina, but cardano is offering an alternative.

22 Minting Digital Ink

Artists are using NFTs to bring their physical creations online to reach collectors, buyers and sellers.

26 Those Elusive 500% Annual Returns

The changing face of crypto crime, including a recent surge in scam victims.

27 Crypto’s Next Frontier: Decentralized Finance

DeFi aims to solve a big problem with the way people do business with strangers.

30 Crypto Committed

Financier Anthony Scaramucci explains why the bitcoin opportunity isn’t “too good to be true.”

October 2021 | Luckbox

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Enhance Your Mind.

Become a Trader.

TASTYTRADE.COM/LEARN 2110_ELEMENTS_toc.indd 2

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editor in chief ed mckinley managing editor yesenia duran associate editors mike reddy kendall polidori editor at large garrett baldwin Tom DeLonge of Angels & Airwaves sat down with Luckbox before his Lollapalooza performance in August.

p. 38

trends life, luxury & the pursuit of happiness

LIQUID ASSETS

35 America’s Top Bottles

RECORD HIGH

36 Rock Enters a New Age—Again

tactics

actionable trading ideas

CHEAT SHEET

RT INSE

Trading

Crypto

INTERMEDIATE

49 Short Puts to Get Long

MUSIC

38 Punk-rocker Turned UFO Researcher 41 Student Debt THE PREDICTION TRADE

42 An Exchange for Everything

CRYPTO CURRENTLY

DO DILIGENCE

FAKE FINANCIAL NEWS 09 Crypto Riche

TRADER PHOTOGRAPH: KENDALL POLIDORI

63 Aussie Dollar Not Finished Falling

44 Trading Crypto’s Volatility 46 Meet George Michalopoulos 47 October 2021

52 Crypto Charts Really Well— Here’s What They Say

FOREX

NORMAL DEVIATE

CALENDAR

TECHNICIAN

60 Crypto 101: Enroll in the Asset Class

43 Reader Survey

CHERRY PICKS

51 No Crypto?

Consider These Proxies

56 Rising Cardano

SENTIMENT

trades

essential trading strategies

On the cover: Illustration by Mark Matcho

THE LAST PICTURE

64 Bitcoin Bodega

technical editor mike rechenthin contributing editors vonetta logan, tom preston creative directors katherine bryja tim hussey contributing photographer garrett roodbergen editorial director jeff joseph comments, tips & story ideas feedback@luckboxmagazine.com contributor’s guidelines, press releases & editorial inquiries editor@luckboxmagazine.com advertising inquiries advertise@luckboxmagazine.com subscriptions & service support@luckboxmagazine.com media & business inquiries publisher: jeff joseph jj@luckboxmagazine.com Luckbox magazine, a tastytrade publication, is published at 19 N. Sangamon, Chicago, IL 60607 Editorial offices: 312.761.4218 ISSN: 2689-5692 Printed at Lane Press in Vermont luckboxmagazine.com

Luckbox magazine

@luckboxmag 2019 & 2020 Best New Magazine Folio Award for Custom Content

Luckbox magazine content is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities and futures can involve high risk and the loss of any funds invested. luckbox magazine, a brand of tastytrade, Inc., does not provide investment or financial advice or make investment recommendations through its content, financial programming or otherwise. The information provided in luckbox magazine may not be appropriate for all individuals, and is provided without respect to any individual’s financial sophistication, financial situation, investing time horizon or risk tolerance. luckbox magazine and tastytrade are not in the business of executing securities or futures transactions, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. luckbox magazine and tastytrade are not licensed financial advisers, registered investment advisers, or registered broker-dealers. Options, futures and futures options are not suitable for all investors. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any securities or futures transaction or trade. For simplicity, the examples and illustrations in these articles may not include transaction costs. Nothing contained in this magazine constitutes a solicitation, recommendation, endorsement, promotion or offer by tastytrade, or any of its subsidiaries, affiliates or assigns. While luckbox magazine and tastytrade believe that the information contained in luckbox magazine is reliable and make efforts to assure its accuracy, the publisher disclaims responsibility for opinions and representation of facts contained herein. Active investing is not easy, so be careful out there!

October 2021 | Luckbox

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CRYPTO CONTRARIANS Was it ever worth it?

Was there all that much to gain?

Well, we knew we’d missed the boat And we’d already missed the plane We didn’t read the invite We just dance at our own wake All our favorites were a-playing So we could shake, shake, shake, shake, shake —Missed the Boat, Modest Mouse (2007) A recent Gallup poll indicates that 6% of investors are holding or have held bitcoin or some other cryptocurrency—a meaningful uptick from 2% in 2018. Active and sophisticated investors have interpreted the survey—and cryptos’ surging market caps—as evidence that digital currencies are entering the mainstream.

Luckbox readers are out in front of the phenomenon—65% of you have traded or invested in crypto. But that also means a third of you haven’t. This issue is for you.

While Luckbox isn’t prone to pounding the table, we’re urging you to embrace the indisputable reality of cryptocurrency and recognize the genius of the blockchain and inevitability of decentralized finance.

Consider these events of the past month …

In the largest crypto deal to date, the Antigua-based crypto-trading FTX Exchange, led

by Sam Bankman-Fried, raised $900 million to value the company at $18 billion. More than 50 private companies, including Coinbase, Solana and OpenSea, have achieved “unicorn” status by earning a valuation exceeding $1 billion.

Some 50% of institutional investors are already allocating funds to crypto, and 70% plan to invest more, according to a recent

Fidelity Digital Assets survey.

The price of bitcoin climbed nearly 50% in the month before our press date. Other altcoins have climbed much more. In August, Cardano became the third largest cryptocurrency by market cap, rallying more than 100% in a single month and more than 1,400% in the past year.

Digital insiders are hailing Ethereum’s recent London hard fork (EIP-1559) upgrade as a game changer. By removing ether tokens from circulation, the company rendered its crypto a deflationary asset, increased the value of outstanding coins and dramatically reduced transaction fees.

Skeptics note the volatility of cryptocurrencies, irrational investor exuberance and the absence of a rational valuation model. But they’re missing the point and ignoring their own experience.

During the past two decades we have witnessed the dramatic disruption wrought by digital technology. Radical change has come to media, retailing, manufacturing, housing, healthcare, education, communications and transportation. How can the digital transformation of currency be far behind?

Thinking Inside the Luckbox

Luckbox is dedicated to helping active investors achieve skill-derived outlier results.

1 Probability is the key to improving outcomes in the markets and in life.

4

2 Greater market volatility brings greater opportunity for traders and investors.

3 Options are the best vehicle to manage risk and exploit market volatility.

4 Don’t rely on chance. Know your options because luck smiles upon the prepared.

The time has come to determine how, what and when to invest in cryptocurrency. While Bitcoin is the market leader, Ethereum has momentum and Cardano and others look promising. There will be winners and losers.

But the sector itself seems certain to emerge as a winner.

The compelling evidence is right before our eyes. It brings to mind the wisdom of legendary investor Benjamin Graham, who said, “In the short run, the market’s a voting machine, but long-run, it’s a weighing machine.”

Luckbox expects the scale will record new highs for Bitcoin, Ether, Cardano, Solana and others this time next year.

Cast your vote however you choose. But skeptics should take note. Call it a revolution in the exchange of value, the natural outgrowth of technological change or some combination of two, but don’t harbor any doubt that the $100 billion decentralized finance industry will continue to grow prodigiously.

This is not the time for contrarian hunches.

Jeff Joseph Editorial Director

Ed McKinley Editor in Chief

Two ways to send comments, criticism and suggestions to Luckbox Email feedback@luckboxmagazine.com Visit luckboxmagazine.com/survey A new survey every issue.

Luckbox | October 2021

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Open Outcry

Decisively Bullish We asked Luckbox readers their thoughts on the future of digital currencies and their importance as an asset class.

Thinking About Bets I love it! Finished three articles and loved the level of explanation the authors provided. I’m going to read it again. This is the only subscription I have ever wanted enough to pay for in my 55 years of life.

—Dennis Kasabian, Folsom, CA The best issue yet. I’m hoping Vonetta’s (Fake Financial News) story continues. I look forward to reading Annie Duke’s book, which I already bought. I’ve run into the Kelly criterion before but never bothered to dig deep. This was the push I needed.

—Brian Linzy, Wake Forest, NC I appreciate the thematic approach to each issue coupled with diverse opinions and articles that are presented in context with the theme.

—Craig Fassler, Healdsburg, CA Loved it. I always love the mathematical comparisons between trading and gambling.

You need more issues like this one!

—Tony Provenzano, Edmond, OK It was excellent, and this is coming from someone who has been in the sports betting industry for over 20 years. Annie Duke is great, and I’m always glad to see her getting coverage. The article about the Kelly criterion was well thought out and informative— particularly the contrarian critique.

—James Murphy, Denver I actually read Thinking in Bets by Annie Duke years ago. It was a great read and has helped me continue to refine my ability to think in probability rather than certainties.

—Stephen Pendino, Point Pleasant, NJ

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I believe crypto is going to go through the roof in the next 10 years, and I don’t want to be left sitting on the sidelines scratching my head!

—Jennie Amerman, Oakland, CA I am buying and holding for a 10-year plan.

Hoping to accumulate by dollar cost averaging over the next 10 years.

—Rich Diekmann, Holmdel, NJ Crypto is going mainstream—the space is maturing, companies are coming up with innovative use cases constantly, and it’s generally one of the most exciting and interesting segments of the world economy. That crypto now is what the internet was in the early ’90s may be an overused narrative, but I believe it to be correct.

—James Murphy, Denver I am an Ethereum developer and a big believer in the potential of applications that can be built on Ethereum (especially in the DeFi space). Also, EIP-1559 from the recent London Hard fork update implements a feature into Ethereum where transaction fees on the network are burned. For this reason, Ethereum has the potential to be deflationary if network demand increases.

Less supply = rising price.

—Anonymous DeFi and crypto are going to change the financial/monetary world over the next decade. I want some exposure so I can ride that wave.

—Aaron Arel, Austin, TX There’s no turning back now—money has combined with software and the connection will only get deeper and deeper. Accumulating ETH is key to participating in that.

—Brian Linzy, Wake Forest, NC

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SHORT INTEREST

THE FUTURE OF THE FUTURE OF MONEY Paris Hilton brought in around $1.3 million for her NFT series Planet Paris. Nashville-based rockers Kings of Leon made $2 million by selling their latest LP When You See Yourself as an NFT. In less than 20 minutes of being open to the public, Grimes made around $5.8 million off of digital apocalyptic-style art, which featured 10 pieces. DJ/producer Steve Aoki teamed up with 3D designer Antoni Tudisco to create psychedelic audiovisual art, amounting to around $4.2 million. Tampa Bay Buccaneers tight end Rob Gronkowski brought in $1.6 million from five collectible digital trading cards that featured Super Bowl moments.

SEE PAGE 22

[Cryptocurrency] is evolving to be much more than a digital currency, and Silicon Valley sees it as the digital infrastructure atop which the next internet will be built.

—Ezra Klein, New York Times opinion columnist SEE PAGE 12

Will over 225 million Americans be vaccinated for COVID-19 by November 1?

YES: 75¢ NO: 26¢ Will Drake drop Certified Lover Boy by the end of the summer?

YES: 58¢ NO: 43¢ — Binary options markets on the Kalshi events exchange SEE PAGE 42

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Luckbox | October 2021

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1.7 million

Americans became new millionaires last year.

SEE PAGE 9

—Credit Suisse Global Wealth Report

TO UNLOCK A SINGLE BITCOIN, MINERS MUST FEED THEIR MACHINES ABOUT 150,000 KWH, ENOUGH JUICE TO POWER 170 AVERAGE U.S. HOMES FOR A MONTH. —Forbes, August 2021 SEE PAGE 20

CARDANO’S ADA TOKEN IS NOW THE WORLD’S THIRDLARGEST CRYPTOCURRENCY —Bloomberg, August 2021 SEE PAGE 16

“The government has formally and officially come out and informed Congress that these things—Unidentified Aerial Phenomena— are real, and that they’re not ours, and that they seem to be performing … in remarkable ways.”

—Luis Elizondo, former director, Advanced Aerospace Threat Identification Program SEE PAGE 38

MTI, which in November 2020 said it had 260,000 members around the world and 23,000 bitcoins—now worth about $885 million—was placed in final liquidation in June 2021.

—Bloomberg, August 2021

SEE PAGE 26

October 2021 | Luckbox

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FAKE FINANCIAL NEWS

Crypto Riche 1.7 million new millionaires and 56 new billionaires emerged in America in 2020.

Here’s a glimpse of the crypto class.

By Vonetta Logan

A

15,000 people possessed millionaire bitcoin accounts.

Those are approximate counts because analysts gathered the data in February, but bitcoin has undeniably become a major player in the field of alternative assets. Its market cap is approaching $2 trillion, and it accounts for half of the money invested in cryptocurrency.

But don’t get the impression that bitcoin has the cryptocurrency scene all to itself. More than 9,000 cryptocurrencies have crowded into the field, according to the CoinMarketCap website. Some were created in the hope of mass adoption and others came into being as the punchlines of jokes.

Because this issue of Luckbox

As many as 100,000 people have $1 million or more stashed in bitcoin wallets.

is dedicated to all things crypto, it seems appropriate to delve into the world of crypto millionaires.

Are they the new nouveau riche? If you’re hoping for MTV Cribs-style videos of palatial estates, Learjets and more beluga caviar than you can shake a fur coat at, prepare to be underwhelmed. Crypto millionaires are as enigmatic as the blockchain, but several inherent traits have emerged.

First, luck. Just right place, right time luck. This is pure market timing. The second trait: All crypto millionaires are zealots. Fanatical and unwavering in their belief that crypto is superior to gold, fiat money and their ex-wives. And finally, when crypto

IMAGE CREDIT TK

parody Twitter account called @justsaysinmice flags clickbait health articles with headlines like, “Scientists Find Link Between Video Games and Sexual Prowess.” But researchers discovered that trend only in mice. The same nudge and wink apply to the spate of breathless headlines proclaiming the explosion of investors becoming crypto millionaires overnight. Just say “on paper.”

As many as 100,000 people have $1 million or more stashed in bitcoin wallets, according to the cryptocurrency data-tracking firm bitinfocharts. That’s up from just 25,000 bitcoin millionaires three months ago. A year ago, only

October 2021 | Luckbox

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ity to money.” Which explains why, despite his billionaire status, Bankman-Fried lives in a modest Hong Kong apartment with roommates.

The first bitcoin billionaire Sam Bankman-Fried is a 29-yearold crypto billionaire several times over. Sixteen times, if you believe the latest Forbes magazine estimate. According to the Yahoo Finance site, “many of Bankman-Fried’s digital assets are illiquid, of speculative value and just plain weird—his sudden prosperity appears to constitute one of the fastest accumulations of self-made wealth in history.” Bankman-Fried started the Hong Kong-based cryptocurrency futures exchange FTX in 2019.

Yes, that FTX, the one with its name sewn onto MLB uniforms and attached to a new stadium in Miami.

The one that Tom Brady touts.

Journalist Roger Parloff described the enterprise this way for Yahoo: “Last month, FTX— of which Bankman-Fried owns nearly 60%—completed an industry-record $900 million fundraising at an $18 billion valuation.

That valuation was 18 times higher than it had been 17 months earlier, at FTX’s first-round fundraising in February 2020.”

Like most crypto millionaires and billionaires, Bankman-Fried believes in redeploying profits, either into charity or back into crypto ventures. A disciple of “effective altruism,” Bankman-Fried views work merely as a vehicle for funding his altruism.

His mother, Barbara Fried, had this to say: “If you’re earning money for personal consumption, there is a very steep, declining marginal utility of income. After your fifth Porsche, do you really need a sixth?

But if you’re earning money to give it away to charity, there’s no diminishing marginal util-

The O.G. bitcoin kings Tyler and Cameron Winklevoss became infamous because of the way screenwriter and playwright Aaron Sorkin portrayed them in The Social Network, a 2010 film about Facebook. The twins came off as giant brutes hellbent on destroying Mark Zuckerberg.

But when they tried to use their Facebook settlement to become venture capitalists, no one wanted their money (insert sad trombone sound) so they pivoted into becoming the Kings of Crypto.

The dynamic duo doubled down and started the cryptocurrency exchange Gemini in 2014 and later founded Block-Fi. Through their personal accounts and various business ventures, the Winklevii have claimed to manage or own 1% of all the bitcoins in circulation, an estimated 180,000 coins.

Today, Gemini offers trading and support for more than 30 cryptocurrencies and is one of the largest crypto exchanges in the world. In March of this year, Block-Fi raised $350 million at a

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$3 billion valuation. Combined, it’s estimated that the Winklevii’s net worth is close to $6 billion.

Sam Bankman-Fried, 29, is reputedly a crypto billionaire.

The baby-faced bitcoin millionaire Erik Finnman has become famous as the “youngest bitcoin millionaire,” and his life story provides fodder for screenplays. Using $1,000 he got from his Nana, he started investing in bitcoin in 2011 when it was $12! He dropped out of high school at age 15 and made a deal with his parents—if he became a millionaire by the age of 18, then he didn’t have to go to college. Get Timothee Chalamet’s agent on the line—he’s perfect to play this kid Finnman!

But cryptocurrency didn’t actually make Finnman’s fortune. He liquidated his “Nana coins” for $100,000 when bitcoin hit $1,200 and used part of the money to start a video education service called Botangle. He used the rest to take some fancy trips and to finance a meet-and-greet with Reddit co-founder Alexis Ohanian.

Finally, the travel Insta-porn I was searching for.

In another scenario worthy of a Hollywood movie, Finnman sold Botangle in 2015 and the buyer offered him either $100,000 in cash or 300 bitcoins, which at the time were trading for around $200 a coin. Because of his zealous belief in bitcoin, he chose the coins.

Asked how he learned about bitcoin he tells this story: “I was in Washington, D.C., at the Jefferson Memorial. My brother brought me to this protest, and some people got arrested for dancing—like Footloose. Some guy had a bitcoin shirt on. We were in the middle of running from the police, and I asked him what it was. He was like, ‘It’s going to end Wall Street, bro,’ and ran off. That was how I found out about bitcoin. I researched it as soon as I got back and just really

PHOTOGRAPHY: PREVIOUS PAGE (WALLET) SHUTTERSTOCK; (BANKMAN-FRIED) COURTESY OF FTX; (WINKLEVOSS) REUTERS/LUCAS JACKSON/FILE PHOTO

millionaires have funds, as jaredx3 writes on the r/bitcoin subreddit, “most of us take profits into bitcoin, not out of it.”

But let’s start at the top.

Luckbox | October 2021

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PHOTOGRAPHY: PREVIOUS PAGE (WALLET) SHUTTERSTOCK; (BANKMAN-FRIED) COURTESY OF FTX; (WINKLEVOSS) REUTERS/LUCAS JACKSON/FILE PHOTO

Tyler and Cameron Winklevoss at the Met Gala for the opening of “Manus x Machina: Fashion in an Age of Technology.”

saw how great it would be—saw its future.”

Um, can we see if Matt Damon is available to play bitcoin T-shirt guy? Now in his early 20s, Finnman is thinking beyond crypto, making investments in venture funding, a cell phone and other endeavors.

The holy-crap-I’m-glad-this-hada-happy-ending crypto guy Chances are you’ve heard this story: Someone’s brother’s cousin’s roommate’s sister’s boyfriend hit the crypto jackpot. This lucky crypto urban legend is Dan Conway. His first-person account of how he came into his crypto millions literally caused my heart rate alert to chime on my Apple Watch.

As he wrote in Hustle magazine about his visit to a bank branch to withdraw funds: “My voice sped up as I said it: $100k. This represented my family’s entire life savings. It was money my wife and I planned to use to pay for our three kids’ college tuition, our eventual retirement and emergency expenses. I was a middle-aged guy with a family who had never been on the cutting edge

Observers warn of the ever-increasing risk of a Janet Yellen smackdown in crypto town.

of anything. But I was about to bet everything I had on an unproven virtual currency called ethereum.”

Conway wrote about how unhappy he’d been in his corporate job and mused about his addictive personality. “A part of me recognized these thoughts as destructive mania,” he confessed. “My addictive personality had landed me in trouble before—first with alcohol, then with harder drugs. My 12-step sponsor wasn’t going to pat me on the back and say, ‘Go buy that bitcoin, Dan! Sounds like a fantastic plan!’”

This is where I started yelling at my computer. By December of 2016, Conway’s $100,000 investment was worth only $40,000. So what does he do? Get even more zealous!

“Though I was $60k in the hole, my confidence in ethereum was stronger than ever … and it was now at a bargain-basementlevel price,” Conway wrote. “So, I decided to double down. That winter, I borrowed $200k on my home and used it to buy more ETH. I now owned 26,750 ETH total, at an average buy-in of $11.21 per

coin. And I was $300k in the hole.”

This is where I punted my computer into Lake Michigan. But in 2017, things turned around for ethereum, and in a span of four months Conway’s investment was worth $6 million.

“On Jan. 3, 2018, ethereum hit $900; three days later, it passed $1k. Then, over the course of two hours, I sold 11k ETH, the majority of my remaining stack, for $10m,” Conway reported.

Even Conway realizes the role that luck played in his success story. “I banked everything I had on relatively unproven technology and got out at the right time,” he wrote.

“For every story like mine, there are hundreds of others about people who lost it all. I know that could’ve easily been me.”

Crypto isn’t bound by something as strong as the immutable laws of physics. No, it’s more like the Muskian laws of the Wild West.

To the uninitiated, it seems crazy to mortgage your house, cash in your 401(k) plan and risk your kids’ tuition to obtain an asset that fluctuates on the musings of a man who tweets “dank memes,” sold all of his belongings and has more baby mama drama than an episode of Maury.

And there are very real concerns about cryptocurrency—like access and security, environmental effects and the ever-increasing risk of a Janet Yellen smackdown in crypto town. Enthusiasm is great when you’re investing, but be careful that it doesn’t border on zealousness. No one knows what the future holds for crypto, but putting stock in Horatio Alger-like tales of rags-to-crypto can be dangerous.

Engage in the crypto market, but do it with your eyes wide open. For the love of all things Shiba, don’t drain your savings.

Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the Connect the Dots podcast. @vonettalogan

October 2021 | Luckbox

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Luckbox | June/July 2021

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The FUTURE of the FUTURE of MONEY

By Ed McKinley Illustration by Mark Matcho

N

o one can see or touch cryptocurrency, but that’s not stopping it from entering the mainstream. It surpassed a market capitalization of $2.5 trillion this spring after beginning the year at less than $1 trillion.

While it’s uncertain that cryptocurrency can maintain that blistering pace of expansion, continued growth seems assured, according to Sam Bankman-Fried, CEO of FTX, a cryptocurrency exchange, and founder of Alameda Research, a quantitative cryptocurrency trading company.

“A combination of regulatory clarity, community growth and mainstream integrations would be the largest drivers of growth this year,” BankmanFried said.

Retail investors will become more comfortable with cryptocurrency when it’s available through trusted third parties, said Patrick Sells, chief innovation officer at NYDIG, a technology and financial services firm dedicated to bitcoin.

“Our research shows that 81% of respondents would be interested in buying bitcoin through their local bank if it was offered,” Sells observed.

But Bankman-Fried noted that a new version of an old conundrum could stand in the way.

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CRYPTO CURRENTLY

“There’s a chicken and egg problem here: You can’t pay for things with crypto if merchants don’t accept it, but merchants won’t get many crypto payments unless there’s demand from the consumer side,” Bankman-Fried said. “So you have to either work within existing distribution channels or simultaneously get adoption on both sides in order to really grow out network usage.”

That’s beginning to happen as financial institutions provide merchants with better access to cryptocurrency, according to Sells.

“A small business may want to accept payments in bitcoin but is unable to complete such a transaction independently,” Sells maintained. “Now, there’s a growing list of third-party platforms acting as the go-between to facilitate the process of offering centralized treasury services in one interface so as not to disrupt account management.”

Meanwhile, the public is becoming more attuned to cryptocurrency’s potential. Consumers, merchants and potential investors are finding its ethereal nature less intimidating as adoption increases.

That’s because they’re beginning to understand that many cryptocurrencies are protected by blockchains—the software protocols stored on computer networks and filled with information that’s nearly impossible to alter.

They’re realizing blockchains, which can store any type of data, serve as digital ledgers for cryptocurrency transactions.

A bitcoin block, for example, might contain the sender, receiver and the number of bitcoins transferred.

But how does a vigilant retail or institutional investor know a block hasn’t been compromised and falsified?

A unique string of numbers and letters called a “hash” serves as a block’s fingerprint. If a criminal tampers with the information in a block, the hash changes.

Each block contains the hash of each block preceding it in the chain, so modifying a single piece of information

Cryptocurrencies may be the most volatile major asset class ever. changes everything, thus making cryptocurrencies extremely secure.

So, investors feel certain they’re buying something real when they put their faith in cryptocurrency. Prices for the most expensive cryptocurrencies have exploded and imploded and exploded again, creating opportunity for savvy traders and lucky speculators alike.

Bitcoin flipped a total of more than 40% in July from a low of $29,308 to a high of $41,598.

That might make bitcoin the most volatile major asset class ever. But unlike many investment vehicles, cryptocurrency also has political connotations.

It fits the credo of the cypherpunk movement, whose advocates began

History in the Making 1870s

Russian anarchists advocate decentralization

1982

First blockchain protocol published

1980s

Cypherpunks use cryptography to guard privacy

1990s

Digicash signs up 5,000 customers for eCash before ending operations

In the early 1980s, online cryptography pioneer David Chaum wrote the first blockchain protocol and invented eCash, a digital currency. He’s credited with developing blind-signature technology, which ensures privacy for online transactions. His company, DigiCash, supplied payment services to banks in the 1990s.

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networking in the 1980s to spread information on using cryptology to ensure privacy on the internet and to push for political change.

Cryptocurrency’s decentralized nature and relative freedom from government intervention—so far—also coincide with conservative ideals of small government and libertarians’ longing to have virtually no government. It allows the markets to take their own course.

Yet some liberals view cryptocurrency as menacing. If enough citizens used

1998

Developer Wei Dai proposes B-money with similarities to bitcoin

it, governments would lose control of the money supply and thus forfeit the power to expand or contract it at will.

With enough cryptocurrency changing hands, governments would also become powerless to track the movement of funds, leading to difficulties with taxation and roadblocks to fighting crime.

Environmentalists decry bitcoin’s energy consumption, complaining that a single transaction consumes as much energy as a typical household in a developed country uses in a day and a half.

They cite the fact that bitcoin’s mining and transactions combined require as much electricity as some countries, with Ukraine or Finland often mentioned as equivalent users.

1998

Nick Szabo proposes decentralized Bit Gold with a proof-of-work system

2008

Bitcoin proposed in a white paper

2009

Bitcoin launched

A person or persons using the supposedly assumed name Satoshi Nakamoto wrote a paper on bitcoin in 2008 and launched the cryptocurrency the following year. The true identity of bitcoin’s founder remains a mystery, but bitcoin currently reigns as the best-known and most valuable cryptocurrency.

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2000 YEAR-END TOTAL ASSETS (billions)

Cryptocurrency Market Cap 6,044

1500

Estimated number of cryptocurrencies as of May 2021 Source: Statista

1000

500

Source: TradingView

0 2016

2017

2018

But China’s moratorium on bitcoin mining has had no lasting impact on the market. And efforts by miners in other countries to convert to cheaper renewable energy have likewise lessened cryptocurrency carbon emissions.

A more personal, more social aspect of the cryptocurrency story emerges, too. A

2011

10,000 bitcoins are traded for two pizzas—their current value would be $463 million

2013

Ethereum invented by programmer Vitalik Buterin and others

2019

2020

2021

service called Bitbar enables patrons at hundreds of American bars to use bitcoin to buy drinks. When a cocktail’s ready, the bartender calls out the imbiber’s secret alias.

And what better topic of conversation could denizens of a Bitbar establishment choose than the ups, downs and future

2014

Bitcoin exchange Mt. Gox steals 850,000 bitcoins

2015

Cardano founded by Ethereum co-founder Charles Hoskinson

2016

Ethereum introduces ether cryptocurrency

of cryptocurrency? Coming together in such an establishment nurtures the cryptocurrency subculture.

Members of that in-group could go a step farther and take an interest in art that lives in the same sort of blockchain that supports cryptocurrency. Critics have deemed some unique non-fungible tokens to be masterpieces, and they’ve sold for millions of dollars.

So far, nothing’s kept cryptocurrency from climbing to the pinnacle of human endeavor. Could it even take its place among world religions? A writer for Rolling Stone characterized a cryptocurrency conference in Miami as feeling akin to a fringe religious gathering.

That faith in the goodness of cryptocurrency differs starkly from the fear that criminals and terrorists use cryptocurrency to launder dirty money. But the distrust appears at least partly exaggerated. The percentage of cryptocurrency transactions tied to illicit activity remains small, and it’s declining.

It fell from 2.1% of transaction volume in 2019 to 0.34% in 2020.

While cryptocurrency ATMs are popping up around the nation and an increasing number of businesses are beginning to accept cryptocurrency payments, a lot of merchants still decline to honor it.

So, cryptocurrency could accomplish something seldom achieved. It could become nearly all things to all people— and an agent for good, ill or both.

2016

Initial coin offerings (ICOs) provide stock in cryptocurrency startups

2017

Japan legalizes bitcoin

2021

Fortune declares bitcoin mining the world’s most profitable business

Charles Hoskinson founded Cardano, a blockchain platform that reduces energy consumption, and co-founded ethereum, the second-largest cryptocurrency by market capitalization.

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Luckbox Leans in with

Charles Hoskinson

By Jeff Joseph

On bitcoin’s entropy, cardano’s opportunity, the next generation of digital currencies and libertarian ideals

Q A

How did you get started in digital currencies?

I was in the mathematics world and decided to jump from academics into the cryptocurrency space as a miner and a speculator in 2013. Since then, I’ve started three companies, and the one that I’m focused on is Input Output, my current company. I’ve been running that for six years. We built Cardano and have a large portfolio of products and services that we offer—from identity to transformational services to consulting. It’s been a hell of a journey. We’ve grown from two people to 500 people in 52 countries.

Charles Hoskinson, a mathematician and tech entrepreneur, served as founding chairman of the Bitcoin Foundation’s education committee and helped establish the Cryptocurrency Research Group in 2013. He was among the ethereum blockchain’s eight founders but left in 2017 to help start Input Output Hong Kong, or IOHK, with former Ethereum colleague Jeremy Wood. As IOHK’s CEO, Hoskinson is leading the research, design, development and adoption effort to make cardano a mainstream digital currency.

Luckbox caught up with Hoskinson at his farm outside Denver.

You’ve said cryptocurrency has entered its third phase. Where are we in terms of scalability and interoperability?

I created the three generations as a way of explaining where we’ve been, where we’re going and what challenges we face to get to the next level. The first two phases were about proofs of concept and introducing cryptocurrencies to the general public. The third phase is really about adoption. So, Phase 1 was asking if it’s possible to have a decentralized movement of value. Because we’d never figured that out and we’d always needed some trusted third party to sort the whole marketplace out. And that’s what bitcoin delivered to us. That’s a magical, amazing thing.

But the minute that we got it, people started saying, “Well, this is kind of stupid. The only thing I can do is push bitcoin around. I can’t issue my own assets. I can’t do stable coins or lending or insurance.”

And so you needed programmability in the transaction.

You need JavaScript to make that happen. Well, that’s what we did. We created ethereum. And when JavaScript came to the browser, the smart contract came to the blockchain.

Suddenly, you could do peer-to-peer lending and offer insurance and issue assets. That was amazing. The problem is [bitcoin and ethereum] were built to demonstrate the concepts, but the minute you start thinking how these concepts live in the world, you need interoperability.

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What is the importance of interoperability?

Imagine if WiFi was particular to the manufacturer—your Apple phone could connect only to your Apple router. Your Google phone could only connect your Google. It’d be a mess. You’d have to have a different phone for every hotel you went to.

So instead, it’s universal. There’s interoperability. You can be in Iran, Israel, South Korea, Russia, China, America—those countries agree collectively on nothing, but your phone can connect to the WiFi in the hotel lobby in every single one of them. So that’s interoperability. You need that.

Second, these systems were never designed to work at scale, for millions to billions of people. That’s why the transaction fees are so high on ethereum, and bitcoin has historically had those problems. You need scalability so the protocol can grow to billions of people.

And then finally, you have a governance issue.

How do you pay to continue evolving and growing the protocols? Who gets to decide where the protocols go? If you don’t have governance of that, it’s just chaos. Here we’re talking about your voting, your property, financial institutions, regulation, transactional regulation and the movement of trillions of dollars every day.

So, the third generation is really about sorting out the standards for interoperability, how to make a system scale and have a governance layer that evolves with the system so that it can always meet its needs. That’s where we are today, and there are a lot of competitors brutally hitting each other with a lot of great protocol ideas. It’s just like when the internet came out and there were 25 search engines and 25 web browsers. It will consolidate at some point into a collection of standards with winners and losers. Some will become Netscape and some will become Google.

competitive nature of monopolies is usually the undoing of the monopoly in some way.

Where did ethereum come from? It was a project of frustration. All the core founders of ethereum came from the bitcoin space, and they were working to make bitcoin better.

It’s so hard to innovate with bitcoin. No monopolies are sustainable in a fast-evolving technological world, and bitcoin is really showing its age. It operates at a clock rate of only seven transactions per second. It’s horrendously expensive to maintain resources, or resources are ultra scarce. The metadata standards are substandard. There’s no provision for regulation or identity.

You can only do push transactions—like credit card payments.

You can’t do pull transactions, like subscription payments.

There’s no programmability that’s worth anything. It’s very hard to build overlay protocols like lightning or mastercoin.

Cryptocurrencies need interoperability. Imagine if WiFi access was particular to phone manufacturers. You’d need a different phone for everywhere you visit.

What prevents bitcoin from evolving?

Well that’s the lowest entropy state? There’s a tendency when you’re the market leader to slow down and prevent the market from changing because you enjoy your monopoly. We saw this with Microsoft in the 1990s and 2000s. We saw this with IBM and their monopoly. We saw this with Standard Oil and their monopoly. We saw this so many times before. You are superinnovative in the beginning, and that’s what allows you to take over everything. You’re doing something so new.

More Then, once you’re the king, you Hoskinson don’t want anybody else to be king Watch the but you don’t really have to work tastytrade interview too hard. Who’s going to yell at you for sleeping in? The anti-

18

Interoperability is non-existent. Bitcoin is not aware that there’s a world outside of itself. I can go on and on.

So, out of necessity, the industry is building competitors, and at some point those competitors will overtake bitcoin. If you look at bitcoin dominance, it used to be like 80/20—80% of all the value is in bitcoin and then 20% in the entire remainder of the altcoin market. But now, this is one of the few years where all coins collectively are worth more than bitcoin.

You’ve said that a “God Protocol” will never dominate the cryptocurrency scene for long.

That’s right because we don’t have that anywhere in human life.

There isn’t one language, one religion or one gender.

You’ve maintained that Cardano will “eliminate the middleman.” How so?

The concept of disintermediation is a big deal in the cryptocurrency space. We don’t like the idea that one person or a small group of people get to tell you how you should live your life. The whole point of these protocols is very libertarian.

We put you in charge for better or worse. So, on the one hand, you’ve maximized personal freedom. On the other hand, if you lose your private keys you lose your money.

The big evil with the financial markets as they are today is that you don’t get to choose how a lot of stuff works. You don’t

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The Evolution of Cryptocurrency According to Hoskinson, cryptocurrencies have entered the third phase of development, and cardano will emerge—among others—as a dominant digital currency technology.

First Generation BITCOIN Bitcoin, the first successful cryptocurrency, doesn’t require a central bank or a single administrator. But it’s not capable of processing enough transactions simultaneously.

Second Generation ETHEREUM (ETHER) Based on smart contracts and distributed applications (dApps), ethereum eliminates downtime, guards against fraud and wards off third-party interference. It brings programming language to the blockchain and enables users to write smart contracts to use in customizable transactions. But this phase still lacks the bandwidth to sanction millions—or even billions— of users and transactions.

get to choose who’s in control, what regulations you’re under or what compliance regime you’re under. You’re just told this is the way it is.

I was moving a wire transfer from one of my bank accounts to another, and the compliance department froze it. I’m moving money from myself to myself, from one U.S.-regulated financial institution to another U.S.-regulated financial institution. I’m the ultimate beneficial owner of both accounts.

“What the fuck are you doing?” they said. “You have to answer a bunch of questions about compliance before we’ll let this happen.” And I say, “I’m sorry, but who owns the money here? This is my money. I’m not sending it to another person, but to myself.” I don’t want to live in that system, so that’s the point of our industry in general.

But then there’s the question of how you do that. We don’t live in a libertarian utopia. There are governments, there are checks and balances, and there are external people and actors.

There are safety nets, in some cases to protect ourselves from ourselves. So, you need a system that extends beyond ourselves, but I should have a say in how that extension works.

That’s one of the reasons we built cardano. We wanted to create a new financial operating system for the world. We

Third Generation CARDANO & OTHERS This phase is improving the user experience and improving governance by addressing...

Scalability: to accommodate infinite data and transactions Interoperability: to help networks work together by sharing information among blockchains Sustainability: to stay relevant by adapting to changes in technology

wanted to disintermediate what I call the middleman of necessity—not the middleman of value, but the middleman of necessity.

And if you can do those things, you’re transforming the marketplace in such a way that it’s much more efficient. It’s intrinsically global, and it’s inclusive instead of exclusive. And it’s fair that Bill Gates has the same experience as the farmer in Senegal. So then it’s all about merit—the good rise to the top.

Do you think libertarian principles will continue to underpin cryptocurrency as it becomes more commercial?

Well, everybody’s libertarian until an event happens, right? So I don’t really care about the ideological purity of Person X or Y. In this space, the protocols carry the ideology—not the people.

What makes crypto unique is that it is a synthetic law of physics. It’s synthetic gravity. It’s a synthetic, standard model.

Once you set those physics, the world works that way. It’s consistent, even if it’s inconvenient to a particular actor, just like gravity has been very inconvenient to at least one skydiver and one mountain climber at least once in history. Gravity won’t change to accommodate anyone’s whims.

Social systems make exceptions, but crypto doesn’t. And that’s what makes it special.

It’s so hard to innovate with bitcoin. No monopolies are sustainable in a fast-evolving technological world, and bitcoin is really showing its age.

Ludwig von Mises is smiling right now.

Thank you, Charles.

THIS CONVERSATION WAS EDITED LIGHTLY FOR STYLE AND BREVITY.

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Bitcoin Mining is Spewing Carbon

By Ed McKinley

20

A

n energy-efficient cryptocurrency called cardano could help dislodge bitcoin, a notorious electricity junkie, from its position as the world’s premier crypto. The shift in the market would be a meaningful step in the effort to curb the worst effects of climate change.

“You can save 99.95% of the total [cryptocurrency] energy consumption with cardano, and that’s probably still a pessimistic estimate,” said Alex de Vries, a data scientist and economist who runs Digiconomist, a Netherlands-based crusade against what he views as problems with bitcoin.

Or, look at it this way: Cardano is making it possible for cryptocurrency production to evolve in ways that roughly parallel industry’s progression from burning wood to splitting atoms, according to Charles Hoskinson, cardano’s founder.

As of now, mining and trading bitcoins—the most popular and most valuable cryptocurrency—uses more electricity than most nation-states, according to the Cambridge Bitcoin Electricity Consumption Index, an often-quoted source of information compiled by the Cambridge Judge Business School in the United Kingdom.

The school measures electricity consumption in terawatt-hours, or TWh, which translates into using one trillion watts per hour. Researchers there found that bitcoin gobbles up 82.2 TWh annually, while Belgium, a highly developed nation of more than 11 million people, uses 82.1 TWh. Unabated, bitcoin consumption seems likely to continue its climb. At a bitcoin price of $42,000, for example, the network would consume up to 184 TWh annually, producing 90.2 million metric tons of carbon dioxide—as much as the city of London,

PHOTOGRAPH: FREEDMAN / SOPA IMAGES/SIPA USA

Producing bitcoins uses as much electricity as the nation of Argentina, but cardano is offering an alternative

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the Digiconomist Index indicated.

With that index, de Vries seeks to determine whether it costs less to produce a bitcoin than the price a bitcoin will bring. If so, miners have an incentive to mine. The more incentive they have, the more they mine. The more they mine, the more energy they use.

This year’s surge in the price of bitcoin has made mining more profitable and thus increased the cryptocurrency’s energy consumption enough that it may now equal that of all the data centers in the world, the Digiconomist website said.

Musk Sends Bitcoin Reeling In May of this year, a single tweet by billionaire Elon Musk caused the price of bitcoin to decline 15%.

Here’s what he said:

PROOF OF WORK

Although cryptocurrencies swallow up a lot of power for transactions, most of their voluminous energy use comes from a process called proof of work, or PoW. Hal Finney adapted PoW to digital money in 2004. It can also stop computers from sending spam or mounting attacks, according to Investopedia.

“PoW is a decentralized consensus mechanism that requires members of a network to expend effort solving an arbitrary mathematical puzzle to prevent anybody from gaming the system,” the Investopedia website said.

To create cryptocurrency through PoW, people join in what de Vries calls a “massive game of guessing a number.”

They use millions of computers working around the world to produce more than 100 quintillion guesses every second of the day, he said.

“One guesses correctly only on average once every 10 minutes,” he said of bitcoin mining. “And if you guessed correctly, you get to create the next block for the blockchain.

And that’s when you get the reward for it” in the form of units of cryptocurrency.

The miners creating the cryptocurrencies are aware of their energy consumption because they’re paying the electric bill, but traders see the cost reflected only in the price that cryptocurrency can bring. “From a user perspective, it’s kind of an invisible thing going on in the background,” de Vries said of the underlying electricity consumption.

The miners who make a living from PoW have little incentive to change the process, he maintained. “They don’t want to talk about it,” he said of miners’ reactions to his work at Digiconomist. “They don’t want to fix it.”

But it doesn’t have to stay that way.

PROOF OF STAKE

Instead of proving a miner has performed the task of arriving at some arbitrarily chosen number through a

PoW process that some regard as much like playing the lottery, Cardano has developed Proof of Stake, or PoS, to create cryptocurrency.

With PoS, people who own cryptocurrency can create more in proportion to how much they already have.

“So if you own 25% of the supply, on average 25% of the time, you’ll have the right to be in charge of … that part of the system for a period of time,” Hoskinson said. “Now, what does that mean?

That the lottery can be run without any energy expenditure.”

In fact, Cardano executives asserted in a report that “proof-of-stake networks … have been proven to use four million times less power than bitcoin, and Cardano will only ever use the energy equivalent of a family home.”

OBSOLETE DRILL BITS

82.2 TWh

Bitcoin’s annual electricity consumption

82.1 TWh

Belgium’s annual electricity consumption

32nd

Where bitcoin would rank among nations in electricity use

Besides using insane quantities of electricity, bitcoin production requires miners to keep buying updated versions of specialized bitcoin-mining computers.

The first miners simply worked on laptops, but mining now takes dedicated computers costing thousands of dollars each, de Vries said.

Hoskinson compared the bitcoin-only computers to drill bits that become obsolete because someone invents a better one. To keep making a profit, carpenters have to keep buying a new bit every 12 months or so, he said by way of analogy.

It gets worse. Only a couple of manufacturers produce the chips necessary for the bitcoin computers, and demand for those chips has worsened the COVID-induced global chip shortage, de Vries observed.

About three million of the sophisticated machines are operating today, but that number doesn’t say much about how many individual miners are at work because some operations employ multiple computers, de Vries noted.

UNBRIDLED PROLIFERATION

Decentralization also works in Cardano’s favor, Hoskinson argued, because the more the network spreads out, the more opportunity stakeholders have to create more cryptocurrency.

“For example, we start a few hundred validators,” he said. “And then we have over 3,000 state pools, and 3,000 unique entities that run the system. Bitcoin has [fewer] than 10 major mining operations, so we’re 300 times more decentralized.”

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For this tattoo inked in 2018, Brad Wooten aimed to combine an old energetic drawing style with new techniques that separate pattern and virtual value. The NFT of the tattoo, Red VI, was minted in 2021.

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T

PHOTOGRAPH: BRAD WOOTEN

NFTs are enabling artists to sell their physical creations online, providing more avenues for collectors, buyers and sellers

By Kendall Polidori

he past year saw a rise in the sale of art in the form of non-fungible tokens, or NFTs. From $69 million pieces of art to 1% stakes in recorded music rights, NFTs are becoming a new go-to for buying, owning and selling art once obtainable only physically. Now, even tattoos are finding a place in the NFT marketplace.

To refresh the minds of anyone who’s forgotten, as well as those who’ve never known, NFTs are digital signatures of authenticity that people buy, sell or trade. They’re created through blockchains—the same technology that backs cryptocurrency.

It’s a difficult concept to wrap one’s head around, though, in terms of tattoo art: How can something that lives and dies on a person’s skin take the form of an NFT that exists only online?

Until the recent introduction of NFTs in the tattoo industry, tattoos were the only art with no resale value.

Tattoo artists are often paid for their time instead of for their work.

But marketplaces like All Our Best, which features six tattoo artists, enable customers to buy the rights to a tattoo design. It gives tattoos status as a collectible that carries an emotional attachment.

Through the marketplace, artists display their unique styles, and their followers can keep up with what they’re selling as NFTs. People can buy the tattoo design as an NFT and wear it as a tattoo applied by the designer. Or, they can keep the NFT as a collectible and pass it down through the generations to an heir who receives it as a tattoo at some later date. That option introduces a physical aspect to the digital artwork.

Some artists keep it strictly online, though, such as Portland, Oregon-based tattooist Brad Wooten. He’s selling digital photographs of tattoo designs in the form of NFTs on his website. His NFTs are digital art with an authentic signature attached.

In February, Wooten learned of the NFT craze and immediately felt compelled to be one of the first tattoo artists to use the new medium.

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Artists mint NFTs by turning them into a part of the ethereum blockchain as a public ledger.

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Crypto-palooza Leading up to its four-day event in Chicago, Lollapalooza announced its first-ever digital marketplace, which featured NFT collectibles celebrating the festival’s 30th anniversary. The collection highlighted the seven international editions of the festival and notable collaborations with select artists from Chicago’s 2021 lineup, including Steve Aoki and Subtronics.

“This is capturing special moments of people coming back together and is a great way for them to interact with and understand crypto,” said Raj Gokal, COO of Solana Labs.

“We see the inherent value of NFTs when you look at the medium as the future form of collectibles and memorabilia,” said Patrick Dentler, director of marketing at C3 Presents. “Not only when the NFT can capture a moment in time through photo, video or animation, but especially when you get creative with add-on items like tickets or access, there’s a world of possibility around festivals and live music experiences.”

The Lollapalooza NFT marketplace will serve as an extension to the online merchandise store and will test the value of NFTs when bundled with future festival ticket sales and line-up announcements.

process of the whole design, probably with some time-lapse video and some of the original data overlaid.”

Wooten recommends that other artists use NFTs only if they’re interested in bitcoin and other cryptocurrencies.

He’s learning more about them every day because of his faith in NFTs. He has plenty of finished artwork to turn into NFTs and plans to move slowly so he can perfect his approach.

“I haven’t had NFTs on my mind when I’m doing video production, but now that I do, it opens up so many possibilities,” he said. “It’s such a new medium, you can literally do anything you want. There are no rules.”

Typically on display on the walls of a tattoo shop or arrayed in binders filled with images, flash tattoos are pre-made designs looked to as options or inspiration for clients.

PHOTOGRAPH: (WOOTEN) BRAD WOOTEN; (AOKI) SETH BROWARNIK/STARTRAKSPHOTO.COM/COVER IMAGES

“I’m interested in the format … I mean, an NFT can really be anything,” Wooten told Luckbox. “I was trying to find my own way into it, and I’m interested in doing exclusively NFT artwork.”

Working in an industry that banks on physical application, Wooten found himself trying to throw together a way to relate Brad Wooten started minting NFTs tattoos to NFTs and began in early 2021. applying to different platforms for distribution. But the process is intense and long, so he turned to free platforms, such as Rarible, where it’s as easy as having a browser wallet and high-resolution photo ready to upload.

So far, Wooten has created four NFTs, selling two within 24 hours for $50 each. He began with tattoos he had done on clients and “creatively manipulated them into something more exotic that you can’t really post on a tattoo portfolio,” he said.

Incorporating NFTs into a portfolio brings in more royalties and helps artists reach multiple platforms, Wooten said. But for him, it’s not about getting rich from a manipulated photo. It’s about creating high-quality art and reaching clients who dwell in the crypto world.

“I guess there’s something that just feels authentic— everyone believes in money,” Wooten said of transforming tattoos into NFTs. NFTs interest artists because they can use the medium just about any way they please. Wooten, for example, sets the price of his NFTs at whatever amount accounts for the cost it takes to mint the creation. If a buyer resells one of his designs, he receives a 12% royalty—repeatedly if it continues to sell.

As with any artist riding the NFT wave, Wooten wonders about copyright for NFTs because his creations are photographs of tattoos he inked on people’s skin. To mitigate risk, he first offers the NFTs to the clients he tattooed before making them available to anyone else. But for the two that sold so far, the buyers were unknown.

Wooten differs from the artists connected to All Our Best because he’s not selling flash tattoos or designs, and he’s not offering to tattoo on the NFT buyer.

“When I design something, I design over a photo of the [client] and fit it onto their body and do all kinds of extra steps once they get there to really tighten and tailor it to their body,” Wooten said. “So, I imagined my NFTs going the other way, basically just sort of taking something and exploring the

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COOKING UP AN NFT Non-fungible tokens, or NFTs, have garnered a lot of attention in recent months. In the first half of 2021 alone more than $2.5 billion in NFT sales volume has exchanged hands, up from $13.7 million in the first half of 2020.

So, what gives? What are NFTs, and how does one create, buy or sell them?

Put simply, NFTs are assets—predominantly digital ones—that are minted and stored on a blockchain, effectively making them unique and scarce. Only one person can claim ownership of any given NFT, and all ownership records are public.

They come in various forms, from photos and videos to music and video games to just about anything in-between—including tokenized real-world assets. One way to think of an NFT is as a digitally stored collectible.

Intrigued by the prospect of the burgeoning NFT marketplace, the editors at Luckbox decided to make one. What follows is the recipe used to create that NFT, as well as a guide for adding NFTs to any interested investor’s portfolio. — M IK E RE D D Y

PREPARATION TIME <One day YIELD One NFT INGREDIENTS 1 t angible or digital asset to turn into an NFT 1 ethereum cryptocurrency wallet 1 ethereum-powered NFT marketplace account to list the NFT $25-$80 (estimated) worth of ethereum to cover fees The Luckbox NFT

STEP 1 Decide what to make into an NFT

STEP 2 Decide which blockchain is right for the NFT

The first step in making an NFT is deciding what to turn into one. Artwork is among the most popular categories of NFTs on marketplaces, but other categories include music, domain names, collectibles and trading cards.

While NFTs exist predominantly in digital form, they can be linked to physical assets as well.

In those cases, the owner of the NFT can redeem it for the delivery of the physical goods.

Luckbox created an alternative digital rendering of its debut April 2019 issue cover for its NFT.

Different blockchains have different token standards, require different crypto wallets and power different NFT marketplaces.

Ethereum is by far the most popular blockchain for NFTs, but others, such as Tron and Tezos, have also been gaining traction.

Luckbox opted for the ethereum blockchain for its NFT because of its size, popularity and familiarity among cryptocurrency traders.

STEP 3 Make an ethereum wallet and an NFT marketplace account Cryptocurrency is essential for buying or listing NFTs, so that necessitates having a cryptocurrency wallet— or a digital place to store some crypto.

Because Luckbox opted to mint its NFT with the ethereum blockchain, an ethereum wallet was needed. Worth noting, not all NFT marketplaces support the same blockchains, so Luckbox needed to find one based in ethereum.

OpenSea, Rarible and Mintable are among the most popular ethereum-powered NFT marketplaces—OpenSea being the largest. For that reason, Luckbox decided to go with OpenSea, which offers seamless integration with the MetaMask ethereum wallet and web browser extension.

STEP 4 Mint and list the NFT on the marketplace

STEP 5 Finished! Now wait for offers

On OpenSea, minting an NFT is as simple as clicking the “Create” button. Doing so will prompt linking the MetaMask wallet to the OpenSea account. Then, upload the asset and create a description for it.

Once created, list the NFT on the marketplace.

NFTs can be sold on OpenSea for a set price, in an auction or as part of a bundle of other assets.

Listing the NFT may incur a network congestion fee, known as a “gas” fee, which will vary at different times.

When Luckbox listed its NFT on OpenSea, the gas fee was roughly $60.

While waiting, explore other listings on the marketplace.

Placing bids for NFTs, or buying them outright, should feel familiar to anyone who has shopped on eBay—with the distinction of using cryptocurrency.

More NFTs Make, and own, Luckbox history

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CRYPTO CURRENTLY

Those Elusive 500% Annual Returns

By Mike Reddy Luckbox’s April 2020 issue, Darknet Diaries, took aim at the criminal underground operating within the anonymous, encrypted underbelly of the internet’s deep web.

There, drug dealers use e-commerce sites to peddle their wares, ill-gotten gains are laundered with ease, scams target the pocketbooks of unsuspecting web surfers and terrorism finds financiers.

Because it’s often thought of as anonymous and thus untraceable, cryptocurrency became the dominant medium of exchange for such operations—within the deep web as well as transcending its surface. But in practice, crypto is more pseudonymous than anonymous. In fact, crypto is traceable and transparent if the authorities can match wallet IDs with their owners.

Hence, blockchain analysis companies, such as Chainalysis, can quantify criminal crypto activity. In its latest study, The 2021 Crypto Crime Report, the firm sheds light on the evolving face of crypto crime, including a recent surge in scam victims.

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ith a $100 minimum deposit of bitcoin, investors could purportedly take advantage of state-of-the-art artificial intelligence-powered trading software to rake in guaranteed returns of 0.5% daily, amounting to as much as 500% annually.

If that sounds fishy, it should. It was the sales pitch for 2020’s largest cryptocurrency scam, conducted by South African fraudsters under the banner of “Mirror Trading International,” or MTI. In total, MTI collected as much as $589 million Illicit activity from more than 471,000 deposits, according to represented 0.34% blockchain analysis company Chainalysis. With of all cryptocurrency that many deposits, the scheme’s too-good-to-betransaction volume in 2020, or $10 billion in true promises suckered victims believed to number transfers. in the hundreds of thousands.

Scams like MTI’s represent the highest-grossing The number of individual form of cryptocurrency-based crime worldwide, payments to scam according to Chainalysis’ 2021 Crypto Crime Report. addresses rose from more than 5 million in 2019 Although scam revenues declined from around $9 to 7.3 million in 2020, billion in 2019 to just under $2.7 billion in 2020, the suggesting the number of number of payments—consequently suggesting the scam victims rose by more number of victims—increased more than 48%. than 48%.

So, what happened to MTI? It didn’t take long before scam allegations grew loud enough to Scams accounted for most cryptocurrencyattract regulators’ attention. related crime, at First came a cease-and-desist order from 54% of illicit activity, the Texas State Securities Board accusing MTI representing roughly of directing a multi-level marketing scam and $2.6 billion worth of cryptocurrency received. operating in Texas without a license. Then, South Africa’s Financial Sector Conduct Authority (FSCA) stepped in with similar accusations, announcing a formal investigation into the company and urging investors to withdraw their funds.

But before FSCA’s could conclude its investigation, a South African hacker group called Anonymous ZA published leaked MTI data exposing security vulnerabilities and bonuses paid to 63 profiles categorized as “founders.” Those profiles, representing 0.038% of all users, received as much as 4.7% of all bonus revenues paid to MTI members.

The jig was up.

In the following months, the home of two MTI principals was raided and the FSCA’s investigation uncovered unreported losses and missing bitcoins. MTI’s CEO, Johann Steynberg, disappeared from South Africa. Like much of the bitcoin fronted by MTI investors, Steynberg remains missing at press time.

The FBI joined forces with South African liquidators to recover funds for U.S. investors, but Steynberg, like much of the bitcoin fronted by MTI’s investors.

Tales from the Africrypt South Africa was home to the biggest cryptocurrency scam of 2020 with Mirror Trading International, or MTI. But the country has already outdone itself in 2021 to the tune of $3.6 billion—more than all of 2020’s crypto scams combined.

In a story similar to MTI’s, the founders of cryptocurrency investment platform Africrypt vanished along with investors’ bitcoin. They left not long after Africrypt Chief Operating Officer Ameer Cajee announced to clients in April that the company had been hacked.

A law firm’s investigation discovered the company’s pooled funds had been tumbled and mixed to make them virtually untraceable. If never recovered, the crypto lost to the Africrypt scam is three times greater than that lost to MTI. Source: The Chainalysis 2021 Crypto Crime Report

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Crypto’s Next Frontier: Decentralized Finance

By Mark Helfman

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hile many think of cryptocurrency as a way to make money or move it around, entrepreneurs and developers have started using the technology to solve problems with financial and commercial systems.

Some aim to rebuild the internet, others want to create frameworks for securing property rights, and a few choose to solve esoteric problems related to voting, data collection, prediction markets and other similarly obscure topics.

Over the past few years, a lot of time and effort have gone into decentralized finance, aka “DeFi,” which aims to solve a big problem with the way people do business with strangers, namely, they need someone to guarantee that the other person does what he or she agrees to do. Usually that role falls to banks, settlement companies and other intermediaries with a financial interest in seeing the deal go through.

This is the essence of finance: Multiple parties deal with one broker who settles the deal to everybody’s satisfaction.

In the legacy financial system, that process takes time and money. It also opens up opportunities for mistakes, fraud, data breaches, corruption, extortion and theft. Each step adds risk, cost and complexity.

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CRYPTO CURRENTLY

DEFI TO THE RESCUE

With DeFi, computer protocols handle all of the steps involved in traditional finance. These protocols use cryptocurrency as the unit of account and the means of settling transactions and enforcing the rules. They work for everybody regardless of their location or circumstances—not just because the rules work all the time but also because it’s impossible to make the protocols do anything but follow the rules.

As a result, this technology promises to make borrowing and lending less expensive, put more idle assets into productive use, simplify the transfer of intellectual property and ownership rights, and give the poor and unbanked better access to financial markets.

Eventually.

For now, it suffers from the same problems all early-stage technologies face: It’s buggy, complicated and hard to use.

FINANCIAL INCLUSION

With DeFi, everybody can lend, borrow, create liquidity pools and investment funds, and participate in yield-producing activities. Already, DeFi platforms have serviced tens of billions of dollars in financial transactions.

To use the platforms, investors simply need a cryptocurrency wallet and a token that’s programmed to work with the platform. They don’t need to know anybody. They just need to download the right app.

There’s no way to turn anyone away from these platforms. The code will not judge how they’re dressed, what they look like, what accent they have or how much money they make. As long as they have the means to secure a loan, they can borrow any amount the protocol allows.

As long as they have assets to offer, their money’s always good.

Anyone can also create financial products by using the protocols as building blocks. Insiders compare this to Lego bricks—stack them or arrange them to serve any purpose.

To expand access to credit and finance, no one any longer needs to fight the

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system. They can simply build a new one. All they need is a laptop, an internet connection and a little know-how.

LOWER COSTS

For anybody willing to take a little time to learn how to use DeFi applications, the advantages become clear pretty quickly. With no middlemen or extra steps driving up costs, developers can create borrowing, lending and savings options that seem impossible with the traditional financial system.

For example, a savings account with Anchor Protocol generates up to 20% in stable interest each year with no minimum deposits and almost no fees ($1.42 in early August).

To oversimplify a bit, Anchor accomplishes that by incentivizing arbitrage in lending markets and using a separate cryptocurrency to boost yields.

Both the deposit and interest are denominated in U.S. dollars via a specialized cryptocurrency pegged to the value of a dollar.

Other protocols can generate even larger returns.

Borrowing costs can sometimes go lower than savings rates, depending on market conditions and the specific

risks remain individual, not systemic.

A cascade of liquidations can wipe out borrowers, but those liquidations will appear in the protocol’s vaults or will be distributed to other members of the network.

In other words, these protocols present tremendous risks to the individuals who use them but not to the financial systems they’re built on.

Or so we think.

THEORETICALLY SOUND

That’s nice in theory, but DeFi is a new and unproven technology. It has existed for only a few years. Some of the most robust and active protocols are less than two years old. Who’s to say they will work the way their users expect?

They also come with a steep learning curve. It can be tricky enough to buy cryptocurrency, and it’s even trickier to use a cryptocurrency wallet. Interacting with a smart contract? Forget about it.

Worse, almost every DeFi protocol has suffered a hack or failure that led to funds stolen or assets liquidated.

Take, for example, Thorchain, a protocol that enables anybody to exchange any digital asset for any other.

DeFi platforms have serviced tens of billions of dollars in financial transactions. protocols of each cryptocurrency, which differ from one platform to another.

At times, borrowing and lending rates make it advantageous to borrow against existing holdings and deposit that borrowed money into a savings account.

That may seem like exotic financial engineering, and there’s some truth to that. But anybody can participate, not just the well-connected.

In any event, the markets adjust and such advantages usually disappear fairly quickly.

Because these protocols demand users borrow less than their collateral, the

If it succeeds, it will serve as the global settlement layer for the exchange of all property that can get recorded digitally.

Ambitious? Yes. And fraught with risk.

Thorchain is a work in progress by an anonymous network of collaborators, developers, community leaders and advocates. While the work happens in public, the team’s identities remain private.

Already, the protocol has fallen victim to at least four breaches significant enough to pause some or all of the platform’s functionality. In the most recent attack, somebody hijacked

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Decentralized finance (commonly referred to as DeFi) is based on blockchains and does not rely on central financial intermediaries such as brokerages, exchanges or banks to offer traditional financial instruments. Instead it uses smart contracts on blockchains, most commonly ethereum.

BENEFITS Tamper resistantance

Fully transparent network

Highly programmable architecture

Permissionless access

Interoperable design

User empowerment

DECENTRALIZED FINANCE TECHNOLOGY USE CASES Asset management Enables users to buy, sell, transfer, stake and earn interest on digital assets

Data analysis and risk management Helps analyze data for risk assessment and reduction

Infrastructure development Offers users the tools to develop, integrate and compile multiple blockchains

$8 million in cryptocurrency. Considering the platform holds only about $100 million worth of assets, that’s no small sum.

Worse, the hackers proved they could have stolen the remaining $92 million but chose not to as a lesson to the team.

Other attacks stole an additional $5 million from Thorchain users.

Centralized Finance (CeFi) exchanges act as an intermediary to manage the crypto transactions and activities of users.

Decentralized Finance (DeFi) exchanges eliminate the need for a third party to control the activities of users. Thus, technology can take over and enable users to manage their transactions.

While Thorchain’s treasury policy covered all losses, one can hardly expect billions of dollars of transaction volume to flow across a platform that can get hijacked seemingly at will.

Perhaps that will change with new iterations and other improvements, but Thorchain is closer to the norm than the exception.

Digital identity Offers portable selfsovereign identity that users find secure and private

Insurance Provides automated insurance claims, secures audits and reduces paperwork

In August, hackers stole more than $600 million from Poly Network, a DeFi bridge protocol. Since last year, hacks against platforms that include dYdX, Harvest Finance, Balancer, Aave, Akropolis, Pickle Finance, Warp Finance, Origin Protocol and almost every other DeFi platform, have led to hundreds of millions of dollars in other losses.

But it’s not just hacks and exploits that pose risks to users. Sometimes, the protocols simply fail.

During the global financial panic of March 2020, the MakerDAO protocol liquidated almost all of its balance sheet.

Prices fell so fast that the immutable rules of the protocol forced all borrowers to either add collateral or forfeit their funds. Most borrowers could not act fast enough to cover their positions, so the protocol wiped them out.

Think of the debacle as the ultimate margin call.

REGULATORY NIGHTMARE

Let’s not forget the legal side of things.

With DeFi, algorithms enforce the protocols. Humans have no say in the matter.

So, who’s responsible for the results?

When protocols fail, should developers be held accountable? Or does that

responsibility fall on users who don’t have any control over the programs?

What happens if the code fails or someone hacks it to defraud its users?

What if a network flaw results in a loss of funds? In the real world, people can sue somebody for damages or try to recover losses. How does one sue a computer protocol? Can the courts subpoena a smart contract? Do developers have some safe harbor or an expectation of “caveat imperator?”

Should anyone even have a right to seek compensation? They used a technology that has no owner or counterparty. At what point does the blame fall on them?

What about tax reporting? Computer algorithms don’t generate 1099s, and the value of their related cryptocurrencies changes all the time. In any event, all the participants live in different places with different rules. Whose rules do they have to follow?

Governments certainly want to know who’s moving money and where it’s going. How far can they go to find that information? Should governments force users to disclose personal data on public blockchains? Can they compel developers to build know-your-customer and anti-money-laundering features into application interfaces? At what point does that infringe on privacy rights or personal security?

CLARITY WILL COME

For all its potential, DeFi will need a lot of time before it can replace the traditional financial system.

If history is a guide, this process will take years. It took the internet 13 years to move from plain text bulletin boards to the worldwide web, and it took even longer for microchips to yield desktop computers.

DeFi went from concept to reality in roughly two years. It will take a lot longer to do the things its proponents claim it will—though probably not as long as some skeptics might think.

Mark Helfman, author of Bitcoin or Bust: Wall Street’s Entry Into Cryptocurrency, edits and publishes the Crypto Is Easy newsletter at markhelfman.com. @mkhelfman

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CRYPTO CURRENTLY

By Jeff Joseph

inancier Anthony Scaramucci was well known among Wall Streeters and hedge fund insiders before he burst upon the national stage as White House communications director in July 2017. A scant 11 days after taking the job he was fired for dressing down a Washington Post reporter.

Now, Scaramucci is pounding the table for a different reason.

Since December, his firm Skybridge Capital has been among the institutional investment firms allocating significant funding to digital assets. Scaramucci’s investment thesis hinges on supply and demand considerations, Fed monetary policy, stimulus payments and fiscal spending as the critical catalysts advancing cryptocurrency prices.

Scaramucci’s fifth book, The Sweet Life with Bitcoin: How I Stopped Worrying about Cryptocurrency and You Should Too! is scheduled for publication this month. He’s granted Luckbox

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PHOTOGRAPH: DEBORAH COPAKEN

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permission to become the first periodical to excerpt passages. He also sat down with Luckbox to provide insight into his upbeat cryptoinvestment outlook.

You’ve identified two themes that support your bullish cryptocurrency investment thesis. One is mainstream and institutional adoption. The other is the liquidity that the Fed and government stimulus is providing by printing money and through fiscal spending. Has anything changed in that outlook?

Yes, to the upside. I’m surprised by the proliferation of digital merchandise, NFTs and digital art. I’m also surprised by the volume of digital applications, known as dApp’s, that are in use right now around ethereum.

I see bitcoin more as a collectible commodity. Its use case to me could be as a store of value or currency. It doesn’t have to become a full-fledged currency. It could just be a store of value and still produce tremendous success f or investors.

It’s way bigger than I initially thought it was. When I first got our clients into bitcoin, there were probably 70 million users, and there are 125 million today, with 46 million in the U.S. I agree with [CEO of Ark Invest] Cathie Wood that there will be one billion users of bitcoin by the end of 2025.

Will there be enough bitcoins for that many investors?

I’ve been on The Street a long time, and I know that supply and demand do matter.

If you’ve got a billion users, and you’ve got 18 million coins left, and there are 49 million global millionaires—according to JP Morgan’s research—then we don’t have enough bitcoins for each millionaire in the world to own one.

Yes, it’s a supply-demand thesis. It’s printing money. And people say, “Well, you know, what you’re saying is too good to be true.” I tell them that as investors, when someone tells you something’s too good to be true, run.

But there are things that are too good to be true. Look at [bitcoin detractors] Charlie Munger or Warren Buffett. Their performance is too good to be true. If you gave them $10,000 50 years ago, you’d have half a billion dollars now. Is that too good to be true? How about Amazon?

If I put $10,000 into the IPO in 1987, I would have $21 million now. Is that too good to be true?

200 other countries, so it’s not going to zero. To the contrary, I liked seeing Gary Gensler [chairman of the U.S Securities and Exchange Commission] more-orless saying that he wants to regulate it, and he wants to make it part of the financial system.

Some outspoken senators are beginning to recognize that there are 46 million people who own bitcoins

Cryptocurrency’s happening with or without you.

Whether you like it, or I like it, or Charlie Munger likes it and Warren Buffet hates it, fine. I don’t care. It’s happening with or without you, so I would rather understand it. And I would rather get my clients conditioned for it so that they can say, “This guy offered me good advice.” That’s our job: to analyze and curate investments for people.

Have you modeled the regulatory risk for bitcoin?

Let’s look at the extremes. The United States bans bitcoin tonight. Bitcoin is considered property, right? The IRS has ruled that bitcoin is an intangible.

So when somebody suggests that U.S. regulators are going to ban bitcoin, they are going to have to abrogate 250 years of property rights in the United States. They are going to have to explain to people and the courts that this piece of property that I own and pay taxes on is intangible. That’s going to be tough to prove.

So, I throw out the Armageddon scenario. The country’s really in a lot of trouble if you’re now ripping up 250 years of legal precedent, and corporate and commercial contracts. They are not going to be able to completely ban bitcoin. So the question is, are you going to be able to use it? And are they going to overtax it? Are they going to overregulate it? That’s where the issue is.

Remember that if you can use it in the United States and China, there are

in the U.S. Despite everything Sen. Elizabeth Warren [D-Mass.] has said about bitcoin in the past, she’s now saying, “Wait a minute, I’m a progressive.

Bitcoin is addressing the inequity of the underbanked.” Bitcoin is going to increase transactional activity for people who should not be charged transaction fees or 19% interest, so even Warren is softening on it.

Is there any event or milestone that might signify a new level of adoption by institutional investors?

That’s a great question. At the beginning of the year, myself included, people thought there’s going to be huge institutional adoption. This past December, MassMutual [the Massachusetts Mutual Insurance Co.] made an announcement that they own $100 million in bitcoins, which is now worth $200 million.

Recently, Larry Fink [CEO of the BlackRock investment management company] mentioned on CNBC that he is not sensing strong client interest in bitcoin. He is not saying he doesn’t own a little bit of it. He says he does.

He’s just saying the demand isn’t mainstream yet.

But when Fink goes on the [CNBC television show] Squawk Box and says he’s seeing interest among his clients, that’s going to be one of the seminal moments. He’s the Big Kahuna.

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CRYPTO CURRENTLY

Nakamoto’s New Era

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Terms like “mining” and “proof of work” are essential for cryptocurrency literacy. In his latest book, Anthony Scaramucci simplifies the complex and explains why his firm now wholly embraces bitcoin 32

n Oct. 31, 2008, a link to an eightpage white paper written by Satoshi Nakamoto titled “Bitcoin: A Peerto-Peer Electronic Cash System” was posted to a cryptography mailing list. No one had ever heard the name Satoshi Nakamoto before.

Who is Nakamoto? His paper contained only an email address and a link to a website called bitcoin. org, a domain registered without fanfare in August 2008. The author was a mystery, and no one at bitcoin.org would ever come forward.

“The ramifications of the creation of Bitcoin are so profound for both economics and computer science that Nakamoto should rightly be the first person to qualify for both a Nobel prize in Economics and the Turing award,” wrote respected software engineer and economist Vijay Boyapati.

What Nakamoto proposed in his white paper was as elegant as it was revolutionary: “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”

Let’s take a second to pick this apart. The paper describes a way for two parties to exchange money without a bank, material goods, or a government backing its worth. Replacing the “trust” granted to a currency with “cryptographic proof” means the network is protected by complex computer algorithms that verify the sanctity of the transaction.

The paper gave birth to a new concept—the coin.

“We define an electronic coin as a chain of digital signatures,” it stated. “Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership.”

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This record of transactions is what people mean by “blockchain.” We’ll get to the ins and outs of “blocks” and hashes in a minute, but for now what’s important is that bitcoin is built to secure the money’s uniqueness, a system that is maintained not by a mint but across computers that are linked in a peer-to-peer network.

Earlier forms of bitcoin emerged in the ’90s.

They were like Myspace to Facebook, or Yahoo or Ask Jeeves to Google. Most were tied to a corporation and therefore doomed to fail.

But Nakamoto knew the world needed a standardized currency that policymakers and politicians can’t control. For cryptocurrency to thrive, it has to be decentralized.

What does decentralization mean? Bitcoin operates without a central bank or single administrator. Instead, it relies on a collective; everyone keeps an eye on everyone else. No one needs to “trust” anyone else because cryptohardened protocols ensure transactions are transparent and secure.

To create an army of independent validators, Nakamoto established another rule: Anyone who can verify one megabyte’s worth of bitcoin transactions—an amount known as a “block”—is rewarded with bitcoins. Those who answer the call are known as bitcoin miners.

Miners are paid for working as auditors verifying the legitimacy of bitcoin transactions.

By verifying transactions, miners form the bulwark against the big enemy of any currency: the “double-spending problem.”

If someone can spend the same bitcoin more than once, it would be worthless. Think about two 20-dollar bills with the same serial numbers— obviously one is counterfeit. The miners’ verification process assures transactions are legitimate. They provide a vital service, while trying to “win the block” and thus get closer to receiving a bitcoin reward.

To win the block, a miner must find the correct 64-digit hexadecimal number called a “hash” before any other miner does. (Actually, it doesn’t have to be exact, but close.) This process is also known as “proof of work” (PoW). It’s basically guesswork—something like spinning the dials on lots of locks at the same time to find the right combinations. The number of possible guesses for each hash is in the trillions.

Miners aren’t using supercomputers to solve complex equations, but mining still requires prodigious computing power. This is by design. As Nakamoto puts it: “Once the Central Processing Unit effort has been expended to make it satisfy

the proof-of-work, the block cannot be changed without redoing the work. As later blocks are chained after it, the work to change the block would include redoing all the blocks after it.”

That brings the discussion to nodes, the backbone of the bitcoin system. Nodes are geographically distributed computers that host and synchronize a copy of the entire bitcoin blockchain. It’s a group effort—anyone can download and run the software on dedicated bitcoin-mining computers, forming a voluntary network that gets stronger as it grows. Miners have to receive confirmation that they have derived the answer from a minimum of six nodes in order to win their block. Some nodes also prevent attempts to double-spend bitcoins by accepting transactions and blocks from other nodes, authenticating them, and then relaying them to other nodes to scrutinize.

What Nakamoto proposed in his white paper was as elegant as it was revolutionary.

Unlike mining, operating a node doesn’t earn rewards. Individuals and institutions alike volunteer to form this peer-to-peer network.

It doesn’t take a lot of computing power to run a node, and about 40,000 computers are now running the required software to validate bitcoin transactions. It’s a digital reflection of the worldwide community of bitcoin believers.

The node system is the very definition of decentralization. With tens of thousands of independent gatekeepers, spread all over the planet, overwhelming or compromising the system is impossible. Blockchain verification means bitcoins can be guaranteed in a transparent way and with mathematical certainty. “Using cryptographic signatures, the owner of a bitcoin can publicly prove she owns the bitcoins she says she does,” Boyapati said.

On Jan. 3, 2009, Nakamoto mined the genesis block of bitcoin, Block No. Zero, which had a reward of 50 bitcoins. A new era had begun, and few noticed.

This excerpt from The Sweet Life with Bitcoin: How I Stopped Worrying about Cryptocurrency and You Should Too! by Anthony Scaramucci was edited for brevity.

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trends life, luxury & the pursuit of happiness

LIQUID ASSETS

America’s Top Bottles A whiskey and a tequila that will raise your spirits

By Jeff Joseph

PHOTOGRAPH: GARRETT ROODBERGEN

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pirits sales in the United States rose 1.3% in 2020 despite pandemic-induced lockdowns, according to the Distilled Spirits Council, an industry trade group.

While the sale of $10-and-below bottles declined, sales in the $115-$170 range grew by 7.3%, and high-end bottles (priced $170 and above) grew by 12.7%—making it the fastest-growing segment of the $1 trillion global market.

While brown spirits continue to maintain their sales momentum, tequilas and mezcals represent new leadership in the super-premium category. Proud of our palette, Luckbox shares tasting notes on two top-shelf favorites.

Flecha Azul Extra Añejo Tequilla

Benriach Speyside Single Malt Scotch Whisky

100% agave baked in traditional brick ovens then aged in exbourbon American oak barrels.

Decadent and full-bodied.

Benriach’s artistic approach to maturation layers bourbon, sherry, red wine and virgin oak cask finishes. Rich and complex.

Price: $329 Proof: 80 Age: 3 years

Price: $199 Proof: 92 Age: 21 years

Taste: Full and balanced blend of oak, vanilla and almond Finish: Light citrus, subtle sweetness

Taste: Lush berries, spiced oak and caramelized honey Finish: Cacoa, red wine, sherry and smoke

5 out of 5

4.5 out of 5

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trends

FESTIVALS

Rock Enters a New Age—Again Rap, hip-hop and pop are dominating the music industry these days, but rockers say their genre is just in a down cycle

festival artists directly reflect the numbers.

More than 30% of all on-demand audio and video streams in the U.S. last year were of tracks recorded by R&B and hip-hop artists, according to MRC and Billboard 2020 data.

The R&B/hip-hop category claimed more than a third of all plays, at 33.9%. For audio streams, R&B/hip-hop accounted for 30.7% of on-demand plays, and across audio and video streams combined, it claimed 31.1%.

So, what does it all mean for rock artists?

The first Lollapalooza lineup in 1991 was

By Kendall Polidori

B

ack in the ‘90s when Blink-182 was touring on angsty albums like Cheshire Cat and Dude Ranch, singer and guitarist Tom DeLonge would spend weeks on end in the back of a van, dirty and getting into fights with random people. Today, traveling with his space-rock band Angels & Airwaves, DeLonge noted that it doesn’t look quite the same as it used to for punk-rock bands—for a multitude of reasons that are easier to explain by saying, “We’re in a new era.”

Musicians are bringing back guitars, angst and soul ...

That’s rock ‘n’ roll.

During an interview with Luckbox before his July Lollapalooza performance in Chicago, DeLonge said rock goes through cycles. These days, rap/hip-hop and pop artists dominate the U.S. music industry, with rap/hip-hop the moststreamed genre, according to 2020 MRC data.

But rock remains the second most-streamed music genre with 16.3% of on-demand audio streams last year. Pop was behind it with 13.1%.

However, the streaming numbers are driven by golden oldies performers like Queen (929,000 streams), Elton John (743,000), Fleetwood Mac (721,000), Creedence Clearwater Revival and John Fogerty (630,000), and Journey (561,000).

For today’s festivals, headliners are undeniably chosen for their streaming numbers

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Angels & Airwaves returned to live music with their first in-person show since before the pandemic when they played the Lake Shore Stage in July at Lollapalooza in Chicago.

and popularity. At Lollapalooza this year, the only obtainable classic rock artist with high streaming numbers was Journey, and they headlined one day of the show.

With rap/hip-hop holding the No. 1 spot for most-streamed music genre, featured

made up of artists grounded in alternative rock, industrial music and rap: Siouxsie and the Banshees, Nine Inch Nails, and Ice-T and the Body Count. For a few years, the festival maintained musical acts within those three genres but has gradually expanded to embrace

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PHOTOGRAPHY: (LOLLAPALOOZA) ASHLEY OSBORN; (ANGELS & AIRWAVES) JONATHAN WEINER; (POST ANIMAL) POONEH GHANA

trends

the moment’s most popular music and artists, hence choosing artists with high streaming numbers and the most attention on social media platforms such as TikTok. But, that’s not to say the festival lineup doesn’t cater to music-discovery lovers looking for smaller indie bands, such as Post Animal, ROOKIE, Mt. Joy, Whitney, Dayglow and Neal Francis. The fest also featured renowned rock bands like the Foo Fighters, Black Pistol Fire, Modest Mouse and Band of Horses.

As a veteran rocker himself, DeLonge said rock has changed because of how it’s recorded. In the days of “classic rock” bands like Led Zeppelin, The Rolling Stones and Pink Floyd, music was recorded to have a raw, live sound. Now, artists pay more attention to how a song sounds digitally.

“Back then, classic rock was recording reel to reel—analog,” DeLonge said. “So you had to write songs together, practice those parts, and then you all come in and record them delicately on analog tape. With computers, I don’t know anybody that writes in a room together and practices it.”

The accessibility of computers and editing software has made it easy for just about anyone to write a catchy song—but DeLonge questions what’s behind much of today’s music: Who the people are, where they’re from, what they’re trying to say or if they even have anything to say.

“It seems to me like everyone is starting to notice that there are a lot of hollow catchy songs out there,” he said. “I feel like this is the beginning of bringing guitars back, bringing angst back, bringing back something that has a soul, that has a reason for existing and a point of view that’s worth listening to. And that’s rock ‘n’ roll—that’s our job, right?”

DeLonge’s not alone in his nostalgia. All five members of Chicago-based indie psychedelic rock band Post Animal said they would like to see more rock acts at festivals like Lollapalooza, but with the evolution of music comes the evolution of headlining names.

Like DeLonge, the Post boys agree that rock is cyclical—phasing in and out of popularity.

Now, with a few years of touring and recording behind them, the members of Post Animal believe rock is making a comeback, but in a new way. The band grew a loyal following by touring in a van across the U.S. playing fast and heavy garage rock—a sound that surely inspired a few mosh pits. But, as with their most recent album Forward Motion Godyssey,

Angels & Airwaves released LIFEFORMS in September, seven years after their last full-length album.

which illuminates experimental synths reminiscent of those on Pink Floyd’s The Dark Side of the Moon album, they’re willing to evolve.

The band has always appreciated other genres and sounds, and members felt it was time to try something new—as there’s only so much musicians can do before falling into the black hole of psychedelic rock, unable to write anything with range. They consider themselves a live band, though, noting that they don’t make music for streaming but instead

make it for people to hear at live shows.

“We embrace the spectrum of modern rock,” the band members agreed. “We really do think there are a lot of people listening to rock music and rock bands, but maybe they’re not using the same platforms to listen to their music.”

According to 2020 MRC data, rock music had 19.2% of total album-equivalent consumption by format for physical albums, or vinyl records, whereas R&B/hip-hop only had 3.7% of total album consumption from physical sales.

Max Loebman, singer and guitarist for Chicago-based rock band ROOKIE, said most rock fans buy vinyl over streaming because that’s the point of rock—getting as close as possible to the imperfect and authentic sound. He doesn’t feel slighted as a rock artist, despite higher demand for rap/hip-hop artists at festivals, because there’s always a space and place for any genre of music.

With bands like The Black Keys, Foo Fighters and Greta Van Fleet playing large arena shows, Loebman said it’s hard to say that rock is dying. Instead, it’s just surviving in a new way.

For Angels & Airwaves, DeLonge acknowledged that the band’s sound does not plug into the way the market is right now. He said Pearl Jam still operates that way today—they roll into a town on tour and play a stadium show.

But hardly anyone is aware they play stadiums.

“No one’s talking about it, it’s not on the radio stations and there’s no posters,” DeLonge said of the band’s stadium gigs. “But everyone that was there is like, ‘That was the best show ever.’ That’s a really cool place to aim for, where you’ve built something that’s on your own terms.”

STREAMING DOLLARS Chicago-based psych-rock band Post Animal took to the Tito’s Handmade Vodka stage in July during Chicago’s Lollapalooza festival. .

Recorded music produced an estimated revenue of $12.2 BILLION in the United States last year, up 9.2% from the year before.

Streaming accounted for $10.1 BILLION, which was 83% of the total and 13.4% higher year-over-year. Physical music sales of $1.1 BILLION were just 9% of total revenue, while vinyl records earned $626 MILLION or 5.2% of the total.

October 2021 | Luckbox

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trends

RECORD HIGH

Punk-rocker Turned UFO Researcher

By Kendall Polidori

He’s not just a musician, and Angels & Airwaves is not just a band— Tom DeLonge creates and educates through ‘psychic warfare’

L

ike any other punk rock kid hanging out in a garage and making music about broken homes with buddies who also came from broken homes, Tom DeLonge couldn’t care less what people thought of him. For photo shoots, he sported only boxer briefs and sometimes not even those. He ran around vandalizing whatever he pleased and pining after girls.

38

Though DeLonge’s obviously matured over the years, when he walked into a dimly lit Chicago hotel lobby for an interview with Luckbox before his Lollapalooza set, he was wearing a wrinkled navy blue tee, jeans and a red trucker hat. He had an iced tea in hand, and it was evident he was not the same person he was back then. He looked like a dad—a regular guy—which is exactly

who he is and wants to be.

When DeLonge left Blink-182 in 2005, none of his fans quite understood why. Here was a punk rocker known for making sex jokes onstage and running around naked in music videos suddenly starting a new band with a mantra of Love.

“I knew back then everyone was going to think this was the stupidest thing—they didn’t understand,”

PHOTOGRAPH BY KENDALL POLIDORI

Tom DeLonge opened up about punk music, human kind and what it means to be a good person during an interview with Luckbox.

Luckbox | October 2021

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IMAGE CREDIT TK

DeLonge said before taking the stage with his band Angels & Airwaves. “It wasn’t normal for a punk rock kind of thing to have that, but that’s why I wanted to do it.”

Back in 2005, DeLonge finally had a vision for what his new band project was meant to be but said it took up until two years ago for it to really click with people. On the band’s most recent tour in 2019, the fanbase seemed to grow significantly, and now DeLonge and the other members of the band are able to present themselves in a way they always wanted to.

“It’s cool to be a good person, to have love in your heart and treat people with respect,” he said. “It’s an energy thing. It’s a conscious thing.

It’s a physics thing. So my goal with Angels is to get people to understand that being self-aware and improving the lives of others around you, literally is a physics-level fundamental expression of us as human beings.”

DeLonge describes what he is

“People will not fucking believe what went down.

I mean, they just can’t even grasp it. It’s gonna scare a lot of people … a lot is coming, and it’s going to change the world.”

doing as his own version of psychic warfare to make being a genuinely good person not so taboo, which includes managing his company, To The Stars Academy of Arts & Sciences (TTSA), a research development and media center for science and technology.

Through the company and its subsidiary, To The Stars Inc., DeLonge and his team have published books, produced documentaries, started a podcast and most notably have confronted government officials, pushing them to release the results of their UFO research.

Even before the Adventure of Angels & Airwaves, DeLonge was screaming at Blink-182 fans that Aliens Exist and obviously was not taken seriously. His personal research down the UFO rabbit hole started with simple curiosity and grew significantly as he found out more. Soon, it became impossible to resist.

But it wasn’t until 2017 that his work was highly recognized.

That’s when he received the UFO Researcher of the Year Award. Then in 2019 some of his findings were substantiated: The Navy confirmed that videos released by TTSA did indeed capture likenesses of UAPs (Unidentified Aerial Phenomena).

That same year, a New York Times article titled “Glowing Auras And ‘Black Money’: The Pentagon’s Mysterious U.F.O. Program” prompted skeptics to take another look at what DeLonge was shouting into the void for years.

More reports are surfacing because of DeLonge’s efforts to inform people. Earlier this year, the Pentagon released the Preliminary Assessment: Unidentified Aerial Phenomena Report, which DeLonge traces to his team’s effort to set up briefings in Congress and at intelligence agencies.

The report represents the most direct U.S. government account of

IN THE BLINK OF AN EYE 1992

Blink-182 forms in Poway, California.

1999

Blink-182 releases platinumselling album Dude Ranch.

2005

Blink-182 goes on hiatus.

Angels & Airwaves is formed.

2006

Angels & Airwaves releases debut album We Don’t Need To Whisper.

2015

DeLonge assembles a team to pursue government data on UFO findings.

2017

To The Stars Academy of Arts & Science (TTSA) launches with three divisions: science, technology and entertainment. The company is composed of scientists, engineers and creatives.

2021 (SEPT) Angels & Airwaves releases LIFEFORMS album.

October 2021 | Luckbox

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trends

what officials call UAPs ever made public. It lists five possible explanations for UAPs but still states that researchers don’t know what the UAPs were.

Not speaking for his team or company, DeLonge said he personally believes the government knows a lot more than the most recent UAP report suggests. It states that one possible explanation for UAPs is they’re technologies deployed by “China, Russia, another nation or a non-governmental entity.”

He knows a lot that most people don’t, and he focuses on telling stories in a digestible way through To The Stars books and films.

But much of what he knows is classified and what he can “expose” is limited.

“People will not fucking believe what went down,” DeLonge said.

“I mean, they just LIFEFORMS, was can’t even grasp it. It’s released in September. going to scare a lot of The album returns people, and so we just to DeLonge’s garage have to go step-by-step. punk origins with heavy It’s going to change guitars and speedy More DeLonge interludes. It diverges the world.”

Tom’s latest from How much? “These from his later synth-foLIFEFORMS are giant games that are cused space rock to get dealing with consciousfaster and more angsty. ness and the social engineering of DeLonge writes music for himself, mankind,” he insisted. not for the radio or to fit a streamIt’s difficult not to question how ing algorithm. With LIFEFORMS someone who came of age as a punk he uses what he’s learned over the rocker and skateboarder would go years to take a hard look at humanon to research UFOs, but DeLonge kind and how lives intersect.

“I go through life now knowing— has a sense of wonder that leads him down many paths. not wondering—that my mindset The point of Angels & Airwaves and my vibration will affect every was to produce work through multi- single thing around me, from my media platforms, and he has been health to the people around me doing just that. After incubating for that I love, to the art that I create,” three years, the band’s sixth album, DeLonge said.

Listen Here Truth or Skepticism

Tom Sosnoff, entrepreneur, options trader and co-CEO of tastytrade, joins Dylan Ratigan, businessman, author and former host of MSNBC’s The Dylan Ratigan Show, for a weekly podcast covering everything from sports and investing to politics and monetary policy. One’s an iconoclast, and the other’s a contrarian. Tune in each week find out who is who.

It’s unscripted and unpretentious—some like to think of it as rants, but refined.

The Prediction Trade

If you can trade it, or bet on it, you can bet they will talk about it on The Prediction Trade—the only podcast for gamblers, traders, investors, math freaks, data geeks and superforecasters devoted to the intersection of probability, prediction and profit. Each episode features expert guests with proprietary forecasting models and insights into the outcomes of prediction market events. So whether you live to bet or bet to live, check out the next episode of The Prediction Trade.

Truth or Skepticism and The Prediction Trade are available on your favorite podcast platform.

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trends

SENTIMENT

SHOULD AMERICA FORGIVE STUDENT DEBT? INTELLIGENCE SQUARED has pitted some of the world’s brightest thinkers against each other in debates. It was founded in London in 2002 with the mission of promoting intellectual diversity by

51% 31% 18% FOR

AGAINST

UNDECIDED

–AUDIENCE OPINION BEFORE THE DEBATE

fostering respect for differing opinions.

The debates are organized in the traditional Oxford style. The side that convinces more audience members to embrace its arguments wins.

The excerpts below came from a debate

STUDENT BORROWERS ARE IN DEBT FOR AN AVERAGE OF

$39,351

conducted in March on whether the United States

–EDUCATIONDATA.ORG

should forgive student debt.

AGAINST

FOR

IMAGE CREDIT TK

$30,030

THE AVERAGE AMOUNT BORROWED BY A PUBLIC UNIVERSITY STUDENT TO ATTAIN A BACHELOR’S DEGREE

HARRINGTON: Congress has already given the president the authority to direct the secretary of education to cancel student debt. President Biden can cancel student debt on his own using the same authority that Donald Trump used last year when he canceled student debt payments and waived interest. And Joe Biden used that same authority this year when he extended that pause. But more is needed. We are at a place in this economy and in our country that is unprecedented. So, there has to be a solution that is bold and meets the moment.

GILLESPIE: About 56% of people who graduate with a B.A. have some student loans. At current interest rates for federal student loans, to pay back in 10 years, that works out to about $275 a month. What happens with that? When you go to college, you increase your lifetime earnings somewhere between $250,000 to $ 1 million. It is a smart move to go to college, and it is a smart move to take out $28,800 in order to do it because you’re going to be making so much more money.

JIMENEZ: We want people with education. They’re less likely to be involved in criminal issues. They pay more in taxes. They’re more engaged in political and civic life. We need an educated public. But it’s wrong to support higher education by forcing students who couldn’t afford it to take out loans. We made a mistake. And as tuition has soared and we told young people they need to go get a degree or multiple degrees to succeed, that’s what they’ve done.

And yet, here we are, with $1.7 trillion in student debt, and it’s continuing to rise with no end in sight.

AKERS: More than half of the outstanding student loan balance in the economy today is held by people who are in the top 40% of the income distribution. What that means is that if we were to forgive this debt, this would be a hugely regressive policy. Yes, people with low income would benefit. But people with high income would actually benefit statistically much more. To me, that’s a very poor way of crafting a solution.

Ashley Harrington federal advocacy director and senior counsel, Center for Responsible Lending

Nick Gillespie editor-at-large, Reason

Dalié Jiménez student loan law initiative director and professor, University of California’s Irvine School of Law

Beth Akers resident scholar, American Enterprise Institute

More Debate See who won the debate

October 2021 | Luckbox

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THE PREDICTION TRADE

Kalshi: The Exchange for Everything Investing in the outcome of events is nothing new, but this federally regulated events exchange is

By Mike Reddy

42

Trading Commission, Kalshi officially launched in public beta this July. And as the close Arabic translation of its name implies, Kalshi’s market topics transcend just politics.

“The beta, we think of it as a ramp-up period as we’re getting all these pieces of the puzzle running together,” Mansour said on the Luckbox podcast The Prediction Trade. “But this is real. This is real trading—it’s open for anyone now.”

Visitors to the exchange are met with broad market categories spanning climate, economics, world events, COVID-19, politics, transportation and even entertainment.

Think a recession will hit this year?

There’s a market for that. Will it rain in Seattle on Friday? There’s a market for that, too.

“This is just the beginning,” Lopes Lara noted. “We’re going to expand a lot from the contracts that are currently there.”

At press time, 40 markets were active with trading volume on Kalshi. The exchange operates with a self-imposed downside exposure limit, or the most one could lose, of $25,000 per market. And that limit, Mansour said, will be increasing over time.

Also likely to increase are Kalshi’s trading hours. The exchange currently operates from 8 a.m. to 10 p.m. Eastern Time seven days a week, already a novelty among equities markets. But the goal, according

Kalshi co-founders Tarek Mansour, left, and Luana Lopes Lara, right.

to the co-founders, is to get as close to 24 hours—minus regular maintenance time—as possible.

Presently, all of Kalshi’s markets are structured like binary options, meaning traders invest in either “Yes” or “No” shares to a market question. The share prices reflect market sentiment toward a given outcome and are valued at a fraction of a dollar.

After a result is determined and a market is settled, incorrect shares become worthless and correct shares pay out for a dollar—not including fees, which Mansour said average between 1% and 2%.

While it’s too early to tell what impact Kalshi will have on the field of professional forecasting, expectations by its founders are high. Event contracts, Mansour said, represent a new asset class more human and accessible than any that preceded it.

“People understand events,” he said. “They understand financials a little bit less so. And, for us, it’s the natural next step in this sort of continuum—one that can really bring in the masses, anyone, into trading on their interests.”

Think a recession will hit this year? There’s a market for that.

Will it rain in Seattle on Friday?

There’s a market for that, too.

More Kalshi The Prediction Trade podcast interview

PHOTOGRAPH: COURTESY OF KALSHI

L

ongtime Luckbox readers are well aware of the educational and financial benefits of reliable forecasting. From the political prediction markets of PredictIt to the leaderboards of Good Judgment Open, bragging rights and profits abound for those with a prophetic edge.

But exceptional seers often face challenges when attempting to turn prognostication into full-blown occupations—or merely a consistent source of supplemental income. In return for unhindered operation, prediction markets in the United States are typically constrained by strict regulatory no-action letters that, among other drawbacks, drastically limit traders’ bet sizes and therefore their potential profits.

The political prediction market PredictIt, for instance, must adhere to a 5,000-trader limit on any given contract within a market, and each trader may invest no more than $850 per contract.

The predictive landscape is changing, however, thanks to two recent MIT grads. Tarek Mansour and Luana Lopes Lara co-founded the first-ever federally regulated events exchange in Kalshi, which derives its name from a similar pronunciation of the word “everything” in Arabic.

After a long and challenging two-and-a-half-year approval process with the Commodity Futures

Luckbox | October 2021

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trends

SENTIMENT

Digital Literacy

L

uckbox readers are ahead of the curve when it comes to investing in bitcoin.

A Gallup panel conducted in June defines U.S. investors as “adults with $10,000 or more invested in stocks, bonds or mutual funds, either within or outside a retirement fund.” Among the investors polled, only 6% owned bitcoin.

Meanwhile, nearly 58% of Luckbox readers indicated in a survey that they currently own cryptocurrency. Some 87% of them have or have had bitcoin in their portfolios.

3/5 1/5

ARE BULLISH ABOUT THE FUTURE OF CRYPTOCURRENCIES

ARE BEARISH

65%  35% 30% TOP 5 2/3 MOST-HELD HAVE TRADED OR INVESTED IN CRYPTO

HAVE NOT

OF READERS NOT CURRENTLY

INVESTED IN CRYPTOCURRENCY THE NEXT

MONTHS

SAY LONG-TERM CAPITAL GROWTH PROSPECTS IS THEIR MAIN REASON FOR INVESTING IN CRYPTOCURRENCIES

20%

SAY THEY HAVE CONFIDENCE IN THE ASSET CLASS

CRYP TOCURRENCIES

AMONG LUCKBOX

READERS



12 60%

PLAN TO INVEST IN IT WITHIN

BITCOIN ETHEREUM LITECOIN DOGECOIN CARDANO

AREN’T KNOWLEDGEABLE ABOUT NFTS

77% OF READERS AGES 18-49 HAVE TRADED OR INVESTED IN CRYPTOCURRENCIES

60% OF READERS AGES 50+ HAVE TRADED OR INVESTED IN THEM

—Luckbox Reader Survey

October 2021 | Luckbox

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THE NORMAL DEVIATE

Trading Digital Currency’s Volatility Dramatic price swings—both up and down— make cryptocurrencies risky but potentially lucrative

By Tom Preston

V

olatility. Without it, the world would be pretty dull. It’s what makes cryptocurrencies so appealing to traders and so frightening to regulators. Dramatic price swings—both up and down— make cryptos some of the most volatile assets around.

But volatility breeds risk as well as rewards.

Traders look at the big rallies and crashes in bitcoin or ethereum, for example, and see large potential profits that could reward taking risk. Regulators sees risk in cryptos upending traditional government-controlled currencies versus a mountain of potential tax revenues.

They’re both right.

But “risk” is a meaningless term if it can’t be quantified, and volatility is what quantifies risk. In the trading world, implied volatility— derived from options prices and in conjunction with the normal distribution—indicates the probability that the price of a stock, bond, future or even a cryptocurrency will be above or below some level in the future. That’s powerful and potentially profitable knowledge.

Most cryptos, though, don’t have options. Bitcoin futures on the Chicago Mercantile Exchange have options, but they’re not very actively traded. A few crypto options exist on other exchanges, but there isn’t broad participation

44

by retail or institutional traders.

The more people trading a product’s options, the better. Specifically, bid/ask spreads tighten, and that generates a more accurate implied vol. Feeding an accurate implied volatility into the probability model, in turn, generates more accurate estimates of future price changes.

The absence of options on, or active trading in, a particular asset is why proxies are used. For example, if a new index was created for big cap stocks but it didn’t have options on it yet, the volatility of the SPX (it being an index of big cap stocks) might be used to quantify the probabilities around how high or low that new index might go in the future. Applying that to cryptocurrencies, traders can use bitcoin’s options to estimate potential price moves. Sure, bitcoin options aren’t very actively traded, but their bid/ask spreads are tight enough to make the implied volatility of their options useful.

Also, many of the cryptocurrencies like bitcoin, ethereum, litecoin, polkadot and OmiseGo are correlated to each other. When one goes up they all tend to go up, and vice versa. That’s why bitcoin options could be used as an implied volatility proxy. Bitcoin options have an overall implied volatility of about 99%. It’s safe to assume that the other cryptos might have

Top 10 cryptos to trade Consider the calculated historical volatility for the top 10 cryptos by market cap and compared with the S&P 500.

Name

2021 Average Historical Volatility

Bitcoin

84.5%

Ethereum

112.4%

Cardano

132.5%

Binance Coin

146.8%

XRP

162.0%

Dogecoin

318.4%

Polkadot

143.5%

Solana

164.5%

Uniswap

153.7%

Terra

170.7%

S&P 500

12.3%

implied vols—if they had options— around 99%. The implied vols wouldn’t be 20% or 300%, for example. Even if the implied volatility of the other cryptos was higher or lower, the probabilities would not be dramatically different. For example, with bitcoin at $45,000, the probability that it’s above $35,000 in 45 days is 72% with implied volatility at 99%. If the implied volatility were 79%, the probability would be 79%, and if the implied volatility were 119%, the probability would be 66%. Different, yes, but close enough that using bitcoin as a proxy is much better than guess-

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ing. Sure, cryptos are volatile, but they still obey the laws of the probability gods.

Cryptos had significant rallies this past summer. Bitcoin, ethereum, titan coin, litecoin, polkadot and gemini all had jumps of 50% or more from late July to the middle of August. In three weeks this past summer, from July 20 to Aug. 10, bitcoin rallied up over 50%. Even with a 92% implied volatility in July, which means large moves are statistically more likely, that 50% was the equivalent of 2.43 standard deviations. The probability of bitcoin doing that was less than 1%—only 0.75% to be precise. Ethereum was up 70%. Using bitcoin’s 92% implied volatility as a proxy, ethereum’s rally was the equivalent of 3.17 standard deviations. That’s big.

Everyone recognizes the big

2110_TRENDS_normal deviate.indd 45

Sure, cryptos are volatile, but they still obey the laws of the probability gods.

potential risks and rewards of trading cryptos. But more volatility often begets more trading activity. And trading activity is the lifeblood of exchanges. So, instead of waiting to trade cryptocurrency options, try trading a proxy like crypto exchange COIN, which has moved along with those cryptocurrencies.

COIN has its own options—which are actively traded—and has implied vol. Between July 20 and Aug. 10, COIN rallied 20%, the equivalent of 1.28 standard deviations based on its 65% implied vol.

If cryptocurrencies themselves aren’t to traders’ liking and they still want to play in that arena, COIN options provide a way to do that. What’s interesting about COIN options is that out-of-the-money calls are often trading well above equidistant out-of-the-money puts.

For example, with COIN trading at $260, the 270 calls with 49 days to expiration were trading for $16.80, while the 250 puts in the same expiration were trading for $14.70. That extra premium in the calls is an indication the market anticipates a rally in COIN. If a trader agreed with the market and thought COIN might rally, buying an at-the-money call with a 260 strike and selling the 270 call is a bullish long call vertical. Selling that 270 strike call at a relatively high price reduces the cost of buying the 260 call and reduces the debit and risk of that long call vertically.

That’s just one way to think about while trading crypto.

Tom Preston, Luckbox contributing editor, is the purveyor of all things probabilitybased and the poster boy for a standard normal deviate. @fittypercent

8/26/21 12:42 PM

trends

1

1 Messaging app, browser, email 2 Trading charts

TRADER

3 Self-healing cutting mat 4 Large reflective ball bearing

5

5 Tools 6 Headphones

2

6

4

3

GEORGE MICHALOPOULOS

Title

Crypto trader and portfolio manager Home/Office location

Miami Beach, Florida

What percentage of your outcomes do you attribute to luck?

100%. It’s the process of structuring a portfolio to harness chance that introduces skill. An individual outcome is always out of your control.

Age

38

Years trading

15

Favorite trading moment?

Massive asymmetric payoffs via well-identified trades around recent changes or new information that the market suddenly catches up to.

How did you start trading?

FAVORITE TRADING BOOK Soros on Soros: Staying Ahead of the Curve

By George Soros Wiley, 1st edition (1995) Paperback, 336 pages $28, Amazon

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Originally during the tech stock boom in the early 2000s while still in high school, but professionally at Citadel after graduating from university. (Citadel is a hedge fund and market maker).

Favorite trading strategy for what you trade most?

Gamma and vega around stocks, bonds and energy.

Average number of trades per day?

Four

Worst trading moment?

Slowly bleeding on a position over an extended period of time.

Tell us about your approach to trading cryptocurrencies.

Disciplined, non-dogmatic portfolio management using options, futures and underlying coins. Constructing a well-defined thesis and exit strategy a priori.

Protecting the left tail/massive drawdowns in exchange for giving up some of the right tail.

Luckbox | October 2021

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trends

CALENDAR

OCTOBER

1-2 & 8-10 Austin City Limits Music Festival

4 National Vodka Day

6-7 Women in Tech, Media and Finance (WTF) Summit

Virtual

13 Enterprise Blockchain Day

13-14 World Blockchain Summit Dubai, UAE

19-20 NFT.NYC 2021

22-24 Shaky Knees Music Festival Atlanta

24-27 Money 20/20 Conference

Las Vegas

26 M LB World Series begins

28-29 Crypto Valley Conference Switzerland

31 Halloween

National Vodka Day Contrary to popular belief, vodka didn’t originate in Russia. It was created in Poland as early as the 8th century, with variations emerging later from Russia and Sweden. People originally drank it for medicinal purposes—moderate intake of the drink helps arteries stay healthy, can mitigate high fevers, reduces bad breath and toothaches, and assists with hair growth.

The clear, distilled alcohol is composed mainly of water and ethanol and is traditionally made by distilling liquid from fermented cereal grains. It contains about 90 calories per shot, making it the favored drink for those not looking to up their daily calorie intake. It can rejuvenate the skin when diluted with water and applied with a cloth or towel to the face. A neutral drink, vodka can be enjoyed in a variety of ways, whether it’s as a straight shot, the basis for a mixed drink or an ingredient in Jell-O. In 2020, 76.9 million nine-liter cases of vodka were sold in the U.S., generating $6.9 billion in revenue for distillers, according to the Distilled Spirits Council of the United States. The world’s biggest-selling vodka is Smirnoff. More than 23 million cases were sold in 2020.

Money 20/20 Money 20/20 was founded in 2012 and has expanded its reach to become a global conference. It returns to Las Vegas this year for a reimagined in-person gathering and will feature keynote speakers from the payments and banking industry. Luckbox will be there.

PHOTOGRAPH: (CONFERENCE) REUTERS

31-Nov. 1 CryptoCon 2021 Phoenix

CryptoCon 2021 The conference for cryptocurrency, NFTs, mining and investing returns inperson this year in Phoenix. For two days, attendees can view exhibitions and talk with experts in cryptocurrency—or sit back and enjoy panel discussions.

The conference offers four ticket options, and it’s open to people in all stages of the crypto world. Newcomers will learn how to get started with cryptocurrency by setting up their own wallets and making their first purchase.

For those unable to attend, 10,000 tickets will be available for a live telecast of the conference.

October 2021 | Luckbox

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8/26/21 11:19 AM

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tactics

Cheat Sheet #17

Cryptocurrencies This cheat sheet shows the results of studies testing for average volatility and correlations

By Michael Hart

C

ryptocurrencies have become a trading realm onto themselves. Investors have hundreds of coins to choose from, and new ones keep emerging. Among all the markets, bitcoin and ethereum are the largest. This cheat sheet focuses on some of what traders need to know before adding coins to a portfolio.

Bitcoin and ethereum are traded as futures contracts under the tickers /BTC and /ETH. They expire like all futures, so a longterm hold would mean rolling to the next liquid contract. There are other factors to consider: 1. Many brokerages do not allow for short selling of cryptocurrencies, making it challenging to play the market. 2. Traders should watch out for high margin requirements.

Be on notice that bitcoin, ethereum and ripple have been much more volatile than other assets, at least up to this point.

When testing for correlations, Luckbox finds that the S&P 500 versus most of the cryptocurrencies used in the test is relatively non-correlated. That said, bitcoin does have a stronger positive correlation with ethereum.

Mike Hart, a former floor trader at the Chicago Stock Exchange and proprietary futures trader, specializes in energy markets and interest rates. He’s a contributing member of the tastytrade research team. @mikehart79

Top 5 traded cryptocurrencies Bitcoin

1

Ethereum Litecoin

More Crypto Coins you can trade at tastyworks

Ripple XRP NEO

Learn from history Crytocurrencies have seen exceptionally high volatilities on average, especially when compared with the average stock.

2 Average historical volatility

Bitcoin

Ether

Ripple XRP

Average Stock

116%

134%

136%

15%

Correlations 3

Correlations range from -1 to +1. A low number or negative number means the underlyings don’t often move in the same direction. A high positive number means the two underlyings often move in the same direction. The cryptocurrencies tested have a low correlation to the market but a high correlation to each other.

S&P 500

S&P 500

1.0

Bitcoin

Bitcoin

0.04

Ripple XRP

0.08

0.49

Ether

0.07

0.52

1.0

Ripple XRP

1.0

0.49

Ether

1.0

October 2021 | Luckbox

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INTERMEDIATE

Short Puts to Get Long

More Ladders A tastytrade video

A look at Intel says a lot about how to study laddering

By James Blakeway

I

t may seem absurd to discuss long equity opportunities in 2021, a year of nonstop new highs in the stock market. However, tried-and-true trade hunters can always find a stock beaten down off its highs with hopes of recovery.

A good example would be Intel (INTC), which was trading below $54 in August. Intel fell from its high of $68.14 in April of this year despite beating earnings estimates in both April and July. Traders and investors who expect Intel to move back above $55 or $60 have plenty of strategy choices, given that it’s a stock with high share volume and tight, liquid options markets.

One strategy investors might consider, should they expect that Intel will stay at current prices or rally higher, is laddered puts. Laddering puts entails selling different strike puts across various expirations. This shifts the strategy into a medium- to long-term outlook while continuing to profit as long as Intel doesn’t drop.

Laddering puts entails selling different strike puts across various expirations.

Consider the example of Intel in the table below.

Intel (INTC) at $53.80 Strike

SEP 55 Put

OCT 52.5 Put

NOV 50 Put

43

71

106

Price

$2.34

$1.67

$1.78

Extrinsic Value

$1.14

$1.67

$1.78

$52.66

$50.83

$48.22

4.4%

3.3%

3.7%

Days to Expiration

Effective Purchase Price Potential ROC IRA

Data as of Aug. 5, 2021

By selling three separate put options across the September, October and November options cycles, an investor has three potential opportunities to be assigned long Intel shares if the stock continues to fall.

If the stock increases, the options will decay and can either be bought to close when showing a satisfactory profit or held until expiration. While the theoretical return on capital (at expiration) for an IRA is naturally lower than a margin account, the average is still 3.8% across the strategy.

The September trade, the 55 short put, is theoretically a covered call replacement as the put strike is slightly above the current price of Intel. If Intel is below 55 at expiration, the trader will be assigned stock. But because of the option premium collected, the effective purchase price, known as basis, is actually $52.66 (option strike minus premium collected).

In a worst-case scenario where Intel continues to fall and the trader takes assignment on all three puts (totaling 300 shares), the average purchase price would be $50.57.

Intel provides one example of how to apply a ladderedput strategy to get long on any desired underlying product with liquid options markets. Traders typically use laddering puts when they assume the underlying stock will increase in value but they’re comfortable owning shares should the price continue to fall.

Each option controls 100 shares, so every month that traders use adds a potential commitment of an additional hundred shares. That’s why lower-priced stocks may be better suited for the strategy, depending on the size of an investor’s account.

As with any strategy, traders should consider their risk tolerance and capital commitment for the opening trade and for the trade they could end up with.

James Blakeway serves as CEO of Quiet Foundation, a data sciencedriven subsidiary of tastytrade that provides fee-free investment analysis services for self-directed investors. @jamesblakeway

October 2021 | Luckbox

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trades actionable trading ideas

CHERRY PICKS

R I PE & J U I CY T RADE IDEAS

No Crypto?

Consider

These Proxies

By Michael Rechenthin ryptos have a weak relationship with the major equity indexes. Anything between -0.15 and 0.15 is considered to have no relationship. Digital currency’s correlation with the S&P 500 is 0.13, and its correlation with the Russell 2000 is 0.05. The Nasdaq 100 is slightly more correlated but still very low at 0.28. This lack of correlation of

C

Low correlation Equity Index

Correlation with Bitcoin

S&P 500

0.13

Russell 2000

0.05

Nasdaq 100

0.28

cryptos with the overall market makes it an attractive diversification vehicle for many.

The exceptions are the following symbols, which can be used as statistical proxies for cryptos.

MicroStrategy Inc. (MSTR) and Amplify Transformation Data Sharing (BLOK) have the highest correlations with bitcoin at

High correlation proxies for cryptos Symbol

Name

Averagae Daily Traded Volume

Correlation with Bitcoin

(in millions of $)

MSTR

MicroStrategy Inc.

610.23

0.74

BLOK

Amplify Tranformational Data Sharing ETF

15.46

0.72

COIN

Coinbase Global Inc.

1123.35

0.66

RIOT

Riot Blockchain Inc.

312.36

0.65

MARA

Marathon Digital Holdings Inc.

281.83

0.64

CAN

Canaan Inc. - ADR

54.62

0.61

SOS

Sos Ltd - ADR

38.70

0.52

0.74 and 0.72, respectively.

So, if you like to participate in the rise and fall of cryptos, these are going to be your best bets. (See “High correlation proxies for cryptos,” above.)

Options markets are good in all the equities mentioned above. The stock with the highest amount traded per day is Coinbase Global (COIN) with a three-month average of $1.1 billion of stock changing hands per day.

In fact, that’s a fast way of examining the liquidity—simply by multiplying the

volume traded per day by price. Generally, anything less than $25 million a day traded is a sign you’d probably want to avoid, and many stocks within this sector tend to be thinly traded.

Michael Rechenthin, Ph.D. (aka “Dr. Data”) heads research and development at tastytrade. @mrechenthin

Sign up for free cherry picks and market insights at info.tastytrade.com/cherry-picks

October 2021 | Luckbox

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THE TECHNICIAN

A V E T E RA N T RA DER TAC K LES T EC HNICALS

Crypto Charts Really Well— Here’s What They Say

By Tim Knight

raders have been charting the financial markets for hundreds of years, and by the late 1930s Robert D. Edwards and John McGee established modern methods of analyzing historical price data.

Just about any financial market can be charted, whether it be commodities, equities, mutual funds or cryptocurrencies, but the charts are truly useful only when the market is organic. That’s because the charts depend on an honest and unadulterated expression of supply and demand in a true market of buyers and sellers.

These days, cryptocurrencies embody the “purest” of markets in that they appear most compatible with classic charting methods and thus represent an earnest representation of the balance between buyers and sellers.

As such, some easy-to-follow and simple-to-interpret chart objects can aid in deciding crucial support and resistance levels for any crypto coin. They can also signal when things have taken a wrong turn.

T

Trendlines The trendline, the simplest element in charting, is a straight line “anchored” to at least two price points. A wellplaced trendline identifies either an uptrend or a downtrend.

A broken trendline indicates the trend has been damaged and might possibly be reversing. Often, the breaching of a trendline changes its “role” from support to resistance (or vice versa).

52

Bitcoin

60000 55000 50000 45000 40000 35000 30000 25000 20000

15000

10000

5000

Feb ‘20

Apr ‘20

Jun ‘20

Bitcoin, by far the largest of the cryptos, provides a beautiful example of a useful trendline, even over long time horizons. The long-term trendline was established on March 13, 2020, and about 14 months later, a tremendous sell-off across the entire crypto landscape took even bitcoin down more than 50% from its price peak. However, the trend was not broken.

More important, even during the most severe portion of the sell-off, the price almost perfectly touched the trendline at just under $30,000—representing a potent buying opportunity at a relatively cheap price—and then it reversed powerfully. Ethereum provides an

Aug ‘20

Oct ‘20

Dec ‘20

Classic charting methods work well with cryptocurrencies, the “purest” of today’s markets.

Feb ‘21

Apr ‘21

excellent example of the “role reversal.” The coin had been steadily pushing higher, managing to stay above its trendline even during moments of weakness.

However, one day the selling was strong enough to pierce the trendline, and after that, the trendline was still a useful guide to prices, but its purpose had changed. No longer was it a mechanism for support, but instead it became a demarcation of when buying would exhaust itself; in other words, resistance.

Saucers While trendlines can be either ascending or descending, saucers can be either bottoming or topping.

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4000

Ethereum

3500 3000 2500 2000

1500

1000

500

Oct ‘20

Nov ‘20

Dec ‘20

Dec ‘20

Jan ‘21

Mar ‘21

Mar ‘21

Apr ‘21

May ‘21

Jun ‘21

Jul ‘21

Polkadot

45 40 35 30 25 20 15

10

5

Aug ‘20

Sep ‘20

Oct ‘20

Nov ‘20

Dec ‘20

Jan ‘21

Feb ‘21

Saucers indicate a time when a market is in an era of uncertainty, and buyers and sellers are struggling to establish a base and a direction.

For example, in the case of a bottoming (or bullish) saucer, prices slowly go lower and lower, but they eventually stabilize and then form a mirror image of what happened before, slowly pushing prices higher and higher.

All along the way, prices do not exceed a certain

Mar ‘21

Apr ‘21

May ‘21

Jun ‘21

Jul ‘21

level. The tension is resolved if and when prices finally push above this resistance level, which completes the saucer pattern and shows that a base has been established.

The Polkadot coin (DOT) provides an example of both a bullish basing pattern and a bearish topping pattern—all in a relatively short time. The greentinted pattern on the left side of the chart shows how the price took months to establish a base, but

once it was completed, DOT went onto a multi-hundred-percent gain in price (see “Polkadot,” lower left).

However, as the red-tinted inverted saucer shows, an upsidedown version of this same price action indicated that the price was cresting, and once the support of this inverted saucer failed, the coin’s price fell swiftly.

The size of the saucer indicates its strength. Typically, larger saucers are more potent than small ones.

Enjin Coin (ENJ) provides an excellent example because its basing pattern is gargantuan compared with the modest topping pattern on the right side of the chart (see “Enjin,” p. 54).

Consequently, the up-move following the bullish base was more powerful than the modest retracement that followed the red-tinted inverted saucer.

Right triangles A right triangle is simply two lines: one of them a trendline (which, as with all trendlines, can be ascending or descending) and the other a horizontal.

In the case of price strengthening, expect an ascending trendline with a horizontal line above it. For price weakness, look for a descending trendline with a horizontal line below it. Thus, a break above the horizontal is a bullish breakout, whereas a break below the horizontal is a bearish breakdown.

The crypto EOS provides a relatively clean example of such a pattern. Prices were range-bound for well over a year and then finally broke out and formed a multi-hundred-percent gain.

A couple of successful tests of this breakout occurred, meaning that some selling took place, but the prices did not break beneath the horizontal in any significant way. Even after the price peaked and collapsed by an enormous percentage, the price merely “tagged” the horizontal again before

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bouncing higher.

Thus, the triangle serves a variety of important functions. Before the breakout, it suggests which prices are relatively expensive or cheap, based upon the price’s relationship to the triangle itself.

If and when the breakout ultimately takes place, the pattern takes on its new role as support (or, in the case of a bearish failure, resis-

Typically, larger saucers are more potent than small ones.

Enjin Coin provides an excellent example because its basing pattern is gargantuan compared with the modest topping pattern on the right side of the chart. tance), which will be an important data point for those who have taken a position.

Many of the patterns cited here have been bullish, but Litecoin (LTC) provides an excellent example of a right triangle alerting the trader to a bearish breakdown. This took place during the year 2018.

The price withered away from about $400 to about $100, and the price action was neatly confined by the triangle shape. After the failure of the horizontal, the price kept falling and never looked back.

Traders who respected this signal would have saved themselves from serious losses by respecting the failure if they happened to own Litecoin at the time.

54

Enjin

Nov ‘17 Jan ‘18 Apr ‘18 Jul ‘18 Oct ‘18 Jan ‘19 Apr ‘19 July ‘19 Oct ‘19 Jan ‘20 Apr ‘20 Jul ‘20 Oct ‘20 Jan ‘21 Apr ‘21

13 12 11 10

EOS

9 8 7 6 5 4

3

2

Nov ‘19

Jan ‘20

Mar ‘20

May ‘20

Jul ‘20

Looking ahead Whether or not cryptocurrencies are going to change the financial world (and, to some degree, the political landscape) remains to be seen. It will probably be years before anyone knows whether or not crypto was a huge fad, a once-in-a-lifetime innovation or something in-between.

But already, here and now, it’s plain to see that crypto represents an excellent trading opportunity.

Sep ‘20

Nov ‘20

Jan ‘21

Mar ‘21

By arming themselves with charts, traders can make better decisions about which coins to trade, when to trade them and what price levels matter. Apply the techniques described here to improve the odds of being a profitable crypto trader.

Tim Knight has been using technical analysis to trade the markets for 30 years. He’s the host of Trading the Close on the tastytrade network and offers free access to his charting platform at slopecharts.com.

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Litecoin (LTC) provides an excellent example of a right triangle alerting the trader to a bearish breakdown.

Litecoin

360 340 320 300 280 260 240 220 200 180 160 140 120 100

80

60

40

Oct ‘17 Nov ‘17 Dec ‘17 Jan ‘18 Feb ‘18 Mar ‘18 Apr ‘18 May ‘18 Jun ‘18 Jul ‘18 Aug ‘18 Sep ‘18 Oct ‘18 Nov ‘18

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CRYPTO CURRENTLY

T H E STAT E O F DIG ITAL CU R R ENC IES AND DEC ENT RALIZED FINAN CE

Cardano Rising

By JC Parets

Sitting saucer Cardano has exhibited a classic technical analysis pattern.

s cardano the next ethereum? Smart people continue to point to the integration of their own smart contract development.

Let’s look at the hype surrounding what they’ve built behind the scenes.

While the massive base in price has attracted the attention of technical analysts, cardano’s protocols can drive demand in a way similar to ethereum and to a lesser degree solana, polkadot and cosmos.

Cardano plans to launch its Alonzo update soon. That will enable developers to build their own programs on the network.

But stories aside, it’s only price that pays, right? The only way to make money in this market—or any market—is to sell it at a price higher than where it was bought. And in the case of cardano, this classic pattern deserves attention.

Back in the 1940s, technical analysts Robert Edwards & John Magee would call this a saucer bottom. (See “Sitting saucer,” above, right). The kids these days like to refer to it as a “Kardashian bottom.”

The rule of thumb from technical analysts Louise Yamada and Alan Shaw goes like this: “The bigger the base, the higher in space,” meaning that the longer the period of accumulation, the more explosive the eventual move becomes once the pattern is completed.

Accumulation takes time, particularly from the largest players. The chart above shows exactly that.

There’s a similar pattern in gold, although it has yet to break out. In

I

56

the case of cardano, those former highs in 2018 were around $1.40. So, traders should be long only if cardano is above $1.40, and they should avoid exposure if it’s below that.

In the case of gold, it’s the same idea. The 2011 all-time highs were just under 2,000. If it’s below that, then traders should want no part of it. But ultimately, if and when gold breaks out, like cardano is attempting in August, then they’ll want to own gold. (See “Buy the breakout,” opposite page.)

In the meantime, traders should want to own assets that have completed these accumulation periods. And cardano is at the top of that list.

Market speculation is a weight-ofthe-evidence game. Traders should

Judging by Cardano’s completed three-year base, a $10 target price isn’t far-fetched.

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position themselves for the highest probability of success.

So, when buying cardano, look around and see what others in the group are doing. A chart shows this is not just a cardano story. There’s strength in the entire group. (See “Recipe for Success,” below, right).

This custom index is composed of

Buy the breakout If and when gold breaks out, traders will want to own gold.

Cardano plans to launch its Alonzo update, which will enable developers to build their own programs on the network. the most prominent smart contract coins like ethereum (ETH), solana (SOL), tron (TRX), algorand (ALGO), atom (ATOM), EOS.IO (EOS), neo (NEO) and tezos (XTZ).

The weight of the evidence is pointing up.

But take this one step further. For cardano bulls, seeing some outperformance over ethereum would be incredibly constructive.

That hadn’t happened at press time, but that may turn and thus confirm the new leadership emerging in cardano.

How high can prices go?

With a three-year base like this completed, a $10 target isn’t far-fetched. Granted, an analyst would still have to take out those former highs from earlier in the year, and $10 is a long way. But coming out of a three-year base, a target in the double digits would give cardano a market cap near $320 billion— much less than ethereum’s nearly $400 billion market cap (See “Lower than Ethereum, p. 58.)

Broadening even more, compare cardano with the granddaddy of them all, bitcoin. If cardano is going to start a period of outperformance, this would be a logical area for that to occur.

Recipe for success This custom index comprises the most prominent smart contract coins, such as ethereum, solana, tron, algorand, atom, EOS.IO, neo and tezos.

October 2021 | Luckbox

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Lower than ethereum Coming out of a three-year base, a target in the double digits would give cardano a market cap near $320 billion—much less than ethereum.

Granddaddy bitcoin?

Cardano is far outpacing Bitcoin in 2021, up 662% compared to Bitcoin’s 41%. (Data as of Aug. 5, 2021)

Viewing it from the point of view of the Fibonacci extension level, a tool traders can use to calculate how much prices may change, it has bounced at 261.8% from the 2020 consolidation.

The stars are aligning for this one.

Breaking out on an absolute basis?

Check.

Outperforming bitcoin? Check.

The risk versus reward ratio is in traders’ favor? Check.

That last one factor is the most important of all. Traders must always be able to answer one question: Where are we wrong?

That gets left out too often.

It’s not about being right—it’s about making money. It doesn’t matter how high traders think it can go or how much money they think they can make. It’s about how quickly they can learn they are wrong so they can move on to something else.

And in the case of cardano, that level is $1.40.

Traders want to be long this name only if they’re above those late 2017 and early 2018 highs. If not, then they cannot make the argument that they are completing this massive base.

In fact, if it’s below $1.40 that means this (potential) accumulation period is still underway.

How high it can go is anyone’s guess. The next Fibonacci extension levels calculated from that last cycle peak are $2.25, $3.65, $5.90 and $9.55.

So, it’s a stair-step higher situation that can take it to each of those targets and beyond.

Again, traders can knock off all of the targets and still be substantially smaller than ethereum is at this writing.

The reward potential is exponential. The risk is well-defined. The trend is up.

That’s what matters most.

JC Parets founded All Star Charts, a research platform covering stocks, interest rates, commodities and forex for institutional and retail investors. @allstarcharts.

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DO DILIGENCE

QU I E T FOU N DAT I O N HELPS P ROACT IV E INV ESTO RS U NDERSTAND T HEI R PORTFOLI OS

CRYPTO 101: ENROLL IN THE ASSET CLASS

By James Blakeway

raders may remember 2011 as a nothing year for the S&P 500. The stock index opened in January at 1,257.62 and closed the year at 1,257.60. Only small circles of tech gurus were mining and trading bitcoin, a relatively unknown asset back then. The next year saw bitcoin finally rally above $1 per coin, peaking at more than $15 in the summer before closing the year back below the $5 mark.

From the close of 2011 until July of this year, the S&P 500 rallied 250%. Bitcoin, on the other hand, returned 884,000%. That explains why every new investor wants to learn about and trade bitcoin, and usually doesn’t care much about the seemingly mundane S&P. Bitcoin’s meteoric rise also explains at least some of the interest and buzz in the likes of dogecoin and other cheaper cryptocurrencies in 2021. New traders, empowered by easy-to-use investing apps and with pockets lined by stimulus cash, plowed money into various cryptocurrencies hoping they were on the ground floor of the next bitcoin or ethereum.

T

The cryptocurrency trading scene feels like the beginning of a new asset class.

60

Ticker

S&P 500 ETF

Dow Jones ETF

Nasdaq-100 ETF

Bitcoin

Ethereum

SPY

DIA

QQQ

BTC/USD

ETH/USD

2020 Return

15.1%

5.9%

45.1%

321.9%

475.0%

2021 Return

20.1%

15.8%

19.5%

69.3%

338.8% As of 8/25/2021

Traders, traditional asset managers and firms building financial products all view cryptocurrencies as an emerging opportunity. They use cryptocurrencies as a new asset class for diversification and use the volatile market for speculative trading.

Still, it’s worth noting that cryptocurrencies failed a key test this summer. Before that, many advocates claimed they were the perfect inflation-hedging asset. But as troubling inflation numbers were published, bitcoin and ethereum fell, driven by talk of crypto regulation in the United States and China, as well as concerns about the environmental impact of crypto mining.

Crypto access For individual investors, there’s no shortage of places to access and trade cryptocurrencies, as well as emerging products that allow indirect access in traditional brokerage or IRA accounts.

Grayscale Investments is capitalizing on the crypto craze by offering cryptocurrency trust products that

More Guidance Quiet Foundation measures your portfolio’s risk

investors can buy or sell much like stock or exchange-traded funds.

Their two largest products are the Bitcoin Trust (GBTC) and Ethereum Trust (ETHE). While both crypto trusts trade on the overthe-counter markets, they exhibit high daily volume, with millions of shares trading each day.

However, both products have two very distinct drawbacks.

First, cryptocurrency has a general disconnect with traditional financial markets. Bitcoin and ethereum trade 24 hours a day, 365 days a year, while the trusts trade only during standard market hours.

That creates an issue for anyone looking to trade the trust products actively. They can’t react instantaneously to any overnight or weekend movement in bitcoin and ethereum, leaving them susceptible to aggressive price moves when the stock market reopens.

The second pitfall comes with the cost associated with these trusts.

The bitcoin and ethereum trusts currently charge 2% and 2.5% in

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annual fees, respectively. It’s easy to forget a 2% fee in a year like 2020 when bitcoin returned 300%.

But if bitcoin stabilizes with 5% to 10% annual returns, those fees will dramatically reduce the benefits of using the trust products. Those looking to hold cryptocurrencies longer-term via these trust products should keep the fees in mind.

Despite the growing interest in cryptocurrencies, choices remain limited for active and derivative traders. The inability to short bitcoin or ethereum starves traders of bearish opportunities. One possibility for long, short and options trades is the bitcoin futures product offered by the CME Group.

However, each contract controls five bitcoins, with a hefty margin requirement, putting it out-ofreach for most retail traders.

Given the lack of traditional exchange-listed crypto derivatives, some traders are getting creative with their crypto speculation and hedging. They’re navigating back to the equity world and using stocks that operate cryptocurrency businesses.

Riot Blockchain (RIOT) stands out as a popular proxy product for bitcoin. RIOT specializes in cryptocurrency mining, operating the largest bitcoin mine in North America. Much like gold mining stocks fluctuating with the price of gold, RIOT often rallies and falls with the price of bitcoin.

The current correlation between RIOT and bitcoin is 0.75, meaning that on any given day it’s likely but not certain that both assets will move in the same direction. Looking back over the last two years, the correlation between the two assets stayed consistently positive. (See “Correlated to Crypto,” above right).

With the higher correlation, options traders sometimes look to hedge long bitcoin holdings with short positions in RIOT, such as short calls or short call spreads.

Others may use RIOT as a long

From the close of 2011 until July of this year, the S&P 500 rallied 250%. Meanwhile, bitcoin returned 884,000%. bitcoin alternative, selling puts and put spreads for a higher probability trade or buying calls for a speculative lower probability bet.

Traders using RIOT stock or options in place of bitcoin should be wary that the correlation relationship could break down at any time. For example, a broad stock

still be overvalued at a $64 billion market cap, its two-sided price action and liquid options markets are compelling for active traders.

Around the world, investors and traders alike are waiting eagerly for the cryptocurrency market to offer further access as well as alternative products. In many ways, it feels like

Correlated to Crypto The current correlation between Riot Blockchain and bitcoin is 0.75. The relationship between the two assets stayed consistently positive over the last two years.

1.00 0.75 0.50 0.25 0.00 -0.25 -0.50 -0.75 -1.00 Apr 2019

Jul 2019

Oct 2019

Jan 2020

Apr 2020

Jul 2020

Oct 2020

market sell-off could drag down RIOT stock regardless of price action in bitcoin.

Crypto exchanges While some investors look for proxies to the cryptocurrencies, others seek broader investments for the expansion of the cryptocurrency sector. Coinbase (COIN), one of the largest cryptocurrency exchanges, stands out as a prominent name.

That’s perhaps because of its infamous post-IPO nosedive in April and May. While COIN may

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as though this could be the beginning of a new asset class.

As firms navigate the upcoming cryptocurrency regulation that seems likely to occur, financial innovators will find a way to offer new cryptocurrency funds and derivatives, further democratizing access to these dynamic assets.

Regardless of investing timeframe or chosen financial products, traders and investors should remain cognizant of the ever-changing new financial frontier of cryptocurrencies and, as always, do their due diligence.

October 2021 | Luckbox

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FOREX

F R E E- F LOAT I N G M AC RO I NS IG HTS FRO M G LO BAL CU R R ENCY T RADERS

Aussie Dollar Not Finished Falling

By Ilya Spivak

Australian dollar/U.S. dollar daily chart

he U.S. dollar backThe AUD/USD exchange rate has trended lower, completing a bearish head and shoulders pattern. tracked in July as the Federal Reserve tempered expectations for when Head it would begin to reduce stimulus.

Shoulder The markets had seemingly Shoulder over-extrapolated after the Fed brought forward its projected rate Neckline hike timeline at the June policy meeting. That change introduced 50 basis points in tightening in 2023 that were previously absent from official forecasts. Traders understandably judged that this Implied H&S Objective ~ 0.7120-30 might mean a sooner start to the process of incrementally tapering back QE asset purchases to zero.

Policymakers curbed the markets’ enthusiasm somewhat in July, asserting that progress toward the start of tapering had Aug Sep Oct Nov Dec 2021 Feb Mar Apr May Jun Jul Aug Sep been made but remains insuffiSource: TradingView AUD/USD has moved lower to hit the 0.7120-30 area since the time of this writing. cient. The dollar slid, registering a loss of more than 2% against an average of major currencies. The Australian Delta woes and China’s zeal The Australian dollar/U.S. dollar exchange dollar struggled to participate, ending up flat Two driving forces are in play. First is the rate has trended lower recently, completing over the same period. spread of the potent Delta variant of COVID-19 a bearish head and shoulders (H&S) chart as large swaths of the Asia-Pacific region strug- formation. The setup implies a downward Struggling despite soft dollar gle to boost vaccination rates. That triggered extension into the 0.7120-30 area. Idling The Aussie’s lackluster performance seems all new lockdowns, including in Australia. The through late July seems to have produced a the more confounding considering a would-be second is turmoil in Chinese equity markets. flag continuation pattern, which may speak to supportive turn at the Reserve Bank of Austra- The benchmark CSI 300 mainland stock index downward resumption ahead. lia. It lapped the Fed in early July, announcing and Hong Kong’s equivalent Hang Seng Index Initially, technical confirmation on a daily the first reduction in its asset-buying program gauge faced heavy selling as Beijing turned the close below the flag’s lower boundary seems to since the start of the COVID-19 outbreak. Offi- regulatory screws on capital. Tech giant Alibaba expose support just above the 0.72 figure, with cials reiterated the plan at their August meeting. was fined $2.8 billion amid an anti-monop- a break below that putting the H&S objective A glaring disconnect between incoming oly campaign. Profit-making was forbidden for in view. Reclaiming a foothold above 0.74 news and the response from price action is ed-tech companies. China is Australia’s larg- would probably signal that near-term liquioftentimes a potent indicator of direction. In est trade partner, making the latter country dation has been neutralized. Testing nearby this case, the Aussie dollar’s inability to capi- highly sensitive to the economic fortunes of the 0.76 could follow from there. talize even as Fed and RBA actions pushed the former. Capital flight from Chinese markets Ilya Spivak is head of Greater Asia at DailyFX, the relative monetary policy balance in its favor amid worries about regulatory uncertainty research and analysis arm of retail trading platform IG. seems to reflect acute underlying weakness. then echoed in the Aussie. @ilyaspivak

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Bitcoin Bodega Bitcoin investors in the United States face a predicament: Not many retailers accept cryptocurrency as currency. In fact, only about 2,300 U.S. businesses accept bitcoin, and 440 of them are based in California, according to a 2021 Fundera list.

Worldwide, 15,000 businesses accept bitcoin, but some countries, such as El Salvador, are

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leading the way toward nationwide adoption.

Salvadorian President Nayib Bukele announced in June that his country plans to become the first in the world to accept bitcoin as legal tender.

Bitcoin wouldn’t replace the U.S. dollar as the nation’s primary currency but would instead be accepted alongside it.

That said, El Salvador has installed more than 200 bitcoin ATMs and prepped 50 bank

branches to accept bitcoin ahead of the Sept. 7 implementation. What’s more, a government app called Chivo enables Salvadorians and tourists to convert bitcoin into U.S. dollars.

According to Bukele, the commission-free app will save Salvadorians $400 million a year in transaction fees. Citizenship, he added, would be offered to people who could prove they had invested in three bitcoins or more.

PHOTOGRAPH: REUTERS/ JOSE CABEZAS

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