life. money. probability. SEPTEMBER/OCTOBER 2022 Free getluckbox.comsubscription:digital Dollars, Diamonds & Digital Assets THE STRONG DOLLAR AND ITS IMPACT ON YOU, THE MARKETS & THE ECONOMY PLUS: DIAMONDS’ DESTINY / BITCOIN’S BOTTOM / PICKLEBALL’S PREVALENCE / CRYPTO’S CRIMINALS / COSTLESS COLLARS
A quantitative strategist-turned-diamondmaven aims to turn one-of-a-kind stones into a tradable investment vehicle.
The world figured out crypto was a bad idea far too late. It had already stolen fiat currency and destroyed lives, a critic argues.
September/October
28 | The Power of the Blockchain Uses for blockchain technology may be restricted only by the limits of human imagination.
The Dollar, Diamonds
12 | The Fed’s High-wire Act
34 | The Signal in the Noise Combine an understanding of sentiment with fundamental and technical analysis to understand markets.
27 | The Argument Against Crypto
September/October 2022 | Luckbox 1
A soft landing for both the economy and the strong dollar seems like a fantasy in today’s uncharted territory.
Critics disparage digital currency and believers praise it. But bears may be missing three opportunities.
22 | A Ponzi Scheme or the Future of Money: The Great Crypto Debate
An all-star panel of experts debate the merits of digital currency and hold forth on the possibility of regulation.
16 | TheDiamonds:NewestAsset Class
20 | Crypto … What Is It Good For?
30 | Crypto Crime Spree
Crypto charlatans separated investors from $14 billion last year, up from $7.8 billion in 2020.
2022
& Digital Assets 10
CraftedCustomPASSIONPERFORMANCELUXURYOutdoorKitchensbyKalamazoowithoutcompromise 888 340 kalamazoogourmet.com4361
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endorsement, promotion
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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! trades&tactics actionable trading ideas CHEAT SHEET Costless Collar FUTURES 51 Big Bets in Smaller Packages OPTIONS ON FUTURES 53 Next-level Currency Trading CRYPTO CURRENTLY 54 Has Bitcoin Hit Bottom? NORMAL DEVIATE 56 Crypto Too Volatile? Try This TRADER 57 Meet MalhotraSanjeev THE PREDICTION TRADE 58 Uncertain Political Futures UNLUCKY INVESTOR 60 Trading Bitcoin Without Bitcoin trends GAME THEORY 37 Playing Pickleball ROCKHOUND 40 The New Face of Punk Metal RECORD HIGH 43 Themed Music Festivals BOOK VALUE 45 The Bitcoin Standard SENTIMENT 46 Should We Isolate Russia? POKER 47 Cash CheatGameSheet CALENDAR 48 Bourbon & Chess life, luxury & the pursuit of happiness On the cover: Art by Mark Wagner editor in chief ed mckinley managing editors yesenia elizabethduranschiele associate editors kendall polidori mike reddy editor at large garrett baldwin technical editor james blakeway contributing editors vonetta logan, tom preston mike rechenthin creative director 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 associate publisher elizabeth es@luckboxmagazine.comschiele publisher jeff jj@luckboxmagazine.comjoseph Luckbox magazine, a tastytrade publication, is published at 19 N. Sangamon, Chicago, IL 60607 Editorial offices: 312.761.4218 ISSN: Printed2689-5692atLanePress in Vermont luckboxmagazine.com Luckbox @luckboxmagmagazine 2019 & 2020 Best New Magazine Folio Award for Custom Content TACTICS BASIC 63 4 CriteriaCrypto FAKE FINANCIAL NEWS 8 BiggestBitcoin’sLoser THE LAST PICTURE 64 Politics, Policy & the Midterms INSERT POLIDORIKENDALLPHOTO: Pickleball is all the rage 37
September/October 2022 | Luckbox 3
illustrations
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 in these articles may not include transaction costs. Nothing contained in this magazine constitutes a solicitation, recommendation, or offer by tastytrade, or any its or While luckbox magazine and tastytrade believe that the information contained in luckbox is reliable and
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assigns.
oney, the subject of this issue of Luckbox, has earned a lot of nick names over the years. It’s been called bucks, cash, dough, bread, jack, lucre, scratch, cabbage, wampum, moolah, greenbacks and dead presidents. A large quantity constitutes a wad, bundle or a king’s ransom. No matter which term strikes your fancy, today’s strong dollar has advantages and disad vantages we address beginning on page 12.
Satoshi Nakamoto, the mysterious and possibly fictional inventor of Bitcoin, is said to have a mostly inactive wallet containing 1.1 million bitcoins—worth $2,380,928,000 ($21,644.80 x 1.1 million). Luckbox wonders if anyone—real or imaginary—still has the key.
The key’s also the problem with someone we know is real. He’s a San Francisco software developer who reportedly forgot the password to a wallet stuffed with more than 7,000 coins.
I need a dollar dollar, a dollar that’s what I need
On the downside, a strong dollar makes American products less competitive at home and around the world. It also discourages international tourists from visiting the United States and can make foreign-based investors hesitate to provide capital to U.S. companies— even during times of heavy borrowing.
M
Bad times are coming and I reap what I don’t sow Well let me tell you something all that glitters ain’t gold
Thinking Inside the Luckbox Luckbox is dedicated to helping active investors achieve skill-derived, outlier results.
4 Luckbox | September/October 2022
2 Greater market volatility brings greater opportunity for astute active investors. 3 Options are the best vehicle to manage risk and marketexploitvolatility.
But in the era of cryptocurrency, money’s not just about dollars. In a series of articles starting on page 20, experts weigh in on crypto’s draw backs, advantages and dangers—everything from big-dollar scams to the endless possibil ities of the underlying blockchain technology.
DOLLAR DAYS
Well I need a dollar dollar, a dollar that’s what I need
4 Don’t rely on chance. Know your becauseoptionsluck smiles upon the prepared. Ed McKinley Editor in Chief
Money takes other forms, too. Gold and silver have served as mediums of exchange for millennia. Diamonds have been prized, coveted and traded since the 1800s, but it’s been hard to trade them as an undifferentiated commodity because each is unique. Beginning on page 16, Luckbox reports on how a techsavvy entrepreneur has set out to overcome that obstacle and transform the stones into a new asset class. If this fosters a better understanding of money among readers, they’re also cautioned not to misplace money, no matter what form it takes.Housecleaners gather the cash and coins that fall between sofa cushions. Savvy car deal ers pull out the backseat of a vehicle as soon as it’s traded in to search for lost money. Some thing similar happens with cryptocurrency, too, according to CryptoVantage.
On the plus side of a strong dollar, consum ers pay less for foreign goods and that holds down inflation. Travelers get discounted trips abroad, and investors purchase foreign stocks and bonds at bargain prices.
And who could forget Laszlo Hanyecz, the Florida man who paid 10,000 bitcoins for two Papa John’s pizzas in May 2010? But, hey, it’s only money.
1 Probability is the key andinimprovingtooutcomesthemarketsinlife.
—I Need a Dollar, Aloe Blacc, 2010
It’s been a long old trouble long old troublesome road And I’m looking for somebody come and help me carry this load
After 10 tries, the wallet self-destructs. He’s tried eight Meanwhile,times.aWelsh software engineer has inadvertently turned his virtual fortune into a buried treasure when a computer hard drive containing his 7,500 bitcoins wound up in a landfill. For more on his predicament, see pageThat8. engineer made an honest mistake, but that’s probably not true of a Canadian who allegedly perpetrated a bitcoin Ponzi scheme. He supposedly promised to give his wife the crypto key to his ill-gotten digital stash but then “died” during their honeymoon. Some suspect he’s still breathing at an undisclosed location.Suchchatter about cryptocurrency as a tool for criminal activity never ends, and one of the storylines that keeps it alive concerns a wallet reportedly associated with the Silk Road, a platform for money laundering and illicit drug transactions. The wallet and its 69,000 bitcoins were discovered at a dark web auction. Now, it travels from hacker to hacker in repeated attempts to crack the code.
SCANTHIS
—Deanna Jones, Alexandria, VA A general college education is the most overrated achievement a young person can attain. Hi-tech education, such as engineering, pre-med and the like, would be examples of exceptions. I spent time working toward an over-hyped MBA degree until I realized that what I was exposed to was largely theory and really didn’t offer an educational advancement.
There’s more for We asked Luckbox readers about their It so surprises me that you guys are so pro-crypto? But nothing personal ... I’ll still continue to enjoy the rest of your content. Well, I hope you’ll still allow me after this?!
—John Gerstle, Louisville, KY Education is a mechanism for separating the haves from the have-nots and providing luxury for the affluent to retain their privileges. Schools charge higher tuition because the government has facilitated the racket ... that’s the role of government—to facilitate the transfer of wealth from the many to the few.
Viktor Striezenec, Slovakia With the advent of Eth 2.0 and the huge (billions) new investments by big business players and governments in blockchain, digital currencies, etc., I think the future will certainly have a place for good quality cryptocurrencies after a big weeding out and, of course, the blockchain is already taking the business world by storm.
to Luckbox than meets the page. Look
this QR code icon for videos, websites, extended stories and other additional digital content. QR codes work with most cell phones and tablets with cameras. Open additionalClicktheHovercamerayour1overQRcode2onthelinkthatpopsup3Enjoythecontent4Two ways to send comments, criticism and suggestions to Luckbox Email tips@luckboxmagazine.com Your thoughts on this issue? Take the reader survey at luckboxmagazine.com/survey OPEN OUTCRY Have you ever cryptocurrencies?traded Yes . . . . . . . . . . . . . . . . . . . . . . . . . . 49% No 51% In general, are you bearish or bullish on the future of cryptocurrencies? Bearish 20% Bullish 60% Don’t know/No opinion 20% 30%27%43% 2021 2022 1. 3.Cardano2.EthereumBitcoin& Dogecoin 1. 3.SHIBA2.EthereumBitcoinINU 2021 2022 Do you currently own any cryptocurrencies? Yes 59% 39% 2021 2022 Which cryptocurrency (if any) do you currently have the most exposure to? (Top 3) Yes 82% No 6% 52%24% 2021 2022 Do you plan to increase your exposure to cryptocurrencies between now and next year? Yes 62% 77% New York SurveyLife LuckboxSurveyReaders Are you confident in your ability to meet your financial goals? Yes 64% 59% New York SurveyLife LuckboxSurveyReaders Are you confident that your retirement savings will last you your whole life?
The decentralized monetary system is the only way to allow the free market to decide what people will use as a long-term store of value. As we are in the beginning stage of crypto adoption, the volatility is high but it improves along with liquidity as more people are joining in.
—Jeff Caudle, Mexico I liked the “Is College Worth It?” article. It provided food for thought. Also, it opened up a discussion among a few of us traders. We believe college is not worth it for all. My husband, for years, made more money than I did. He did not graduate from high school and was an auto mechanic; I have an M.A. and worked for the federal government.
—Ken Bank, Fort Lauderdale, FL
—Adam Green, Silicon Valley, CA
outlook on cryptocurrencies.
INTEREST
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6 Luckbox | September/October 2022
By its very design, blockchain technology is poorly suited for just about every purpose currently touted as a present or potential source of public benefit. From its inception, this technology has been a solution in search of a problem and has now latched onto concepts such as financial inclusion and data transparency to justify its existence, despite far better solutions to these issues already in use. Despite more than 13 years of development, it has severe limitations and design flaws that preclude almost all applications that deal with public customer data and regulated financial transactions and are not an improvement on existing non-blockchain solutions. The catastrophes and externalities related to blockchain technologies and crypto-asset investments are neither isolated nor are they growing pains of a nascent technology. They are the inevitable outcomes of a technology that is not built for purpose and will remain forever unsuitable as a foundation for large-scale economic activity. We need to act now to protect investors and the global financial marketplace from the severe risks posed by crypto-assets and must not be distracted by technical obfuscations which mask an abject lack of technological utility.
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DOLLARS, DIAMONDS & DIGITAL ASSETS SHORT
Dear U.S. Congressional Leadership, Committee Chairs and Ranking Members: We are 1,500 computer scientists, software engineers and technologists who have spent decades working in these fields producing innovative and effective products for a variety of Weapplications.stronglydisagree with the narrative—peddled by those with a financial stake in the crypto-asset industry—that these technologies represent a positive financial innovation and are in any way suited to solving the financial problems facing ordinary Americans.
Life Time fitness clubs CEO Bahram Akradi. Life Time is building 700 pickleball courts across the country
$346,675 The value of one bitcoin futures contract at the crypto’s peak —Computed by Luckbox from Chicago Mercantile Exchange data Is $17,600 bitcoin’s
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“It’s my belief that pickleball will be the largest participatory sport in the U.S. eventually.”
Excerpts from the June 1 letter in support of responsible fintech policy to Congress penned by Stephen Diehl and signed by 1,500 software engineers
Former New Orleans Saints quarterback and Superbowl Champion Drew Brees on pickleball after announcing his investment in the Mad Drops Pickleball Club, a major league pickleball team.
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September/October 2022 | Luckbox 7
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Danny Wimmer Presents founder Danny Wimmer on the Bourbon & Beyond festival
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We really captured lightning in a [bourbon] bottle with this lineup. Honestly, it’s one of the best-billed festivals in 2022 ... there is no better place to be this fall than Kentucky.
$7.7 billion Was stolen worldwide in crypto scams last year, an 81% increase over 2020.
—Business Insider
By weight, diamonds are the most valuable natural resource ... I would not be surprised if investor asset allocation to diamonds is ultimately similar to gold, silver or platinum.
“I am an avid pickleball player, fan and student of the game.”
“... YOU CAN’T FIGHT INFLATION WITHOUT IMPOSING SOME PAIN ON THE MARKETS AND THE ECONOMY. THEY SHOULDN’T CODDLE THE MARKETS BY IMPLYING THERE’S NO MAJOR ISSUE HERE [AND THAT] WE’RE GOING TO HAVE A SOFT LANDING FOR THE ECONOMY. I THINK IT’S TOO LATE FOR THAT. WE HAVE TO HAVE A HARD LANDING.” —Ethan Harris, head of global economic research at Bank of America
—Thomas Lee, head of research at Fundstrat Global Advisors
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By Vonetta Logan James Howells
to The New Yorker. By the time Howells gave up his mining ambitions, he had accumulated nearly 8,000 bitcoins.
LoserBiggestBitcoin’s
Realizing his loss, Howells went to the local dump in Newport, Wales, to see if anything could be done. At the time, his coins were worth over $6 million. When he told the landfill manager what happened, he was escorted to a spot to survey the site. It was about 15 soccer pitches worth of garbage. But the manager did impart some wisdom.Newport organized its trash by cells: dirty nappies, old furniture and consumer elec tronics. Theoretically, it wouldn’t be impos sible to pinpoint the drive’s whereabouts in the vast landfill.
Uh-oh, SpaghettiOs!
“I’m a systems engineer. I’ve never thrown a hard drive in the bin. It’s just a bad idea,”
Howells told The New Yorker. The next day, his partner took the garbage out. It would take a few months for Howells to realize the impli cations of shared chore duty in a relationship.
In his interview with The New Yorker , Howells said Bitcoin reminded him of Napster, the beacon of freedom for poor college kids who wanted to hear the latest by Britney Spears. He started mining for bitcoin right away. The first time he tried, his computer was one of only five on the entire network. He mined coins for a while, but the incessant whirring of the laptop fan (mining is very intense for computer systems) annoyed his partner.
W hat scares me about digital assets are the clickbait headlines screaming warnings like “Account Holders Wake up to $0 Balances.” It seems digital assets are so insidious they can’t but help to be party to crimes while you sleep. But what happens if you’re not a victim of cybercrime and, instead, you break your own heart? Consider this maxim: “If you think the price of winning is too high, wait until you get the bill for Whetherregret.”youhave
FOMO (fear of missing out) from not dumping your stimmy cash into ether, sold everything at highs, or you just can’t remember your dang custodial password, what’s the actual cost of regret? To find out, I slid into the Twitter DMs of James Howells, the internet’s most notorious bitcoin loser. A drive between a rock and a hard place In August 2013, Howells, a Welsh engineer, decided to tidy up his home office. He chucked an unwanted hard drive into the wastebasket and asked his partner at the time to take out the trash in the morning. Before he went to sleep, he reconsidered discarding the drive and made a note to remove it from the garbage.
“There was no Bitcoin version on Apple at the time so there was no reason,” he recalled
A Welsh systems engineer is dealing with the cost of regret after carelessly discarding crypto now worth $184 million
A few months after the drive went into the trash, Howells came across a BBC News story about a Norwegian who had used his bitcoin profits to acquire a palatial pad in Oslo.
A man, a plan, a dumpster As Luckbox was going to press, Howells’ interred coins were worth around $184 million. At Bitcoin’s peak, Howells’ stash
Fast forward six months and Howells spills lemonade on his gaming/mining rig. He trans ferred some of the information on the hard drive over to a new iMac but didn’t bother with the bitcoin folder.
8 Luckbox | September/October 2022 FAKE FINANCIAL NEWS NEWSWALES/BRITTONDARRENPHOTOS:
Miner threat Howells was a fan of Bitcoin from the start. The idea of an alternative to fiat currency that couldn’t be tracked to individual users fit with his libertarian beliefs.
Quick! Everyone check your sofa cushions. Howells remains very much involved in digital assets and still wholly believes in the core principles. He’s not rattled at all by the so-called crypto winter. “At current prices, I believe we are in the accumulation zone before the start of the next bull run,” he maintained. “At this stage, you should not care if you purchased at $23,000, $20,000, $18,000, $26,000 ... you will not care what exact price you paid in a few years when the next bull run pushes Bitcoin up to between $150,000-$200,000.”Iaskedhowhehandled the internet chatter about his role as a Bitcoin martyr. “At the end of the day I cannot change what happened. It is what it is,” he said. “There is always the chance my coins turn from millions into billions, and then it would be an even bigger mistake. But I’m prepared for that now so when it does happen, I’m cool with it … plus, the chance of receiving the coins still exists, the data is still recoverable and I do not think that will change too much with time—unlike a lost lottery ticket that would have disintegrated by now. At least I still have a chance.”
Daniel Kuhn put it this way in an article for the CoinDesk news site: “In creating a tamperproof, append-only distributed data A
Bitcoin fundamentalist I asked Howells whether there’s some way to “rewind” to when he mined the coins and then “restore” them.
“In the beginning,” Howells responded, “I kind of felt like Oliver Twist asking his local council if he can dig in their landfill, and they repeat the same answer over and over.” That answer was “No.” To move the project forward, he assembled a team of pros to complete the task to a high commercial standard without damaging the environment. He wanted to show the deci sion-makers at Newport Council that this would be a serious recovery effort by profes sionals and not just one man with a shovel. At the high end, he estimates his plan will cost in the vicinity of $11 million. The profits, once the drive is successfully recovered, would be split among the team and theIt’stown.been frustrating for Howells that he can’t get a meeting with town officials even though this story is veri fiably viral. He says his efforts include “a pretty compre hensive team of experts in all area[s] of expertise required to perform a landfill reclama tionHe’soperation.”thinking of AI special ists to identify the hard drive amid the trash, waste management, specialists to deal with any contaminated materials and site-specif ic-specialists to provide local knowledge about this partic ularThelandfill.areaof the dig site is 250 meters by 250 meters by 15 meters deep. It’s about 40,000 tons of waste. Howells believes his team can complete the task in nine months to a year.
September/October 2022 | Luckbox 9
Vonetta Logan, a writer and comedian, appears daily on the tastytrade network. @vonettalogan approached $500 million in value.
“Who decides this?” he wants to know.
“Where does it end?” Howells doesn’t want shortcuts—not even for himself—because he believes in the integ rity of Bitcoin. I’m pretty sure that once those bad boys reached $500, I’d run over a family member to get my money back. In fact, there’s precedent. In 2016, Ethereum agreed to restore some $60 million to one of the curren cy’s holders after the crypto was stolen through a vulnerability in ether’s code.
“If Bitcoin did work this way,” he replied, “it would be broken, and it would not be valuable at all … like zero! The fact that even I cannot get my coins back without the original private key proves that Bitcoin’s security system is as good as it is claimed.”
An estimated 20% of all bitcoin currently in circulation—2.78 to 3.79 million out of around 18.5 million coins—are held in lost wallets, according to Chainalysis, a blockchain data platform that assists financial institutions.
As a systems engineer, he knows how to organize a project, and he’s developed increas ingly sophisticated strategies for finding the hard drive. I reached out via Twitter to ask him about his plan.
bitcoin-ladenharddriveislanguishingsomewhereinthisWelshlandfill.
He’s trying to bide his time, but this project has become a driving force in his life. “I am trying to be patient and engage with Newport City Council in a business-like manner in order to work with them on this rather than against them,” he said. “If they absolutely continue to refuse any and all access to the site then, yes, court action is a viable option but only as a very, very last resort.”
Moving forward
If developers could make back-end code changes to re-issue the coins, Howells contin ued, then what would stop them from giving back anyone else’s coins? What would stop governments from demanding certain coins are moved from this wallet to that wallet?
So every day, Howells holds out hope and pushes on. His life is quieter now. His part ner has left and taken his three kids with her. I asked if he had any thoughts on who should play him in the movie of his life. He laughed and said, “LOL. Absolutely no idea.”
But movie or not, this is one story that I hope has a happy ending because no one should pay this high a price for regret.
Howells’ missing bitcoins might increase in value from millions of dollars to billions. base, Bitcoin founder Satoshi Nakamoto also created a monetary system that would be very hard to hack, censor or dismantle.”
byArt WAGNERMARK
The Fed is aiming for a soft landing, diamonds could become the newest asset class, and the fate of crypto is becoming the focus of debate after bitcoin lost 70% of its value in this year’s meltdown.
September/October 2022 | Luckbox 11 Assets&DiamondsDollars,Digital SOFT LANDINGS / 12 DIAMOND DAYS / 16 CRYPTO USE CASES / 20 THE CRYPTO DEBATE / 22 THE CASE AGAINST CRYPTO / 27 BLOCKCHAIN EXPLAINED / 28 CRYPTO CRIMINALS / 30 SENTIMENTAL INVESTING / 34
C
onsider the following: Andrew Brig den, chief economist at Fathom Consulting, found that 469 inter national economic downturns occurred between 1988 and 2020. Of those events, the International Monetary Fund had predicted only four. When it comes to forecasting the likeli hood of a soft or hard landing by late 2023, it’s anyone’s guess. In a world where political and economic leaders no longer agree on a simple definition of a “recession,” what chance do they have of accurately predicting crisis or recovery? The central bank must attempt a soft landing through aggressive rate policy and old-fash ioned luck as inflation pressures continue. In addition, several new risk factors—foreign to previous inflationary cycles—could further entrench inflation and create even more uncertainty.
A soft landing for both the economy and the strong dollar seems like a fantasy in these uncertain times. That’s why investors should look back to the 1970s for ideas on how to proceed.
BY GARRETT BALDWIN
MIXED SIGNALS In August, markets rallied on low volume after the Commerce Department reported an 8.5% annual increase in the Consumer Price Index (CPI). Core CPI—a measurement stripping volatile food and energy costs from the equa tion—registered at Month-over-month,5.9%.core CPI was flat but stillTheelevated.White House took a victory lap in response to the data, with President Joe Biden telling Americans there was “zero inflation” in July. Half-truths and new definitions for basic economic terms have become pastimes among officials. Despite two consecutive quar ters of GDP contraction (a common measure ment of past recessions) earlier this year, Federal Reserve Chairman Jerome Powell and National Economic Council Director Brian Deese both argued that the U.S. economy did not fall into recession. Treasury Secretary
Hedge fund manager Bill Ackman has suggested the Fed may need to increase the Fed funds rate to 5% in 2023 to contain entrenched inflation and wages. Ackman has indicated the market failed to price in such risk. Zoltan Pozsar, global head of short-term
The Fed’s HIGH-WIRE ACT
DOLLARS DIAMONDS & DIGITAL ASSETS
12 Luckbox | September/October 2022 WAGNERMARKILLUSTRATION:PHOTO
Janet Yellen and Nobel laureate economist Paul Krugman were counted among the many whoAnagreed.argument over the definition of a reces sion erupted in online portals. Wikipedia permitted the removal of “two straight quar ters of economic contraction” from its defi nition. The website later locked the page to prevent revision. Facebook and Instagram now flag discussions around recession that don’t fit the official narrative. That said, Deese had used the “two quarters” definition on tele vision for over a decade. So, too, have many recession-denying officials. These semantics matter. Even though the National Bureau of Economic Research will decide whether the U.S. economy fell into recession this year, it’s important to note that an official recession has been declared 10 consecu tive times that the economy experienced nega tive economic growth in two straight quarters. But the odds of an announced recession before the election is 0% likely. Even if the U.S. isn’t in recession, the likelihood increases as the Federal Reserve must take action to tame ugly inflation numbers. With the CPI reaching 8.5% in July, the real U.S. interest rate (based on the Fed Funds rate of 2.5%) is negative 6%. That’s the lowest level on record and draws comparisons with the inflationary cycle of the 1970s. While many pundits believe inflation will cool over the next eight to 12 months, the transitory narrative never materialized, and new factors linked to wages and global supply chains have emerged.
DEGLOBALIZATION AND REALIGNMENT
Aside from the observations of analysts Pali hapitiya and Furchtgott-Roth, other challenges complicate the mid-to-long-term inflation picture, including warnings from the 1970s.
Washington University professor and former U.S. Transportation Department Deputy Assistant Secretary Diana FurchtgottRoth expressed similar concerns in June.
While Congress provided stimulus to enhance semiconductor production, the White House policies could limit U.S. oil and gas develop ment. For example, the White House raised oil royalty rates for the first time ever in 2022 and scaled back lease sales. It will also take time to expand supplies in various U.S. industries online. Today, the global semiconductor supply chain remains under pressure as concern grows over China’s possible invasion of Taiwan. Such an event could destabilize roughly 90% of the world wide semiconductor supply.
The second pathway is through fiscal policy. The recent passage of the Inflation Reduction Act raises corporate taxes, which could cause companies to pass along the expense by raising prices for consumers. In addition, Congress has again engaged in massive fiscal stimulus when inflation remains high. The Inflation Reduc tion Act will likely fail to live up to its name.
Finally, the Federal Reserve’s monetary policy is the bluntest tool against inflation. The central bank’s rate hikes increase the cost of capital, change consumer spending and affect the “aggregate demand” of the U.S. econ omy. When the Fed is forced to go it alone, especially with limited supply-side and fiscal policies, it could require a level of aggres siveness that stymies consumer spending on housing and other durable goods—the critical drivers of macroeconomic growth, according to Eric Basmajian at EPB Macro, a company that provides economic research. As Basmajian notes, these two components of the U.S. economy comprise less than 15% of GDP today but are the primary factors in deciding whether the U.S. economy swings between recessionary and expansionary periods.
There are three primary ways to combat inflation.Thefirst is through supply-side solutions. More products and services could bring the supply and demand imbalance into better equilibrium. Congressional or regulatory agency policy can promote these approaches.
Inflation (PCE) Fed Funds Rate20%15%10%5%0%-5% Source: Federal Reserve Economic Database (FRED) 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2020 2012 2014 2016 2018 2020 2022
The Fed Funds rate, defined as the Fed Funds upper limit less the core CPI, has descended deep into negative territory. That complicates efforts recovery.
real
“The Fed is projected to end the year at a Federal Funds rate of 3.25%—well below inflation,” she said. “Inflation has never been reduced with a Federal funds rate lower than the inflation rate.” The markets don’t believe such hikes are coming. In fact, investors have priced in rate cuts by the first quarter of 2023. The bet is the Fed will flinch and move to support the economy.Interest rate hikes above 5% could create problems for Washington, including higher borrowing costs at the Treasury when U.S. debt is north of $30 trillion. However, the Fed’s historic and aggressive moves on rate hikes have preceded other challenges at home and in the global economy. The higher the rate hikes go, the less soft the landing will be, even if such actions are necessary to prevent stagflation.
NOT MUCH HELP FROM CONGRESS
interest rate strategy at Credit Suisse, thinks a 6% Fed and an “L-shaped recovery” may be necessary to fix structural problems.
The Wharton School of the University of Pennsylvania assessed the legislation this way: “The act would have no meaningful effect on inflation in the near term but would reduce inflation by around 0.1 percentage points by the middle of the first decade.”
Venture capital manager Chamath Paliha pitiya has noted during several episodes of the All-In podcast that the U.S. has never tamed inflation after consecutive prints of CPI over 5% without bringing the Fed Funds rate above thatGeorgelevel.
Domestic prices remain stubbornly high. The July jobs report showed robust employ ment has been anchored by a 5.2% increase in hourly wages. That said, real wages remain lower than inflation, and the bulk of wage gains have been driven by individuals switching jobs. According to Pew Research, Americans who changed careers have earned a median 9.7% pay increase since 2020, while the median for employees who remained with the same employer was a 1.7% loss. With more job open ings in America than individuals seeking jobs, Has the economy ever really had a soft landing?
at
September/October 2022 | Luckbox 13
Get real
BLOOMBERG ’S THREE-ACT PLAY
Thecustomers.Russia-Ukraine war has fractured global supply flows in critical commodities, adding to supply chain problems lingering from the COVID-19 shutdowns. Both events are contributing to a continued shift toward deglobalization.“Ifthetrendtoward deglobalization contin ues, it could cause a supply-side shock,” writes Oleg Ruban, head of analytics applied research for Asia-Pacific at Morgan Stanley Capital International. “In addition to shortages, the lack of global competition and a long-term reduction in trade could add to inflation pres sure, as well as slower innovation cycles and lower long-term GDP growth.”
American consumers have opened a record number of credit card accounts, hinting at a cost-of-living crisis and the possibility of a credit bubble in 2023.
For decades, multinational companies have lowered the cost of labor by outsourcing manu facturing and other business lines to develop ingDuringnations.the period of globalization, the international workforce doubled in size. But the United States must now onshore criti cal supply chains in semiconductors, phar maceuticals and other industries that have relied on foreign labor and expertise. Paliha pitiya argues that while onshoring will benefit national security, companies will face chal lenges in controlling wages. That’s especially true if job openings increase, causing more workers to look for higher pay.
As noted, the blunt nature of the Fed’s rate hikes will increase the cost of borrowing and may aggregate demand for durable goods.
This was a critical challenge for the Federal Reserve and its Chairperson Arthur Burns in the 1970s, as it struggled to contain longterm inflationary pressures. Simon White, a commentator at Bloomberg Markets Live, notes that conditions in today’s economy could follow a similar inflationary trajectory.
White projects a similar “three-act play” with the Fed failing to account for structural inflation that fuels a resurgence in higher prices and CPI. “We are now in Act I, where inflation is high and rising,” writes White. “We will soon enter Act II, where a respite in inflation hoodwinks the Fed into believing it can prematurely take its foot off the tightening pedal prematurely.
Officials are speaking about recession in half-truths
and redefining basic economic terms. DOLLARS DIAMONDS & DIGITAL ASSETS A three-act play When the Feds fail to account for structural inflation, it fuels a resurgence in higher prices and CPI. Source: Bloomberg 1 8 15 22 29 36 43 50 57 64 71 78 85 92 99 106 113 120 127 134 141 148 155 Headline CPI Index (100=October 1967) Headline CPI Index (100=May 2020)200240220180160140 CPI9.1%Today:YoY Peak in YoY CPI, March 1980: Met with the Volcker Hikes 100120 Act newInflationI:highs Act II: The“allprematureclear” Act III: The comeback–with a vengeance
14 Luckbox | September/October 2022 observers expect wages to continue to rise, fueling further inflation as costs are passed on to
The fuel equation could change in October. By then, the White House is expected to end its policy of releasing 1 million barrels daily from the Strategic Petroleum Reserve. With aggregate demand under pressure in the gasoline markets, investors may want to examine other possible sectors facing supply challenges. Crushing aggregate demand with limited supply support can reintroduce infla tionary pressures if the Federal Reserve starts to cut interest rates again. If supply is flat and demand increases again, one should expect higher prices and a possible repeat of an infla tionary cycle linked to energy.
Meanwhile, the 2022 surge in gasoline prices presents an extremely critical challenge for the Federal Reserve as it raises and cuts interest rates. Gasoline prices have slumped since June, which is linked to a sharp drop in demand. The total demand for gasoline in the U.S. in the summer of 2022 was lower than the demand for fuel during the height of COVID lockdowns in the summer of 2020. At the same time, China’s demand has slumped because of ongoing lockdowns.
What’s more, the onshoring movement is transpiring during the most significant global realignment of the nations’ political and economic interests since World War II, a trend that’s not inspiring much media coverage. Since 2009, Brazil, Russia, India, China and South Africa (BRICS) have moved toward greater collaboration and closer political alli ance. Recently, the BRICS began negotiations with Argentina and Iran about further coop eration on trade and less reliance on the U.S. These seven nations—all engaged in a large amount of physical resource extraction and trade—represent more than 31% of the global GDP and 42% of the world’s population. In addition, the political alignment has given rise to rumors that these nations may explore a new currency for global trade. That could threaten the dollar’s strength in worldwide business and create new inflationary challenges.
secondaryUKbankingcrisisProlonged/significantdecline
Bond Mexicanturmoilmarketandcrisis Asian crisis 1997, Russian crisis 1998, and LTCM1998bailoutDotcombubblebursts U.S. collapsehousingsetsoffcontagionWorst year on record for % of global assets in territorynegative
In addition, real estate investment trusts— focusing on industrial properties—will benefit from reshoring international supply chains. Names like Stag Industrial Inc. (STAG), Duke Realty Corp. (DRE), and Prologis Inc. (PLD) are REITs that offer protection against inflation through rising rents and strong cash flow.
Source: Bloomberg
The central bank finally met the challenge until former Fed Chair Paul Volcker raised interest rates above the CPI. While the econ omy fell into a recession in the early 1980s, a combination of supply-side policy efforts helped restore economic confidence and investment.However, this time is different. The desta bilizing nature of deglobalization, record government debt and inflationary costs linked to the green transition creates unknowns that make relying on Fed policy alone a question able approach.
September/October 2022 | Luckbox 15
Investors should revisit assets in the oil-and-gas patch, particularly explora tion and production companies like Devon Energy (DVN) and ConocoPhillips (COP) that continue to return capital to investors in the form of higher dividends or aggressively pay down their balance sheets.
In addition, the playbook includes cheap community banks and financial thrifts that may eventually become takeover targets. Inflation can strain existing deposits among institutions. Besides, the consolidation of the financial sector will remain a trend for the foreseeable future.
THE LOST DECADE Even in the face of rising inflation, the so-called “hedge” assets like gold and bitcoin have underperformed in 2022. A stronger U.S. dollar and little concern about debt insolvency have put pressure on these assets and engen dered broader bearish sentiment. That said, investors who aren’t actively trading the ups and downs of the market should consider using a playbook from the past to confront the uncertainty of the Fed’s interest rate plan. As noted, the Fed’s fail ure to tame inflation in the 1970s suggests potential challenges may lie ahead.
shock.supply-sidecouldDeglobalizationcausea
In the public markets, dozens of community banking institutions are trading for less than their liquidation value. Buy and hold, and don’t look at them. Garrett Baldwin, a commodity and trade economist, serves as Luckbox’s editor at large. He actively trades value and momentum stocks and wagers on sports and prediction markets. Trouble ahead overseas? Increases in the U.S. Federal Funds rate often immediately precede financial crises abroad.
SOFT LANDING OR STAGFLATION Can the Federal Reserve achieve a soft landing? Has there ever really been one? It depends upon whom one asks, but a June 2022 report from the Congressional Research Service (CRS) noted that “soft landings are infrequent.”TheCRSalso said Powell highlighted soft landings in 1965, 1984 and 1994. But econ omists have pointed out differences between then and now. “Some other recessions, such as in 2020, should not be attributed to tighten ing,” the CRS wrote. “However, inflation was low in 1965 and 1994, and below 5% in 1984.”
in real asset prices
This sets the stage for Act III, where price growth stops falling and takes off again, this time making new highs.”
1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 20%18%16%14%12%10%8%6%4%2%0%
debtAmericanLatincrisisBlackMonday1987S&L1987crisisJapan bubble bursts, recession in West, UK housing crash, Scandi banking crises
To begin to answer that question, the chart “Trouble ahead overseas,” (top right) shows the Fed’s actions on rate hikes since 1974. Every time the Fed has moved quickly on rate hikes, a global crisis has emerged not long after. Though several crises were domestic, including Black Monday, the Great Reces sion and 2018’s market tantrum, one can’t help but notice the relationship between sharp rate hikes and global events like the Asian finan cial crisis, the Latin American debt crisis of the early 1980s and the Long-Term Capital Management bailout. In 1994, the Fed might have achieved a soft landing, but rate hikes helped fuel a collapse in the Mexican peso and the ensuing Tequila Crisis. These days, nations like Sri Lanka and Bangladesh have already experienced severe financial challenges because of rising debt. But the possible global contagion isn’t limited to one or two nations in the months or years ahead. The International Monetary Fund has warned that dozens of countries face debt pressures from a rising dollar. The known challenges carry steep risk. But the unknowns could produce additional pres sure that may force central banks to pivot and potentially commit a series of policy errors. The global economy is in uncharted waters, but the range of possible responses seems the same as in the 1970s.
While the U.S. economy may avoid a reces sion, there’s also the issue of an interconnected global economy. What should one make of the many emerging markets facing pressures over a rising dollar?
Determining that each coin carries the same value required a computer-science break through, according to Kinney. He’s a software engineer who has received 4,000 patents while starting four companies.
Each coin contains a mix of diamonds with the size, clarity and color to make it equal in value to all of the other coins that Diamond Standard makes. The mix of every coin the company will ever manufacture will be equal to all of the other coins. Thus, as the company’s name suggests, it’s establishing a standard for diamonds that will never change, even if the coins are created decades apart.
The Newest Asset Class DIAMONDS:
Diamond Standard records that process in the blockchain and anyone can look it up to see how the eight or nine diamonds came together
16 Luckbox | September/October 2022
DOLLARS DIAMONDS & DIGITAL ASSETS
Yet, investors really had no good way to take a position in those riches, so Kinney set about changing that. Eighteen months ago, he began manufacturing and selling diamond “coins” and “bars.” The former consist of eight or so diamonds embedded in a circle of resin several inches across, while the latter are larger resin rectangles housing diamonds with 10 times the value of a diamond coin.
$1,751 Value of an ounce of gold as of Aug. 23, 2022 $1 . 1 million Value of an ounce of diamonds
It’s why no one has been able to set a trans parent price for diamonds—until now. A former Twitter quantitative strate gist-turned-diamond-maven has set out to turn the one-of-a-kind stones into a mass-mar ket product and make them available to retail investors. Speaking by teleconference call from his Manhattan office 14 floors above the Diamond District, Cormac Kinney described his work at Diamond Standard, the company he formed to realize his gem-studded vision. He’s in the midst of transforming diamonds into a financial instrument by creating tech nology that commodifies the stones, establish ing an electronic market for buying and selling diamonds, starting a private fund based on diamonds, filing for regulatory approval for an exchange-traded fund (ETF) tied to diamonds, and offering what he describes as the first diamond options and the first diamond futures.
At his current company, he buys diamonds of every weight, color and clarity—every possi ble diamond except the most expensive, larg est ones and the smallest available. Then the computer divides them up evenly to put them into the coins and bars.
D
Diamonds arrayed in resin have the same value in every Diamond Standard coin and bar, helping to establish a transparent price. We’re cleaning up the entire diamond supply chain because we’re regulated. Everyone has to comply with standards that never before existed.
iamonds may be forever, but only a few of the biggest, most precious examples have been taken seriously as an investment vehicle. The problem’s been that each one is unique—they aren’t a tradable, undifferen tiated commodity like oil, gold, corn or pork bellies. Instead, they differ according to vari ables known as the 4Cs: cut, color, clarity and carat weight.
“It’s a $1.2 trillion asset,” he noted. “I’m talking about the above-ground diamonds dug up for the last 100 years—what they’re all worth if you mark them to market today.”
Kinney found his calling by chance. “My wife is a diamond dealer,” he said, “and I learned accidentally about the diamond market.” His initial lesson revealed the size of the market and made a profound impression.
A serial entrepreneur is working to transform one-of-a-kind gems into a tradable commodity BY ED MCKINLEY
While all this was happening, Diamond Standard also recently won approval to list futures on the CME Globex. It’s also been approved to launch options and expects to establish enough liquidity to offer them by early next year.
$1.2 trillion The value of all the diamonds dug up in the last 100 years
September/October 2022 | Luckbox 17 to match the standard. It’s not just a matter of averaging because diamonds increase in value exponentially as they approach flawlessness. But lookups should be easy because the coins carry QR codes like the ones restaurants use to digitize menus. The coins also contain a computer chip that stores a blockchain token. Whoever owns the token, owns the coin. “We have the world’s only regulatory license for a commodity token,” Kinney noted. But the superlatives don’t end there. “This is the world’s first-ever regulator-approved diamond commodity,” he said. At press time, coins were worth $6,160. Their price had increased $1,160, or 23.2%, since the initial public offering in 2021. They were up $130, or just over 1%, for the year.
The exchange vendors are all approved by the Gemological Institute of America, the authority that also grades every diamond before it’s offered on the exchange. Vendors sign agreements stipulating they will not manipulate prices or accept gems mined with child“We’relabor.cleaning up the entire diamond supply chain because we’re regulated,” Kinney said of the exchange. “It has to be compliant with all of these standards that never existed.”
There’s more to come, too. Another step for Diamond Standard will come as an ETF open to the general public. Investors will be able to add a position in diamonds to a portfolio of stocks, bonds and options.
commodity.ThecompanyofequalandwithabasedStandardDiamondresin-coincontainsmixofdiamondsthesize,claritycolortomakeitinvaluetoalltheothercoinstheproduces.result?A
Cormac Kinney is laboring to make diamonds silvercommodityindistinguishableanlikegold,orporkbellies.
Diamonds would bring diversification to any portfolio because they’re not correlated with other securities. In other words, they don’t rise or fall in value with other assets. The company is awaiting approval from the U.S. Securities and Exchange Commis sion to start the ETF. But the regulatory Each
Diamond Standard has sold 3,000 coins, and about 90% of the buyers have chosen to store them in facilities operated by the Brink’s security company. Kinney arranged for Brink’s to store them for $36 a year. He compared the 10% who keep their coins at home with gold bugs who enjoy a physical connection with a precious commodity. But investors don’t have to keep diamonds under lock and key at Brink’s or stashed in a safe in their home office to become involved in the market. Diamond Standard has started a private fund with its value based on coins and bars. It’s for accred ited investors only and requires a minimum commitment of $25,000.About 200 investors have subscribed to the private fund, including “several registered investment advisors who have given us pretty substantial allo cations,” he said, noting that the fund had been available to inves tors for only a few weeks when he spoke to Luckbox. Registered investment advi sors account for about 80% of the fund, with 20% coming directly from high-net-worth individuals. Several retirement accounts have bought shares in the fund because they had been following Diamond Stan dard’s progress, Kinney said, noting that they couldn’t buy coins or bars because they’re prohibited from purchas ing commodities. Most investors are trad ing through brokers who handle digital currencies.Thecompany is also building its own fee-free marketplace called the Diamond Standard Exchange. The exchange provides liquidity to earlier buyers and either a discount or faster delivery to subsequent buyers. It forces price discovery to create price transparency.
Since August 2020, outperformeddiamonds gold, silver and the S&P 500
“I wanted to make it much more of a liquid spot market, so we built our own,” Kinney noted.Diamond Standard started the exchange two years ago, and 150 of the world’s largest diamond vendors have joined. They list an average of a million diamonds a week. Kinney’s company uses the exchange to bid on every type of diamond. It’s fully automated and doesn’t rely on phones or traders.
DOLLARS DIAMONDS & DIGITAL ASSETS
Nearly 1 billion years
“The SEC asks you questions, and they don’t give any indications,” Kinney said. The date isn’t a matter of great importance, he main tained, because the private fund has been so successful. Still, the ETF should be operating in a year, he estimated.
Diamond Standard coins and bars have a smaller profile than hundred dollar bills but far more value.
Investors in Diamond Standard Co. include Rick Rieder, head of the global allocation team at asset BlackRockmanagerInc.
Age of the oldest diamonds
Initially, investors in the ETF will probably pay a fee of three-quarters of 1%. That’s a little high, Kinney conceded, noting that it should come down as the fund grows. Besides, it will prove its worth as a convenient fund that retains custody of the diamonds and pays for auditing and third-party administration, he said.
Diamond Standard can succeed if it attracts enough investors, Zimnisky maintained, noting that “liquidity would beget more liquidity, which would draw in more of the market.”
Making Diamonds Fungible
Recent developments with uranium might provide clues about what could happen with diamonds, in Kinney’s view.
18 Luckbox | September/October 2022
Because there’s been no financialization of diamonds until now, their value has remained flat for 20 years and has even declined once inflation is factored into the equation. They’ve increased in value only 42%. In the same time period, gold and silver have returned 430% to 530%, while the S&P 500 has risen 400%, the Diamond Standard website said.
Even at today’s prices, an ounce of price of nearly every security.
Age of the youngest diamonds agency hasn’t told the company when that approval might be forthcoming.
FOR DIAMONDS to become a mainstream vehicle for active investors and traders, some one has to turn them into an asset, making them interchangeable instead of one-of-akind, said Paul Zimnisky, a diamond jewelry industry analyst. That would make diamonds somewhat akin to a commodity like gold.
“So, there are all of these individual mar kets, thousands of them, and there are com plications that come with that with regards to turning it into a liquid investable market,” Zimnisky said. But a company called Diamond Standard aims to make diamonds fungible by grouping them into fixed batches based on rarity and value, he continued, noting that the firm is taking an objective, technical approach.“It’sthe best attempt I have seen to make diamonds a mainstream investible product,” he said. “So far, the company has shown itself to be very persistent in trying to make this concept work on a larger scale.”
Other factors favor diamonds as an invest ment, too, Kinney maintained.
4.5 billion years
Diamonds have turned around in recent years. Since August 2020, diamonds have increased in price by 47.74%, while the S&P 500 went up by 22.8% and gold declined by 14.52%, the site said. The gains will continue, Kinney predicted. Making diamonds a commodity will increase demand, he said, causing them to rise five-fold in price in the next five to seven years. Accord ing to his estimates, investors may buy about 15% of the world’s diamonds.
Diamonds are also a hard asset, unlike stocks or bonds that represent someone else’s liability. “It can’t default,” he said of diamonds. “You have it in your possession.”
diamonds is worth 10 times the price of an ounce of gold. That makes diamonds porta ble, Kinney said, noting that a tray containing a million dollars’ worth of coins and bars is the size of an iPad. The coins and bars come with enough authentication to trade them face-to-face, and tokenization enables investors to trade them electronically with a minimum of fric tion, he Eventually,said. diamonds will correlate with other assets, but for the next seven years, they’ll be in a one-time phase of posi tion-building, Kinney said. One-sided demand will prevent them from rising or fall ing in tandem with other assets except when a severe market turndown brings down the
Age of the planet Earth 4 billio n years
“An ounce of gold is an ounce of gold,” Zimnisky noted. “It’s understood to be 99.99% pure, and we know what the market is 24/7.” Di amonds, on the other hand, fall into thousands of categories with regard to size, quality and color—and then there’s rough and polished.
“What we’ve tried to do is plug into the whole familiar Wall Street commodities fund machine,” he said. “Something similar happened with uranium last year. For the first time, there were some uranium funds, and those funds ended up buying the [entire] available supply of uranium that’s liquid on the market and traded. They ended up driving up uranium 77% in seven months.”
FEW HAS THE SPICE . HAND-MADE IN SMALL BATCHES, USING A MASH-BILL INSPIRED BY WHISKEY’S PRE-PROHIBITION GOLDEN ERA. FEW COMBINES A HIGH RYE CONTENT & PEPPERY YEAST TO MAKE A UNIQUELY SPICY BOURBON.
INSPIREDBY1893
BY RYAN GRACE
A decentralized exchange, or DEX, is a mechanism used to trade or swap crypto currency. DEXs don’t require the limit order books employed by traditional financial intermediaries.InDEXs,automated market makers facilitate buying and selling. These “smart contracts” are essentially algorithms that use formulas to price assets and conduct trading activity. After connecting a crypto wallet to a DEX exchange, a user can trade cryptocur rency pairs on a peer-to-peer basis 24/7.
20 Luckbox | September/October 2022
The exchange in turn charges a small fee. All transactions are settled transparently on the S ome celebrate praise cryptocurrency as the most trans formative tech since the invention of the internet, while others condemn it as a gigantic and even dangerous bubble. Its eye-watering volatility means both the skep tics and adherents will be right some of the time.
So, if the narrative du jour doesn’t fit the recent price action or vice versa, what is it? What’s crypto good
Cryptofor?
WHAT IS IT GOOD FOR?
According to one view, crypto is simply a long-duration, high-beta technology invest ment. It’s not immune to business cycles, macroeconomics or rising interest rates.
DECENTRALIZED EXCHANGE: UNISWAP
For now, let’s chalk one up for the bears. After its recent peak-totrough drawdown of about 70%, crypto as an asset class is neither an inflation hedge nor a store of value—at least in the short term.
But that’s no reason not to review some of today’s applications that could offer a glimpse into what’s next for crypto.
As a result, it has embedded asymmetry with the potential to disrupt industries. That doesn’t mean, however, that all crypto use cases will succeed—or even the vast majority.
Nobody knows for certain where crypto is headed, nor when it is headed there. As with all nascent technologies, it’s impossible to predict developmental trajectories.
DOLLARS DIAMONDS & DIGITAL ASSETS
Critics disparage digital currency and believers praise it. Right now, the bears may seem clairvoyant, but investors who focus on the price of bitcoin may be missing three opportunities.
Some contend crypto has no intrinsic value, but the examples of Uniswap, Ribbon Finance and Aave represent compelling use cases. Not every crypto-based business plan will survive, but the technology is apparently here to stay. No one knows where crypto is going, but it seems unlikely to go away. These use cases not only present real finan cial utility provided by DeFi applications but are also opportunities for users to generate income when participating in these protocols. Users can generate yield by providing liquidity to decen tralized exchanges, selling options premium through options vaults, and by lending crypto to borrowers at variable interest rates.
OPTIONS VAULTS: RIBBON FINANCE Options vaults replicate derivatives trading strategies without the need for users to have a deep understanding of how derivatives actually work. Instead of navigating the complexities of manually structuring positions and trading options, investors simply deposit crypto into a vault. Then, via a smart contract, the vault automatically deploys the trading strategy. Ribbon Finance is the largest protocol avail able for users to participate in these products. Currently, only two options strategies are available on Ribbon: covered calls and secured putWithselling.Ribbon, investors can’t customize options trading strategies. Instead, the plat form employs “centralized” managers to pick and choose the expiration and strike prices of contracts using a combination of decentral ized options protocols and over-the-counter market makers. They’re similar to optionsbased exchange-traded funds.
Centralized banking is also weighed down with paperwork and requires long waiting periods. Anyone who has ever taken out a loan or applied for a mortgage can testify to that.
BORROWING AND LENDING: AAVE When you borrow money from a bank, you pay interest; when you lend money, you earn inter est. This traditional banking process, however, is neither transparent nor democratized.
Beyond trading, users can also gener ate income on DEXs by providing liquidity. Anyone can become a liquidity provider on Uniswap by depositing cryptocurrencies into what’s known as a liquidity pool. These pools of assets are then used to facilitate trading on theWhenexchange.investors swap one token or crypto currency for another, the amount of the asset they’re buying is removed from the pool, and the asset they are selling is added to the pool. Prices on the exchange are then adjusted to reflect the shifting balance of the pool. As trades occur, the fees charged by the exchange are distributed to the liquidity providers within the pool, in proportion to the amount of liquidity provided. DEXs could very well usher in a paradigm shift in how assets are traded. Besides provid ing liquidity for all token pairs, the technol ogy effectively lets anyone generate revenue on crypto by becoming a “mini market maker.”
It’s not much of a stretch to envision how DEXs could impact the status quo of the current financial system, particularly if more securities begin trading in tokenized forms.
On the other hand, Aave, an instantaneous smart contract-based cryptocurrency borrow ing and lending platform, is available to all. There’s no “credit check” or waiting period. Instead, loans are over-collateralized to miti gate risk, and anyone who has crypto to pledge as collateral can borrow. Like Uniswap, Aave uses “pools” to create liquidity. Lenders deposit money into the pools and receive interest, while borrowers take out loans and pay interest.
The spreads on the rates for borrowers and lenders are much tighter in decentralized finance, or DeFi, than in centralized finance. At a bank, savers may receive 0.5% interest from deposits, while borrowers might pay 3.5% interest. At Aave, they can deposit a U.S. dollar stable coin, which is pegged to the U.S. dollar, and earn 0.41% or borrow at 1.53%.
PRICE ISN’T EVERYTHING
Ryan Grace heads digital assets at IG North America. @tastytraderyan Uniswap has become the first decentralized financial application to generate over $1 billion in total transactional revenue.
REUTERSPHOTO: underlying blockchain. Today, the largest DEX is called Uniswap, and it runs on the Ethereum blockchain. Uniswap was launched in 2018 and has become the first decentralized financial appli cation to generate over $1 billion in total trans actional revenue. It also consistently rivals the trading volumes of well-known centralized crypto exchange platforms such as Coinbase.
September/October 2022 | Luckbox 21
DEBATECRYPTOGREATTHE
Proponents extoll the virtues of digital currency, while critics deem it worthless. Nearly everybody advocates regulating it. BY ELIZABETH OWENS-SCHIELE
DOLLARS DIAMONDS & DIGITAL ASSETS
22 Luckbox | September/October 2022 A SchemePonziortheFutureofMoney:
Stephen Diehl Campbell Harvey Greg Magadini
Recently, there have been several compa nies [Celsius, Voyager, Three Arrows] that had kind of a Lehman Brothers moment where they were offering bank-like services to the public, and it turns out they ran out of money, and there was a run on the bank. That decreases the entire faith in the entire ecosystem, which caused a run on a lot of other products, and people moved their money from crypto assets into safer assets.
THE PANEL
What’s the primary reason you would advocate for or against investing in cryptocurrencies?
Stephen Diehl Co-author of Popping the Crypto Bubble , Diehl is a software engineer and prolific crypto blogger based in London.
CAMPBELL HARVEY: I am a researcher. I do not advocate for any particular type of invest ment other than a diversified portfolio. But, it is a mistake to invest in a single crypto like bitcoin. That’s akin to investing in the equity
September/October 2022 | Luckbox 23
AnthonyEdwardNicholasKristinScaramucciSmithWeaverWoodford
EDWARD WOODFORD: Crypto and the foun dation of digital assets is a technology that can be applied to absolutely anything. It can be a means of transfer, it can be a store of value, it can be art, such as NFTs. The cryptocurrencies that are the largest assets today, like bitcoin, are seen more as a trad able asset. These are volatile assets, but the argument is simply, do you want better diversification? All the data points to the fact that you can have a better Sharpe ratio if you invest in digital assets as part of your portfolio. [ The Sharpe ratio measures risk-adjusted return. ]
Juthica Chou
STEPHEN DIEHL: There’s no such thing as an investment in cryptocurrency. Because with cryptocurrency, it’s an asset that has no income. There’s no underlying fundamentals, there’s no underlying cash flow, there’s no income. So investing in cryptocurrency is the same thing as going to Las Vegas and playing roulette. So one is not investing crypto, one is gambling on crypto.
GREG MAGADINI: From a pure investment perspective, cryptocurrencies are a para digm-shifting world event. No one truly knows what these things are worth yet. This means it’s an “even” playing field for investors. No one has 50 years experience with this asset class, and often retail investors are the first ones in. Traditionally, retail investors are the last ones in as they are excluded from VC (venture capital) invest ments, pre-IPO funding rounds. Another interesting facet of cryptocurrency investing is the opportunity to self-custody funds and travel the world with your wealth attached to you. This might not seem important in the Western world when things are working well, but it becomes infinitely important outside of that context.
@smdiehl One is not investing in crypto, one is gambling on crypto. —Stephen Diehl
NICHOLAS WEAVER: Cryptocurrencies start with zero sum: Every dollar “earned” is at the expense of someone else, and that’s before you consider the various costs in the system which turn it into a huge money loser. As such, the only “investment” it resembles is a giant Ponzi scheme and, in the end, the system will cost many billions of dollars of “investor” money.
ANTHONY SCARAMUCCI: Every investor should have some allocation to cryptocur rencies in their portfolio, even if it’s just 1% or 5% of your market exposure. It’s import ant to make a distinction between Bitcoin and everything else because the investment thesis is completely different. Bitcoin is the first technologically advanced non-sovereign currency or asset. Bitcoin’s tokenomics are clearly defined: It is censorship resistant, and the blockchain is secured through proof of work—which is the most secure consensus mechanism, although it uses lots of energy. For other cryptocurrencies, I believe we are in the early stages of a transition to a more decentralized financial system where trust is built into smart contracts that allow the financial system to operate without as many toll-taking intermediaries. We have a long way to go in terms of security of those decentralized systems, but I believe we will get there.
Founder and managing partner of SkyBridge Capital, Scaramucci launched the SkyBridge Bitcoin Fund and authored four books.
—Juthica Chou
@scaramucci
24 Luckbox | September/October 2022 DOLLARS DIAMONDS & DIGITAL ASSETS market and choosing a single company. It should also be recognized that people misper ceive that the tail risk for cryptos is much greater than equity markets. We show that the S&P 500 has many more 3,4,5 standard devia tion tail events than bitcoin or ether. Yet, it is a mistake to believe that adding cryptos to your portfolio leads to large diversification gains. In the past, bitcoin and ether had near-zero correlation with the S&P 500. The correlation is dramatically higher today. Crypto invest ment is dominated by speculators, and cryptos are “risk on” investments—in good times they do well and in bad times people dump their crypto along with other risky assets. This is a new space. There is considerable risk. However, we know from basic finance, there is a positive relation between risk and expected return. We are 1% into this disrup tion, and historically, there are advantages to getting in early—rather than waiting for the industry to mature.
@juthica
The [traditional] banking system has excluded billions of people from accessing life-changing financial services.
Anthony Scaramucci
CHOU: A key pillar of the value case for crypto is its permissionless nature, which enables it to be utilized in so many different ways. It follows that a core part of crypto’s appeal would be undermined if it lost its permission less nature so that vast swathes of the global population found themselves excluded by gatekeepers. This speaks to the heart of the crypto movement, which was developed as a viable alternative to the legacy—and permis sioned—banking system, which has excluded billions of people from accessing life-chang ing financial services. All to say, there would be very little point to the crypto movement if it ever became permissioned.
Our
—Anthony Scaramucci
WEAVER: The cryptocurrency boosters have had over a decade to show some realword utility, any utility, beyond paying for million-dollar ransoms and drug deals.
hope is innovation.withoutprotectsframework[cryptocomeWashingtonthatcanupwitharegulatory]thatinvestorsstifling
JUTHICA CHOU: I’d argue one of crypto’s main—and arguably overlooked—attrac tions is the fact it’s been utilized in so many different ways. This is often picked up by crit ics who argue crypto lacks a single constant and cohesive narrative and, therefore, no inherent utility. However, I’d counter by saying this is largely a result of the asset class’ permissionless nature and speaks to its persistent appeal for investors all around the world. Take bitcoin as an example. Investors in developed economies usually see bitcoin as an alternative means to gain exposure to the tech space, but we’ve seen how in other parts of the world, particularly in countries that lack a stable or accessible financial system, bitcoin is used as a means to purchase realworld goods and services. The trend for the multiplication of use cases will likely continue to accelerate, particularly with the substantial influx of both retail, and now institutional, investors who joined in the most recent cycle. Buying bitcoin or another crypto asset gives investors the opportunity to gain direct expo sure to what is effectively a Cambrian explo sion in utility. What would change your opinion?
DIEHL: Crypto is repeating the financial disas ters of the last 200 years. The Celsius meltdown was a very classical event. It was a bank run—an unregulated bank that was offering extremely
MAGADINI: These are tactical times to be flat or short cryptocurrencies from a trading perspective. Ultimately, these are speculative risk assets. Therefore, there’s a ton of two-way volatility to their prices. From a long-term investment perspective, jurisdictional regu lation could complicate holdings and invest ments. Should my country or state make it impossible to invest in cryptos, this may sway my thesis or force me to move away.
Juthica Chou Now head of OTC Options Trading at Kraken, Chou co-founded LedgerX, a bitcoin futures and swaps exchange.
SCARAMUCCI: What would change my mind about investing in bitcoin would be if the network were ever hacked or corrupted, which has never happened, and becomes less likely by the day as the network expands. What lesson should investors learn from the recent melt down in the cryptocurrency complex?
Campbell Harvey Professor of finance at Duke University, Harvey authored DeFi and the Future of Finance @camharvey
WOODFORD: It’s volatile, it’s a risky asset. It should be a portion of your portfolio, not the entirety of the portfolio. I think people talk about 2% to 6% of your portfolio being in crypto—mine is higher just because I’ve been in the crypto space for five years.
Nicholas Weaver Senior staff researcher at the Inter national Computer Science Institute, Weaver lectures at the University of California at Berkeley. @ncweaver
Edward Woodford Co-founder and CEO of Zero Hash, Wood ford also co-founded and served as CEO for Seed CX and How App. @zerohashx
high yield deposits to customers that were beyond belief. As it turns out, they were proba bly running something that was at first approx imation like a Ponzi scheme. That’s not new.
Gary Gensler, chairperson of the U.S. Securities and Exchange Commission, says the Howey Test from the 1940s applies to cryptocurrency. Should cryptocurrencies have to abide by the same regulations as securities, or should regulators devise new, bespoke rules?
SCARAMUCCI: The lessons investors need to heed with respect to the recent drop in crypto prices are: Size your positions correctly and think long term. Crypto is a new asset class and thus, inherently volatile. If you’re not willing to ride those waves of volatility, your asset allo cation should reflect that and crypto should be a small part of your portfolio. If you zoom out, crypto prices are on a steep upward trajec tory that resembles the early life of many of today’s leading tech stocks. If you’re invest ing in the space, don’t try to trade against the pros, invest for the long term and focus on high-quality assets. Also, learn best practices around trading, custody and service provid ers you use. Certain lending platforms were offering unrealistic returns backed by exces sive staking with customer assets. If you have the wherewithal, learn about self-custody with hard wallets. If you want to store your assets at a centralized entity, do your homework on that platform and work with best-in-class provid ers with transparent processes and balance sheets.
MAGADINI: There are a few lessons to be had here. First, there’s been a lot of passive yield and “convergence” trades recently and posi tioning got very crowded. The problem with a crowded trade is that once a player liquidates, the spread goes against other holders, then another tranche of traders is forced to liqui date, making spreads worse again … so on and so forth. Actually, astute traders might hunt for obvious and crowded trades to bet against. The other lesson is that OTC lending desks are opaque. Their activity is systematic, and it’s hard to gauge their risk. Lastly, third party custodi ans are unreliable. Remember: ‘Not your keys, not your coins’—this mantra has proven to be true over and over again throughout the years.
September/October 2022 | Luckbox 25
CHOU: First, this hasn’t been unique to crypto. The “meltdown” is part of a broader market downturn—the byproduct of a radi cal tightening in monetary policy in response to inflation running at levels not seen for 40 years—that has pretty much led to a sell-off in all asset classes, apart from the U.S. dollar. All that being said, this meltdown—like the one in 2018—has highlighted that many crypto companies still do not have adequate treasury and/or risk management protocols in place, leading many investors to lose access to their funds. This downturn has demonstrated that investors should thor oughly research the companies and protocols they’re looking to entrust their capital to.
HARVEY: This space is vola tile. It is the sixth time since 2013 we have seen a drawdown like this. Further, cryptos are risk-on assets like equities. When the equity market falls, so do cryptos on average. That explains lots of the current movement.
WEAVER: By and large, the cryptocurrency space is reca pitulating half a millennium of various financial failures while cloaking itself in a fog of technobabble. The regulations, such as the Howey Test, the regulations from the free bank area (on stable coins), and other older rules are very much: “If it looks like a duck, and quacks like a duck, and swims like a duck...”
DIEHL: Crypto assets are securities for stocks. They meet the legal description of securities—take some money, give it to a bunch of people to do something with it, and make a return based on the efforts of the people that run it. Whether you do it on a computer, or you do it on paper, it doesn’t matter. Crypto assets are securities just like we’ve had for 100 years. We’ve had secu rity since the stock markets in London in the 1700s. They meet the legal description, which under the Howey Test, has been in place for the last 75 years. The Securities Act
“Oneauthority.isthe regulation of dollar-backed stable coins, and this is a fairly new con cept,” she said. “It requires these sort of ful ly reserved assets, and there isn’t a uniform guidance around how to do that.”
DOLLARS DIAMONDS & DIGITAL ASSETS
WOODFORD: Should the Howey Test be applied to cryptocurrencies to test effect? Securities? For sure, but it needs to be updated. It’s a framework of discus sion of whether it’s a security, but there are definitely tokens that are securities, and there’s a bunch of tokens that are not securities.
of ‘33 is an enormously successful piece of regulation that has safeguarded U.S. capital markets for the last 100 years. I don’t see any reason why doing things on a computer should be exempt from the Securities Act, which should be technology agnostic, as Chair man Gensler says.
CRYPTOCURRENCY qualifies as an “investment contract” that would be subject to U.S. securities laws under the Howey Test from the 1940s, ac cording to Gary Gensler, chairperson of the U.S. Securities and Exchange Commission (SEC). The Blockchain Association agrees. “It’s very clear that the Howey Test applies to cryptocurrencies, just like it applies to oranges, right?” said Kristin Smith, the group’s executive director.
Similarly, the CFTC has authority only over commodity futures and some limited authority over fraud and manipulation in the underlying spot markets.
“Theregulation.SEConly has jurisdiction over securities, and if you’re dealing with a com modity spot market, they don’t have that authority,” Smith said.
It’s difficult to know exactly when a crypto becomes fully decentralized, Smith said, but even though application of the Howey Test is complicated, the bigger question is whether crypto is really a security and should be regulated as such.
That structure, she said, could fall under the purview of the Commodity Futures Trading Commission (CFTC). Smith believes the federal government and state agencies have done as much as they can within the laws that exist today to figure out how current regulations apply to cryptocur rencies, but there are two gaping holes with no
If something really egregious happens, the CFTC can step in, but it doesn’t have authority to regulate crypto spot exchang es. Smith believes Congress needs to designate the CFTC or the SEC to create a new authority to regulate the crypto market.“Ithink that 2023 is going to be the year we start to see some significant progress on that front,” she said. A Security or a Commodity?
Greg Magadini Co-founder and CEO of Genesis Vol atility, Magadini was a proprietary trader at SMB Capital, Chopper Trading and DRW. @genesisvol Kristin Smith Executive director of the Blockchain Association, Smith leads the crypto industry’s public policy initiatives.
“I think that most securities lawyers in the cryptocurrency space believe that most of the cryptocurrencies that traded on exchanges in the United States are not securities,” Smith said. “They are com modities and therefore require a different type of regulatory structure.”
26 Luckbox | September/October 2022
It’s one area where everyone agrees some sort of framework should be in place, and Congress has worked to move forward on that. The other area is crypto spot mar ket
@kmsmithdc The crypto ecosystem and the crypto industry are willing participants in the regulatory discussion. —Kristin Smith
When a crypto’s launched, there’s an expectation of profits based on the effort of a common enterprise, Smith contin ued. In the early days of a cryptocurrency network, it’s often a common enterprise with a single company and a team of developers setting forth their vision. But over time, the network becomes decentralized, she noted. Multiple teams, multiple people and multiple forces—not just a single common enterprise—begin to dictate the value of the currency.
MAGADINI: This is a personal philosophy and an eternal question—freedom or safety? I will choose freedom all the time. I think people are smart enough to make their own investment decisions. Should we restrict innovation to ensure these nascent markets are free of fraud? I would say, no. I’m not pro-fraud. I’m pro-innovation and progress. At the extreme, we could theoretically make investing extremely safe by making all forms of investments illegal, except holding cash at home under your mattress. Risk pays! Let people take risks. Let investors and found ers learn from their mistakes. We should prosecute theft, Ponzi schemes, and lying. But that isn’t the same as prosecuting individuals with a legitimate business whose tokens fall under a “technical” defi nition of securities.
SCARAMUCCI: I want to let the regulatory process play out in Washington, but we hope that Washing ton can develop a framework that protects investors without stifling innovation.
People created a lot of other projects like bitcoin and called them “cryptocurrencies.” They used different types of blockchains. They all tried to remake money but in differ ent ways. Some of them wanted to create new forms of banks, some of them wanted to create ways to break the law, and some of them really believed they were building good things for the world, until they blew up. A lot of normal people believed these lies. These people lost a lot of Cryptomoney.money was really bad at buying things in the real world since they had to pay taxes on it, so then people had to create imag inary things to buy. So they created collec tions of make-believe cartoon animals to buy. Many celebrities started promoting cartoon animals as a way to make money from their fame by playing make-believe. This hurt a lot of their fans when they realized what they were buying was imaginary and their investments collapsed.Despite all the anger about this project, a lot of rich people liked these cryptocurren cies because they could do bad things to make money with them that were illegal elsewhere. And rich people didn’t have much else to buy in the real world so they started to buy imagi nary things because the only way to grow their wealth was to run scams. A lot of history schol ars warned this was a repeat of the Gilded Age. Rich people became richer, and poor people became poorer. Crypto made that worse. Crypto was a story about giving people new money, but instead it just stole people’s old money and destroyed their lives. Unfortu nately, the world figured out crypto was a bad idea far too late. Stephen Diehl, a London-based cryptocurrency critic and co-author of Popping the Crypto Bubble, is widely quoted and publishes blogs at stephendiehl.com. He’s worked 15 years as a software engineer in financial services. @smdiehl
BY STEPHEN DIEHL Crypto was a story about giving people new money, but instead it just stole people’s old money and destroyed their lives. Unfortunately, the world figured out crypto was a bad idea far too late.
DOLLARS DIAMONDS & DIGITAL ASSETS
The first crypto project was called Bitcoin. It went badly because its technology and economics were poorly designed.
September/October 2022 | Luckbox 27
REPRINTED IN ENTIRETY WITH PERMISSION FROM
C
rypto was a project that wanted to remake money. Except many of the people who believed in this project didn’t like banks, didn’t like taxes and they didn’t like the government. They didn’t trust organizations of big groups of people, and they thought we should trust computers instead. The people who built this project had very weird ideas about regula tion, the history of finance and what makes goodMoneymoney.is normally created by national governments, and a group of people called a central bank who are given the job to make the money usable. They do this by controlling how it is lent out between banks and people.
Good money is money that exists to be lent out over many years for people to buy homes and to pay people to do jobs for other people. When this works, the economy grows and everyone is happier.Thefirst crypto project was called Bitcoin.
The Simple Argument CRYPTOAGAINST STEPHEN DIEHL
It started trying to be a special type of money that did not have a central bank. It went badly because its technology and economics were poorlyBitcoindesigned.wasbased on a technology called blockchain. It was like a spreadsheet that would update across multiple computers. But the catch to this technology was that people could only add new rows to the spreadsheet, they couldn’t delete rows. This initially seemed like it would be very useful, except in practice, it was very slow to update the spreadsheet and people realized they actually wanted to delete things. They also didn’t want to use a spread sheet that everyone in the world could see. The economics of Bitcoin were also bad. When people use money, they want to buy things with it quickly and they want to know that the price of the thing they want to buy won’t change drastically. Bitcoin is bad at both of these things. Bitcoin was bad at being stable money because the technology was not designed to do that, because it didn’t want to have a central bank. This was unfixable because the entire project was based on a badNotidea.only did the whole experiment not work, but over the 13 years it ran, it caused enormous damage to the natural environment of a planet already in peril. It consumed vast electricity, and mostly in countries where the resources needed to make that electricity were cheapest, and least regulated. So, then people made up a different story about Bitcoin. They said it was no longer money, it was a new type of investment. People said bitcoin was a way to make a lot of money really fast. But unlike other investments, bitcoin was built on bringing more people into the project because what they did wasn’t a good business. The business depended on paying one person by borrowing another person’s money until it all ran out of money.
o understand the value of cryp tocurrencies—or lack thereof— investors can begin by cultivating a working knowledge of the under lying technology: the blockchain.
DOLLARS DIAMONDS & DIGITAL ASSETS
Ultimately, the uses for the blockchain may be restricted only by the limits of human imagination.
Bitcoin, Ethereum and the other 19,000 or so versions of peer-to-peer money are simply components of blockchains. But blockchains can exist with no native cryptocurrency at all.
BITCOIN VERSUS ETHEREUM An understanding of a basic blockchain shows how a network like Bitcoin works. But Ethe reum isn’t quite the same. The greatest differ ence between these two networks comes down to two words: executable code. Bitcoin’s programming language is “Turing incomplete,” meaning it can understand only simple orders, such as buy and send. The Ethereum network uses a “Turing complete” language called Solidity. It’s used to write smart contracts, which is simply code executed on the Ethereum blockchain. Smart contracts provide the foundation for dApps (decentralized applications). The contracts run on basic computer code. They’re somewhat like vending machines: Once a programmer provides a predetermined input (the insertion of cash), an output is produced (a bag of chips). No intermediary is required. Bitcoin and Ethereum have a lot in common, but Ethereum seems to have the overall advantage.
28 Luckbox | September/October 2022
T
INTRODUCTION TO D EFI The brazen and burgeoning world of DeFi looks traditional centralized finance (CeFi) square in the eye and says, “Anything you can do, I can do Currentlybetter.”initsnascent stages, DeFi is a mirror image of the current financial system but offers numerous advantages. DeFi doesn’t require trust, provides high security and costs less per transaction. It’s more democratic and moredAppsefficient.inDeFi enable any participant to partake in activities normally reserved for wealthy individuals and institutions. That includes staking, market making, lending or borrowing, and speculating with derivatives.
What’s wrong here? Well, humans can be quite unreliable. The system works only because we trust people to safeguard our money. In other words, depositors count on bankers not to drain cash from savings accounts. But the failure of numerous financial institu tions in the 2008 crisis inspired Satoshi Naka moto to invent Bitcoin. Unlike banks, Bitcoin doesn’t require trust. That’s because banks are centralized, and blockchains are decentralized.
Early iterations of the blockchain had a problem known as double-spending. Develop ers couldn’t prove cryptocurrency wasn’t spent twice. Like traditional banks, they were using a “trusted” third party to ensure that didn’t happen.
Then came Nakamoto’s white paper, which solved the problem by creating the world’s first truly decentralized blockchain network.
In other words, every participant in the Bitcoin protocol gets a say on the state of the network. It will succeed if the majority wants it to keep operating, which is in their best interest.
MORE ON D APPS dApps harness the power and security of a blockchain. It’s how Amazon (AMZN), Twit ter (TWTR) and Meta (META), parent of Facebook, capture the power of the internet. Blockchain is often referred to as Web3, or the third iteration of the internet. In this version, programs and applications aren’t stored on a server run by a central authority (like the companies above) but instead on a peer-to-peer decentralized network. The monetarily ambitious can interact with dApps in finance. This growing segment of blockchain is called “DeFi,” short for decen tralized finance. Let’s dig into DeFi next.
Blockchain Timeline 3200 B.C. Mesopotamianscreatethefirst clay ledger. 1900 B.C. Egyptians carve the firsthieroglyphscryptographic into a tomb. 1983 CryptographerDavidChaumcreates Protocol.”Signature“Blind 1989 David Chaum invents “DigiCash,” a electroniccentralizedcurrencygovernedbycryptographicprotocols.
In its most basic form, a blockchain is simply a ledger—a shared, decentralized and immutable ledger that securely stores transactions. Financial institutions use intricate ledgers to monitor and control the movement of funds. Withdraw $100 from an ATM, and the bank records the transaction and debits your balance. Large institutions are centralized, meaning a group of people takes responsibil ity for securing our finances.
The Power of the BLOCKCHAIN Technology safeguards cryptocurrency by creating an immutable ledger and banishing less-than-reliable humans from the equation BY MIKE MARTIN
Here’s what he wrote: “We propose a solu tion to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.” Besides establishing a trust-free system for transactions, Bitcoin uses blockchain technol ogy to ensure security through the SHA-256 algorithm.Banksare often hacked, but that’s never happened to networks like Bitcoin and Ethe reum. Once a transaction is placed in a “block” and that block is added to the blockchain, it becomes immutable—the equivalent of being set in stone. So, let’s review a hypothetical bitcoin trans action to see how it works.
6 Miners paid Miners who solve the cryptographic puzzle are compensated in two ways. They receive the number of coins specified by the protocol and the fees participants attach to their transactions.
Most NFT transactions occur in a centralized marketplace called OpenSea.
The acronym “NFT” stands for non-fungible token. Fungible simply means interchange able. U.S. currency fits the definition because any $1 bill is as good as the next. Non-fungible means an asset is unique and cannot be inter changed. All paintings by Cezanne, for exam ple, are not valued equally. Think of NFTs as digital collectibles. Cate gories include digital art, sports clips, photo graphs, music, memes and trading cards.
The first stop for Dave’s cryptocurrency transaction is a mempool, a database of pending transactions that acts as a waiting area. Miners (or sometimes “validators”) sift through the transactions in their mempool to make sure they’re valid. They include the transactions with the highest fees in a block to be validated.
USE CASES So, are people actually using blockchains? Yes! Aside from the consumers interacting with the aforementioned dApps, companies and governments are employing the power of the chain. In 2022, De Beers launched Tracr, a block chain-powered platform that tracks and manages the production of its diamonds. The technology traces gems to their source to assure customers they’re not buying “blood diamonds.”Meanwhile, the Illinois Blockchain Initia tive aims to use the power of the technology to secure the records of the state’s citizens, such as birth certificates, death certificates, Social Security numbers and passports. Globally, about a third of all food is lost or wasted, but IBM has created the Food Trust blockchain to digitize supply chains, which helps reduce Ultimately,spoiling.theuses for the blockchain may be restricted only by the limits of human imagination.
1991 Stuart Haber and W. Scott publishStornetta How to Time-Stamp a Digital Document—the foundational idea for blockchain.
FUN FACT: The bitcoin cryptocurrency is spelled with a lowercase “b,” while the Bitcoin network is capitalized.
A upswing500% doesn’t seem outside the realm of forpossibilitybitcoin.
4 Verification After a block is validated, the transactions in it are broadcast to the entire network. Nodes in the network accept the block only if the transactions are valid and have not already been spent.
1993 Moni Naor and Cynthia Dwork invent “proof of work” (PoW). 1998 Nick Szabo of DigiCash proposes “Bit Gold”—the first decentralizedcurrency.virtual 2008 Satoshi Nakamoto writes a white paper entitled Bitcoin: A ElectronicPeer-to-PeerCashSystem. 2009 First bitcoin is mined. 2015 First ether coin is mined. 2016 First organizationautonomousdecentralized (DAO) is launched. 2017 Bitcoin futures begin trading on the MercantileChicagoExchange.
2 Transaction enters a mempool
1 Transaction requested Dave wants to send some of his bitcoin to Mary. He attaches a transaction fee to the order to ensure his transaction is selected for validation. After that step is complete, Dave sends the order and it’s broadcast to the peer-to-peer bitcoin network.
7 Bitcoin transaction is settled
3 Transaction enters a block for validation After miners have placed their chosen transactions in a block, they validate them by using algorithms to solve a cryptographic puzzle. In Bitcoin, the technique is called proof of work (PoW).
How Does A Blockchain Work?
September/October 2022 | Luckbox 29 NFT s
Mike Martin serves as tastytrade head of content for digital assets.
Even though the block that Dave’s transaction was in has been added to the blockchain, he still needs to wait for a few more coins to be mined for confirmation. Once a few more blocks are added (typically six), the potential for double spending is eliminated, and Dave’s transfer of bitcoin to Mary is finalized.
5 Block added to the chain After all the transactions in a block are both validated and verified, the block is added to the blockchain. Once added, the transactions become immutable. They can never be altered.
Last year, $8.6 billion worth of cryptocurrency was laundered by cybercriminals, Chainalysis said. By transaction volume, scams represented the largest type of crypto crime, including a type of scam called “rug pulls,” in which founders of a coin or DeFi project begin by luring in unsuspecting investors. Then the founders cash out, causing the value of the cryptocurrency to fall to zilch. Laundering billion increase $602 million in At least 140 ransomware strains in 2021, up from 119 in 2020 and 79 in The average ransomware payment size was greater than $118,000, up from $88,000 in
2019 >
in 2021 > 30%
DOLLARS DIAMONDS & DIGITAL ASSETS
2021 >
Money
BY WELD ROYAL
30 Luckbox | September/October 2022
over 2020 Ransomware >
Crypto charlatans are using novel schemes to separate investors from billions of dollars.
Last year alone, illicit addresses received $14 billion, up from $7.8 billion in 2020, according to blockchain analysis company Chainalysis. The firm identifies scams and stolen funds as the fastest growing areas of crypto crime.
CRIME SPREE Crypto
Cryptocurrency crime reaches an all-time high, affecting savvy and novice investors alike
Let’s look at who’s losing money and how much. We’ll also outline prevalent schemes for committing fraud, speculate on where crypto fugitives might hide out, and review the growing list of lawsuits by investors looking to recoup cryptorelated losses.
> $8.6
2020 and $25,000 in 2019 Stolen Funds > $3.2 billion stolen in 2021 • Almost 6x the amount stolen in 2020 • $2.3 billion stolen from DeFi platforms > Code exploits, security breaches and flash loans result in stolen funds Share of 2021 ransomware revenue taken by Russia-affiliated strains CIS-avoiding Evil Corp Other Russian connection No indication of Russian connection OVER81%WORLDWIDEVICTIMSSCAMMEDBILLION$7.7FROMRISE2020 ChainalysisSource:$108$08$58$158 $4.68 $11.78 $7.88 Total cryptocurrency value received by illicit addresses, 2017-2021 MalwareCybercriminal administrator Fraud shop Darknet market Child abuse material Terrorism financing Stolen funds Scam Sanctions Ransomware 2017 2018 2019 2020 2021 BILLIONS $4.48 $14.08 26.4%27.4%36.4% 9.9% ChainalysisSource:
Investors in the United States, the European Union and other regions are bilked by crypto thieves in just a handful of nations, with Russia, North Korea and Iran taking the lead.
In 2021, Russian cybercriminals set the pace for ransomware; North Korea’s hacks flourished and bitcoin mining helped Iran evade billion-dollar U.S. sanctions, according to Chainalysis.
Who’s losing money to crypto crime? The youngest and oldest investors, and just about everyone in between, according to the Federal Trade Commission. FTC data shows boomers have the highest losses. GenZ and millennials also suffer.
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$600,000,000$450,000,000$300,000,000$150,000,000 108530
Cyber hideouts
0 Amount stolen Number of hacks $29,152,000 $522,348,270 $254,545,976 $298,185,300 $395,407,153
Everyone’s hit hard
North Korea-linked hacks by total value stolen and number of hacks, 2017-2021 2017 2018 2019 2020 2021 Year
In Senate testimony in March, Shane Stansbury, a former federal prosecutor and fellow at Duke University, said that Iran and North Korea’s use of crypto to fund their regimes constitutes “a huge problem.”
> TAKING INVESTMENT ADVICE from someone you’re dating online can be particularly hazardous, according to the FTC. > 20-TO-49-YEAR-OLDS were more than three times as likely as older age groups to report losing cryptocurrency to a scammer.
> 30s ARE THE YEARS when people are the hardest hit by crypto schemes—35% of their reported fraud losses since 2021 were in crypto. > 70s ARE THE YEARS when people have the high est losses from crypto crime. Median individual reported losses tend to increase with age, topping out at $11,708 for people in their 70s.
“DARKNET”ILLICITMARKETSHITANALL-TIMEHIGHINREVENUE IN2021$2.1BILLION,$1.8BILLIONOFWHICHWASGENERATEDBYDRUG-FOCUSEDMARKETS ChainalysisSource:
32 Luckbox | September/October 2022 DOLLARS DIAMONDS & DIGITAL ASSETS
A timeline of Ruja Ignatova’s rise and fall
A FORMER COINBASE GLOBAL PRODUCT MANAGER in early August pleaded not guilty to what federal prosecutors say is the first insider trading case involving cryptocurrency.
2014 Ruja Ignatova founds OneCoin as a multilevelscheme.marketing
Blockchain Noir
2016 OneCoin’s shutteringexchangeso-calledcloses,theonlywayforOneCoinbuyerstorecoupinvestments. 2017 Ruja issuedbeingdisappearsIgnatovaafterchargedwithwirefraudandothercrimes;afederalwarrantisforherarrest.
The masterminds behind Web3 era crimes could have been created for Netflix original movies, and the glamorous Ruja Ignatova is one such villain. Authorities allege she stole $4 billion from investors worldwide. She is now on the FBI’s list of “Most Wanted Ignatova’sFugitives.”sagabegins in Bulgaria, moves to London, heads to Hong Kong, advances to Norway and finally winds up in Greece, where she disappears. Authorities allege the missing Oxfordeducated “cryptoqueen” defrauded investors through OneCoin, a Bulgarian-based crypto outlet.
WANTEDMOST
REUTERSPHOTOS:Kim Kardashian
CELSIUS is accused by Jason Stone, a former investment manager at the company, of using customer funds to fix the price of its own crypto token, engaging in fraud and ignoring risk protocols.
HIGH PROFILE CLASS ACTION SUITS AND OTHER LITIGATION FILED IN THE LAST YEAR INCLUDE: KIM KARDASHIAN and FLOYD MAYWEATHER are accused in a class action lawsuit filed in January 2022 of artificially inflating the price of the cryptocurrency EthereumMax.
2022 The FBI adds Ruja Ignatova to its Ten Most FugitivesWantedlist.
In 2014, Ignatova and others started offering commissions to hawkers of OneCoin who sold it to acquaintances in an alleged pyramid scheme. In globe-trotting engagements that included a packed house in London’s Wembley Stadium, Ignatova praised the token. “OneCoin is for everyone,” she told an audience in 2016. “Make payments everywhere, everyone, globally. And this is who we are. Global citizens of a small world, wanting to make a change.” Unfortunately, OneCoin proved worthless, and it wasn’t backed by blockchain technology, according to the FBI. The bureau issued an arrest warrant for Ignatova in 2017, the same year she went missing, and is offering a reward of up to $100,000 for information leading to her arrest.
TERRAFORM LABS (Luna, Terra Tokens) founder Do Kwon and several venture capital firms were sued by Illinois resident Nick Patterson, who claims the defendants violated federal securities laws and misled investors.
THREE ARROWS CAPITAL, a formerly high-flying crypto hedge fund that managed as much as $10 billion in assets until it collapsed into liquidation, had its assets frozen by a federal bankruptcy court in July.
The Signal in NOISE
focus on price action itself. The toolbox of indicators is applied to identify whether prices are in a trend or exhibit momentum and congestion. So, which has better tools—fundamental analysis or technical analysis? Well, the battle between fundamental and technical analysis never ends, and there’s no clear winner. Both face a key gap in identifying why prices are moving. The causal link between fundamen tal forces and price action is often too longterm to guide traders effectively. Technical analysis, at best, provides an X-ray of what’s happening but doesn’t explain why. But there’s hope. Sentiment provides the bridge between fundamentals and price levels. Sentiment, as an indicator for markets, has been around for decades. For example, the Michigan Consumer Sentiment surveys and the New York Federal Survey of Consumer Expectations provide general longer-term measures of expectations. Business sentiment indicators known as diffusion indicators, (i.e., purchasing manager indexes) provide a measure of optimism in the business sector. Documents like 10-Ks that companies provide to the Securities and Exchange Commission are also important for tracking investor sentiment. Those sources of sentiment fail to help inves tors plot near-term trading strategies. But sentiment based on YouTube talking heads and social media chatter provide a fairly new, nearly real-time tracking of market emotions.
To get ready, they’ll need to separate the signal from the noise, which takes more than the standard tools of fundamental and tech nical analysis. It requires understanding and measuring market emotions expressed as sentiment.Butlet’s begin with some thoughts on two types of analysis: fundamental and techni cal. Traditionally, investors have used both to shape Fundamentalstrades. provide a longer-term diagnosis of the forces at play. They include but aren’t limited to inflation, employment, economic growth and the money supply. Central banks pay close attention to changes in those Technicalmetrics.investors
34 Luckbox | September/October 2022
Understanding and measuring investor sentiment helps fill the gap left by fundamental and technical analysis BY ABE COFNAS
DOLLARS DIAMONDS & DIGITAL ASSETS
M
Source: Unt voluptate sum Googling inflation Google ranks inflation searches for this year. 100 means peak searches in the time frame.
arkets abhor extremes. That means the current era will end, and investors should prepare for the retrace ment—a phenomenon Investopedia defines as “the temporary reversal of an overarching trend in a stock’s price.”
In other words, social media-based senti ment fills the gaps left by both fundamental and technical analysis. Nobel laureate Robert Shiller noted in his recent book, Narrative Economics: How Stories Go Viral and Drive Major Economic Events, that story arcs are an
APR 202210 APR 24 MAY 8 MAY 22 JUN 5 JUN 19 JUL 3 JUL 17 JUL 31 1009060402030507080
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Trends data
But how does the often fervently bullish gold crowd explain downward swings in the precious metal? The answer lies in under standing gold sentiment. Gold is bullish when expectations of dovish Fed policy prevail. It swings bearishly when markets fear an increased rate of tightening.
INFLATION AND KING DOLLAR Most of the planet’s economic interflows are priced in U.S. dollars, making it the most important currency. A surging dollar has increased costs and decreased profits. In particular, multinational companies have been hurt by exchange rate risk.
WHAT TO EXPECT In the next three to six months, up to one year, investors who understand the underly ing sentiment narrative will gain an edge. Here are four forecasts based on the integration of fundamentals, technicals and sentiment.
THE DOLLAR AND THE EURO The euro’s parity with the U.S. dollar is the focus for traders. It’s also a play on whether the U.S. economy grows faster than the eurozone economy. At any moment in time, a sustained level at parity with the U.S. dollar depends on the result of a battle of expectations.
It’s time for investors to track the emotions that trigger price movements. Words become the new tool for understanding and predicting priceConsidermovements.thefollowing formula: Price = fundamentals x sentiment In this general equation, if fundamentals were positive but sentiment was negative, prices would have downward pressure. If fundamentals were negative but sentiment was positive, prices would reflect a bullish pressure. There are many variations.
If leaders at those companies paid atten tion to sentiment, it would not have come as a surprise. Understanding why the rising dollar has occurred can help prepare for the coming decline.It’sa question of fundamentals and timing. But the path ahead for the dollar will depend not only on the level of inflation but also on expectations that inflation and rate hikes will continue. Trading the dollar is also trading sentiment. U.S. dollar traders face the key sentiment question of the duration of inflation, as well as expectations for the rate of change in the coming months. Markets want to know whether peak inflation has occurred.
Second, the euro will be battling to remain near parity with the U.S. dollar, reflecting uncertainty of the dollar’s direction and the ability of the eurozone to achieve positive growth. If the ECB keeps raising rates while the Fed stops, bullish sentiment will emerge for the euro/U.S. dollar currency pair (EUR/USD).
Every trading decision results from an inves tor’s subjective judgment of the positivity or negativity of fundamentals and sentiment. The challenge is to quantify both fundamental and sentiment expectations properly. Sentiment analytics has become a third bucket of analy sis for trading currencies and other markets.
ABE COFNAS has been an analyst, coach and trader in currency markets for more than 25 years. He teamed up with Steve H. Hanke, professor of applied economics at Johns Hopkins University, to create the Hanke-Cofnas Gold Sentiment Score. It quantifies hourly social media sentiment on gold by tracking the frequency of key bullish and bearish words surfacing on the internet. Each word generates a score, and a total score per hour is calculated and ultimately produces turningpoint alerts that include buy and sell signals posted at thegoldsentimentreport.com
Technical investors focus on price action, including momentum and congestion.
important way to understand price movements.
September/October 2022 | Luckbox 35
First, sentiment about the U.S. dollar won’t shift in the short term because of expectations that the currency will remain volatile. In the longer term of one year, the U.S. dollar appears likely to decline with expectations of peak infla tion and cessation of the Fed’s rate increases.
Marshall McLuhan’s prophetic comment that “the media is the message” has come to full fruition. Social media and internet-based senti ment are important because they help extract the reason behind a price surge or sell-off.
Let’s take a high-level view of currency pair extremes and apply sentiment thinking to shape some trading scenarios.
Statements by the Federal Reserve provide a good source of dollar sentiment expectations. The Fed has been wrong many times, but trad ing the dollar requires making a judgment on Fed sentiment and expectations.
The exchange rate between the euro and U.S. dollar, or EUR/USD, could also strengthen against the U.S. dollar when market expecta tions favor a dovish Fed compared with a more hawkish European Central Bank (ECB). EUR/ USD traders should track what the ECB says in its rate decisions.
Google Trends, a site that analyzes search volume, can help with that judgment. Enter ing the search term inflation shows that the frequency of mentions continues a rocky road of peaks. Maybe Google Trends is telling inves tors something.
In fact, one of the best tools for reading the tea leaves of central bank sentiment is actu ally reading the key statements. Words count and can catalyze and crystalize the narratives that follow. One of the best examples of the power of words is when Italian Prime Minister Mario Draghi said the ECB will do everything to save the euro. GOLD But let’s not ignore gold and crypto. Both have emotionally linked, cult-like followings.
Fourth, gold traders who analyze senti ment will expect gold to swing up and down, as expectations for the U.S. economy remain in search of consensus. However, gold will rise to $1,900 within a year as the current ratehike regime will pause and the Fed may even begin stimulus.
It’s all a matter of coming to an understand ing of sentiment and adding its wisdom to fundamental and technical analysis.
Third, the yen seems likely to strengthen both in the near term and long term. Senti ment regarding the Japanese economy is that inflation there will stay above 2%. With U.S. inflation and interest rates flattening, the U.S. dollar exchange rate with Japanese yen, or USD/JPY, is positioned to drop significantly.
Think of gold as an emotional barome ter of anxiety about the effectiveness of the Fed. One of the best ways to trade gold is right after a Fed Statement, or a nonfarm payroll report. The direction gold takes will immedi ately reveal bullish or bearish sentiment.
Weller’s story isn’t unique, at least in the sense of pick leball discovery. For the past few years, the sport has grown immensely in popularity. The pandemic caused a 21% increase in participants from 2019 to 2020, and more than 4 million people played the game in 2021 in the U.S., according to USA Pickleball, the sport’s national governing body.
ByTrainPickleballTheKendallPolidori
A
September/October 2022 | Luckbox 37 trends life, luxury & the pursuit of happiness GAME THEORY
Here’s why America’s fastest growing sport isn’t likely to slow down anytime soon
t the height of the COVID-19 pandemic, Brian Weller and friend Dustin Martin, who’s now his business partner, were sitting around with noth ing to do—until a friend suggested they join in on a game of pickleball. Their neighborhood on the South Shore of Boston had tennis courts repainted as pickle ball
PICKLEBALL COURT DIMENSIONS SIDELINE NET HEIGHT: 34" @ CENTER + 36" @ POSTSNON-VOLLEYZONE(KITCHEN) NON-VOLLEYZONE(KITCHEN) BASELINE LINENVZ LINENVZ 44' 7'7' 15' 20'
“Thecourts.first week, it was maybe four couples and then the next couple of days, it was eight couples, then it was 12 couples,” Weller said. “Then someone was handling the drinks and cocktails, and then we’d all go over to another friend’s house after. So that’s how it started, we were like, ‘we could do something like this [on a bigger scale].’”
Last summer, Weller started a pop-up offering pick leball games, food, drinks and some additional games. In June, he found a large, permanent space and opened PKL Boston. It’s been booked up for reservations and lessons ever since.
So far, there are 38,140 known courts in the U.S. and 53,110 official members of the association—an increase of 43.5% over 2021, according to USA Pickleball. The organiza tion’s Places2Play database indicates that loca tions increased to 9,524 in 2021, with nearly 800 new locations added since 2020.
Worcester said the sport is one of the most equitable in the world because nearly anyone can play, regardless of age, athletic ability, gender or Worcesterbackground.addedthat MLP “is one of, if not the only, pro sports league that has completely equal footing for men and women. Co-ed teams play mixed doubles and genders play singles against each other in Dreambreakers [a unique tiebreaker found only in MLP]. We are champions for gender equality in sports, and person is a pickler waiting to happen.”
Pickleball Magazine is the official publication of USA Pickleball, the governing body of the sport.
4 MILLION PEOPLE played the game in 2021 in the U.S. — USA Pickleball
“As our vision states, Major League Pick leball believes pickleball makes the world a better, more joyful place,” said Anne Worces ter, strategic advisor for MLP. “So our greater purpose is to build this sport we love so much and bring it to as many people as possible. Every person is a pickler waiting to happen.”
Pickleball player Parris Todd taking the APP Franklin NYC Open Women’s Singles title at the USTA Billie Jean King National Tennis Center earlier this year. Pickleball is played with a plastic wiffle-like ball and solid, lightweight paddles.
Ken Herrmann, CEO and founder of the USA Pickleball-sanctioned Association of Pickleball Professionals Tour, has been lead ing the push for pickleball tournaments. After his Herrmann Tennis Academy closed, he was on the lookout to open another tennis club in Evanston, Illinois, when a team member from Wilson Sporting Goods questioned why he wasn’t including any pickleball courts in the blueprints.“Isaid,‘What do you mean pickleball?’ And he said, ‘This whole boom is coming, and you need to put pickleball courts in,’” Herrmann recalled. “Lo and behold, they were right. Wilson was creating this whole line of pick leball paddles and clothing and shoes, and all of the above. So I went ahead and educated myself on the business of pickleball.”
In 2018, he helped put together The Chicago Pickleball Open, which drew 400 players from across the country. After seeing how well that did, Herrmann put together a group of advisors to hold the first-ever national pickleball tour. They came up with a 13-city schedule and made the announcement in June 2019. The USA Pickleball was formed in 2005 to main tain the official rules, sanction tournaments, provide players with ratings and produce the annual USA Pickleball National Champion shipsTheTournament.growingattraction to pickleball resulted in the creation last year of Major League Pick leball, or MLP, which has four members on each of its 12 teams for a total of 48 players.
So, what exactly is pickleball? Think of the sport as a hybrid of badmin ton, ping pong and tennis, with a ball made of plastic that’s larger than a tennis ball. A single game is played to 11 points, and a team must win by two Accordingpoints.toNBC News, “Pickleball was the fastest-growing sport in the country from 2019-2021.”Foryears,the sport has been played primarily by folks 50 years of age and older, but it recently became a hot commodity among people of all ages. Pickleball bars like Weller’s PKL Boston are introducing it to a broader audience.
“Every
The bar has five pickleball courts, four shuffleboards, two cocktail bars, a full restau rant, lounge space and areas for cornhole—a bag-toss game. PKL is already looking to expand to other major cities like Chicago, New York, Denver and Nashville, Tennessee, Weller said. “We want to bring the game to everyone from an 8-year-old looking for a summer program to young adults looking to do some thing fun on the weekends,” he noted. “The sport is easy to pick up. I can play with my 10-year-old son, and we can have a pretty competitive game with two adults. That’s the overall appeal of the sport: Something easy that anyone can pick up and do.”
The essentials One paddle per player One plastic wiffle-like ball with holes One 3-foot net
38 Luckbox | September/October 2022 trends
pickleball is a great conduit for that.”
— Anne Worcester, strategic advisor, Major League Pickleball
APPOFCOURTESYTODD)(PARRISIMAGES;GETTYPADDLES)(PICKLEBALLPHOTOS:
For the first time, CBS Sports will broadcast professional pickleball this year at the PPA Tour Skechers Invitational Summer Championships at the Riviera Country Club in Los Angeles.
“The PPA Tour is proud to lead the way in advancing the sport of pickleball, and it will take a giant leap forward with the two-hour live television broadcast on CBS, said Connor Pardoe, commissioner of the Professional Pickleball Association—the PPA, not to be confused with the APP. “We are always look ing for ways to elevate the sport of pickleball.”
Source: Statista 2022 0465321 Number of participants in pickleball in the United States from 2014 to 2021 (In millions) 2014 2015 2016 2017 2018 2019 2020 2021 2.82 3.13 3.3 3.46 4.2 4.82 2.46 2.51 first tournament was set for March 2020 in Hilton Head, South Carolina, but then the pandemic happened.
Other investors in MLP teams include Los Angeles Lakers coowner Jim Buss, Milwaukee Bucks co-owner Marc Lasry and tennis star James Blake.
“We were able to put on three events during the fall of 2020. Last year, in 2021, we had 17 events, and this year, we have 32 events sched uled with over $2 million in prize money,” Herrmann said. About 700 to 800 players show up to each tournament, both professionals and amateurs, he said. Approximately 250 of those players are professionals who tend to play in multiple tournaments. The tour has also gone interna tional with the English Open and the Span ishAsOpen.astart up, the money was coming directly from Herrmann and other investors. Now, APP has a number of sponsors that contrib ute to the prize money. On average, professional pickleball players make $75,000-$100,000 a year, Herrmann said, and that’s without outside sponsorships.
Herrmann and Weller agree that the sport’s main appeal is its ease of play. “When you go and try to assess yourself in tennis, it can take years to improve your skill level. But because of the simplicity of pickleball, especially at a recreational grassroots level, a player can advance [rapidly] within a few months,” Herr mann said. He added that more Division 1 tennis play ers who might be struggling on the Associ ation of Tennis Professionals Tour or the Women’s Tennis Association Tour are realizing they can move to pickleball and get to the pro level really quickly. That way, they become a top 10 player in pickleball, instead of a top 200 player in Astennis.forthe future of the sport, Herr mann said APP is working hard to recruit younger athletes, hoping to make pickle ball an official Olympic sport in a few years. The association is pushing for intramu ral pickleball in colleges and universi ties to increase the chances of making it a scholarship sport one day—which will then motivate elementary school and high school kids to pick up the sport at a younger age. “Major League Pickleball has set a goal to have 40 million pickleball players in the U.S. by the year 2030,” Worcester said. “We’ve seen a 40% growth over the last three years ... we are well on our way.”
REUTERSBREES)(DREWSHUTTERSTOCK;COURT)(PICKLEBALLPHOTOS: Drew Breesrate.fasteraatsporttheuptakingareplayersfemalebutmen,areparticipantspickleballof60%About
PickleballUSA—
BIG DILLS
“We’re seeing more non-endemic sponsors get into the sport, whereas before, it was basi cally just paddle companies,” he noted. “Now we’re seeing bigger name brands come into the sport, which adds to the theory about growth in the sport.”
Pickleball courts are smaller than tennis courts.
Major League Pickleball, which was established in 2021 and expanded to 12 teams this year, is attracting the attention of stars and team owners from traditional sports. Drew Brees, former quarter back for the New Orleans Saints, has become part-owner of the Mad Drops Pickleball Club, an official major league team. Brees told CBS Sports he wants to help “raise awareness around the incredible players and com petitions in MLP, helping grow the sport of pickleball and fostering overall fan engagement.”
To Punk Metal
By Kendall Polidori
reaking into their own angsty punk metal songs, the Ulrich brothers— sons of the legendary Metallica drummer Lars Ulrich—ignited the screaming fans bunched around a Lollapalooza Chicago stage facing Lake Michigan. They played a full set of originals despite having only one single Bassist-vocaliststreaming.Layne
The Beatles, Stones and Zeppelin were awesome—but rock lives on. Why not break out of the classic rock cocoon and give new rock a chance? Rockhound is here to help. Think of it as a bridge from 1967 to today and beyond.
40 Luckbox | September/October 2022 POLIDORIKENDALLPHOTO:
B
Ulrich has a rapid, raspy voice. He sings ener getically with quick facial expressions and tongue movements (similar to Lars) in between lyrics. The other brother, drummer Myles Ulrich, puts his entire body into percussion, his long curly hair flopping about in different directions. They are Taipei Houston. If you didn’t already know they were the sons of Lars, you’d be able to tell after watching two seconds of their live set. But, they’re also much more than that. trends
Layne and Myles Ulrich, sons of Metallica’s Lars Ulrich, made their Lollapalooza Chicago debut with a Friday set on the BMI stage.
THE ROCKHOUND Taipei Houston Bring
Alternative Influences
‘ONELOLLAPALOOZA’SSONG’
START WITH Taipei Houston’s single As The Sun Sets, and you might hear a fuzzy guitar sound similar to Jack White’s style. That’s the key to experimentation—it’s all in what pedal and equipment you use.
“We know that stuff is obviously going to come up. The only way out of it, is through it,” says Myles back stage at Lollapalooza the morning after their July festival performance. “We just want to find our own voice and are trying to shape Taipei Hous ton as having its own identity and its own kind of creative atmosphere.”
Kendall Polidori is The Rockhound, Luckbox’s resident rock music critic. Follow her reviews on Instagram and Twitter @rockhoundlb.
Marvin Gaye and Tammi Terrell —EMMY MELI n Closer, Nine Inch Nails
Layne adds that despite growing up around influential music and musicians, it has always been a sepa rate thing for them. It’s been more about finding their own way. Much of that can be credited to their favorite band, Arctic Monkeys. Layne and Myles vividly recall hearing Arctic Monkeys’ first album Whatever People Say I Am, That’s What I’m Not when it first came out in 2006, when they were just 5 and 7 years old—and more specifically, the song From The Ritz To The Rubble. Although not as apparent in their own music, the brothers say Arctic Monkeys have had the most influence on them as musi cians, mainly because each of their albums feels like a new era.
September/October 2022 | Luckbox 41
“I was never pushed by anybody to do music,” Myles says. “I feel like I discovered it myself, which is a great thing because then when I really got into it, I felt like it was something that was my own.”
“With them, and also Radiohead and Jack White, each thing they do is so distinct, and they really are not afraid of [not] getting stuck in the things they do,” Layne says. “That’s one of the main things we think about— especially right now being a duo—not being afraid of pushing boundaries and branching out in different ways.”
As The Sun Sets
The two grew up in a musical envi ronment with their dad but also came of age experiencing San Francisco. Myles says it’s an intensely creative community, where they went to school with musicians and found their inter est in music by playing with friends.
n R U Mine? Arctic Monkeys —TAIPEI HOUSTON n What Once Was, Her’s n Watermusic, William Basinski n Hard to Explain, The Strokes —LAST DINOSAURS n Waiting In Vain, Bob Marley
—DAISY THE GREAT n Son Of The Sun, Willie Dunn —CALDER ALLEN
Punk metal band to look out for:
PAY ATTENTION TO how layered the song sounds with only two instruments. The duo uses every inch of their gear and builds off one another. Layne’s vocals also add to the energy of the song because he’s essen tially screaming—but in a controlled way that doesn’t overpower.
—GRABBITZ
The Rockhound has been asking musical artists, “If you could only listen to One Song for the rest of your life, what song would it be?” See more on @rockhoundlb.Instagram
In their latest single As The Sun Sets , Layne’s fuzzy, heavy bass is reminiscent of Jack White’s guitar work. But Myles says they come from a multifaceted place where their music is inspired by performers like Billie Eilish and Kendrick Lamar, and they hope to show more of those influences in their future work. The key is to keep listeners engaged. Taipei Houston was born in the pandemic, when Myles and Layne were in lockdown together at home. They’ve played music together for years, but the time inside allowed them to really focus on sitting down to play, sing and mess around on different instruments together. They also had more time to listen intently to music that spoke to them but also to the music they were creating. “It’s definitely exciting to finally share with people the recordings because we’ve been playing our songs live for [over a year now] but haven’t had anything recorded. So it’s a breath of fresh air,” Myles says.
n Ain’t No Mountain High Enough
KID KAPICHI –Taipei Houston
In the recordings, their modern take on punk metal shines through with loud and heavy instrumen tation despite having only one bass and drums—similar to Royal Blood. But their live performance is where their character truly shows. For them, it’s about keeping music experimental, energetic and, ulti mately, fun. The smiles on their faces on stage are the proof.
—BETO MONTENEGRO OF RAWAYANA n I’ll Be There, The Jackson 5 n Heartless, Ye —KAYCYY n Harvest Moon, Neil Young n Life On Mars? David Bowie
TaipeiMoreHouston
LOLLAPALOOZA HONORABLE MENTION: IDLES
IDLES are live musicians at their best. They not only know how to play aggres sive heavy punk rock but also know how to do it in an inviting way. Their shirts are soaked in sweat, and their floral dresses are falling off their broad shoul ders. Yes, floral dresses are punk. With lines like “Fuck the queen,” IDLES take punk to a different level. But at the core, they celebrate music through com munity, pleasure and, above all, love— making note of the power of being a lover, which Talbot says is “being open to offering a shoulder to someone else.”
In short, IDLES rock hard and play their instruments as though they won’t get a chance to play ever again. They also know how to deviate and sing Since U Been Gone by Kelly Clarkson because it’s catchy and why the hell not sing it.
British rock band IDLES sent festival-goers into a mosh pit frenzy with their Saturday night set at Lollapalooza in Chicago. Lee Kiernan
42 Luckbox | September/October 2022 GHANAPOONEHPHOTOS: trends
Joe Talbot’s face burns a fiery red. The veins in his neck protrude, and sweat trickles down his temples in a consistent stream. He leans forward, talk-like singing and screaming in his own British-punk way, looking straight into the crowd as though he’s talking directly to them. The lead singer of British rock band IDLES doesn’t look mad though—he’s amped up. An IDLES show is like attending an intense CrossFit workout with nonstop movement, only a bit angrier and more emotional. The first song of their Satur day night Lollapalooza Chicago in July set sent fans into a massive mosh pit frenzy. Some felt the music compelled them to move, but others couldn’t help but just stand in awe, watching the wildly exuber ant production on stage. Every single member of the band never once stops moving. The guitarists stomp around on stage, flipping their long hair and running into the photo pit before jump ing into the barricaded crowd. Talbot, on the other hand, whips and twirls his microphone around like a jump rope and shakes his hips to the high-speed rhythm.
Danny Wimmer Presents (DWP) has been curating live festivals for more than 10 years, with six in 2022 in cities across the U.S.
McCurry: Ticket sales are obviously very important, right? But we focus a lot on the fundamentals and how we can produce a safe and afford able festival. We try to check off all those boxes by finding ways to not ignore the increases that are hitting our industry daily. We find ways not to pass it on to the consumer while still producing a top tier festival experience. That’s a win for us. We do fan surveys and make sure that we’re on top of anything that needs to be tweaked or enhanced the next year. We have a lot of growth in the next five years, and we have to take into account things that are happening outside of our world with the cost of goods and infla tion. We want to make sure we are providing value back to our fans. After a decade of curating live entertainment, is there still anything people might not know about DWP?
September/October 2022 | Luckbox 43 trends RECORD HIGH
Themed Music Festivals
Danny ChamieWimmerMcCurry
Chamie McCurry: We love cele brating the local communities that we’re in. Inkcarceration was rooted in the fact that we have this gorgeous and historic building in the Ohio State Reforma tory, and from there, it just kind of took on a life of its own. It all ties back to what that community is best known for … combining the tattoos with the prison was a very easy concept to getDWPbehind.has prided itself since day one on want ing to bring the best and biggest rock festivals to the U.S. So for Inkcarcer ation, we pride ourselves on delivering exactly what the fans want. They want their rock, and that’s why it has been sold out the last two years. It is nonstop rock. It is right down the middle of rock ‘n’ roll includ ing your favorite bands, the best up-and-coming bands, and we have stayed focused in that genre. Tell us about Bourbon & Beyond. McCurry: We had been in Louis ville, [Kentucky], for a couple years doing Louder Than Life and had some real success there. The more time we spent in Louisville, the more we got to know the commu nity and the people who make up the city, and really got to know all the bourbon brands. At the time, there wasn’t really any other festi val that celebrated bourbon and that community. Bourbon is the No. 1 tourist attraction bringing people to Kentucky year round. We recognized that and because we are so invested and love this commu nity so much, we wanted to put on Bourbon & Beyond and celebrate that. It is the world’s largest bourbon and music festival. We have over 50 brands of bourbon that come in, we have the world’s largest menu of rare bourbons that can be sampled and purchased. We’ve really grown and embraced that urban community and all of our bourbon partners to be able to give the fans an experience where they can drink bourbon and listen to a variety of acts.
By Kendall Polidori Danny Wimmer, founder, and Chamie McCurry, chief marketing officer, discuss the entertainment company’s unique approach to music festivals D WP’s music festivals are often niche-oriented, such as the company?tion.tattoo-centricBourbonwhiskey-themed&BeyondandInkcarcera-Whyisthisafocusforthe
‘ONE SONG’ n No Quarter, Led Zeppelin —DANNY WIMMER n Landslide, Fleetwood Mac —CHAMIE MCCURRY The Rockhound has been asking musical artists, “If you could listen to only One Song for the rest of your life, what song would it be?” See more on @rockhoundlbInstagram:
Danny Wimmer: It’s no doubt the last few years have thrown a lot at our industry, and I believe we have more hurdles coming our way. But concert promoters, in general, are a resilient bunch, and if the last few years have taught us anything, it’s that when you focus on the funda mentals and put the fans’ experi ence at the forefront, you can have a lot of wins.
How does DWP gauge festival success?
McCurry: I think a lot of fans out there think that we’re this massive corporation that has thousands of employees. We do have thousands of employees when we get on site, because we are essentially building a city. On a day-to-day basis, though, we’re a small, independent company that really works overtime and goes the extra effort because every single person at the company is driven and fueled by the fan experience. We have less than 50 full-time employ ees and are able to produce some of the best, most attended and success ful festivals in the U.S. Where would you say the music festival industry is headed?
PRESENTSWIMMERDANNYANDTHRASHERSTEVEPHOTOS:
Luckbox Leans in with Danny Wimmer Presents: DWP has prided itself since day one on wanting to bring the best and biggest rock festivals to the U.S.
N ak ed or Covered, I t ’s Your Call.
BOOK VALUE By Tim Knight M y story begins in the summer of 1993. We were renting an office for my 1-year-old company, and one of the guys called me over to his desk to show me something. He fired up something on his screen called a “browser,” which enabled him to use this thing called the “internet.” At what should have been an epiphanic moment, I shrugged and told him it seemed like a way for nerds to look at obscene images. That wasn’t too far off the mark, but it didn’t exactly suggest a visionary moment on my part. I offer this anecdote to explain why, since that fateful day nearly a third of a century ago, I have been somewhat insecure about my ability to identify the next big thing. In recent years, the purported revolution has been crypto. Cognizant of this aforementioned insecurity, I have tried—I have really, really tried—to get it. I’ve read countless books and articles. I’ve watched hour after hour of videos. And, time and again, I’ve reached the same conclusion: This is a solution in search of a problem. A good friend of mine was kind enough to send me a book he thought would help me see the proverbial light. He’s a big believer in crypto, and he made me promise to read the book if he bought it for me. So that was that, and the book showed up.
The book, in fact, has very little to do with Bitcoin; it doesn’t even really get into the subject until about 200 pages in. Instead, it’s mostly a very enjoyable economics book—a true pleasure to read.
While these two schools have widely disparate methodologies and analytical frameworks, and while they are engaged in bitter academic fights accusing each other of not caring about the poor, the children, the environment, inequality or the buzzword du jour, they both agree on two unquestionable truths: First, the government has to expand the money supply. Second, both schools deserve more government funding to continue researching really important big questions which will lead them to find ever more creative ways of arriving at the first truth.
The author comes off as delightfully feisty—but if you’re a fan of John Maynard Keynes, you definitely don’t want to open this up because the author clearly has a white-hot disdain for the guy.
Tim Knight has used technical analysis to trade the equity and options markets for decades. He founded Prophet Financial Systems and created the website slopecharts.com, which offers free access to his charting platform. @slopeofhope
September/October 2022 | Luckbox 45 trends
I absolutely recommend this book, and if you’re not into crypto, don’t let the title dissuade you. If you have libertarian tendencies, this book will amplify them, as it did my own.
The difference is that the other books have only that boring boiler plate stuff, whereas the first 80% of this book is a terrific introduction to the Austrian school of economic thought.
As it stands, a large number of firms in all the advanced economies specialize in warfare as a business, and are thus reliant on perpetuating war to continue being in business. They live off government spending exclusively and have their entire existence reliant on there being perpetual wars necessitating ever-larger arms spending
It’s called The Bitcoin Standard: The Decentralized Alternative to Central Banking and was written by Saifedean Ammous. Having finished the book, allow me to share a few thoughts.
Luckbox’s Technician columnist reviews a crypto classic that explores bitcoin’s libertarian underpinnings
The StandardBitcoin
The author holds Keynes and the central banks responsible for most of the world’s woes and about 100 million human deaths. He also considers bitcoin the only legitimate digi talSomecurrency.excerpts should give readers a taste of the author’s colorful prose style: There are two main government-approved mainstream schools of economics thought: Keynesian and Monetarists.
The real impact of this is the widespread culture of conspicuous consumption, where people live their lives to buy ever-larger quantities of crap they do not need. When the alternative to spending money is witnessing your savings lose value over time, you might as well enjoy spending it before it loses its value. The financial decisions people make also reflect on all other aspects of your personality, engendering a high time preference in all aspects of life: depreciating currency costs, less saving, more borrowing, more short-termism in economic production and in artistic and cultural endeavors, and perhaps most damaging, the depletion of the soil of its nutrients, leading to ever lower levels of nutrients in food.
As I said, the book has surprisingly little to do with Bitcoin. Indeed, only the final portion of the book is about the cryptocurrency, and it kind of fizzles out by then. It’s pretty much the same boilerplate stuff about crypto that every other book has.
Jonas Shaende, chief economist of the Fiscal Policy Institute with a focus on economic relations and monetary systems.
More Debate See who won the debate YES NO
$1.78 TRILLION
SHOULD WE ISOLATE RUSSIA?
Emma Ashford, senior fellow at the Atlantic Council and author of Foreign Policy’s “It’s Debatable” column.
RUSSIA PUMPS10.5 MILLION BARRELS OF CRUDE AND CONDENSATE OIL PER DAY
62% FOR 20% AGAINST 18% UNDECIDED –AUDIENCE OPINION BEFORE THE DEBATE
The excerpts below come from a debate in July about whether or not it’s smart policy to impose sanctions against—or ban energy imports from—
MCFAUL: Isolation is the better strategy to achieve our national and international interests than all the alternatives. Isolation is a strategy to achieve something, as is engagement. It’s important to define what you are seeking to achieve. For the United States of America to achieve its most important objectives vis-a-vis Russia, isolation helps us more than engagement. If you’re going to argue for engagement, there are costs to engaging Mr. Putin today. Are you going to normalize annexation in the name of getting along with Putin? Are you going to forget about human rights and shake the hands of the guy who slaughtered thousands of people in Mariupol? That’s a trade you have to make.
INTELLIGENCE SQUARED U.S. invites some of the world’s brightest thinkers to debate issues. The organization was founded in New York in 2006 to promote intellectual diversity by 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.
McFaul, former U.S. ambassador to Russia and author of Cold War to Hot Peace Radan Kanev, member of European Parliament as a representative of the Democratic Bulgaria coalition.
RUSSIA PRODUCES14% OF THE WORLD’S TOTAL CRUDE AND CONDENSATE OIL SUPPLY
SHAENDE: A series of really adverse economic actions were taken against Russia without giving much thought to the destabilizing, prac tical impacts of such actions on the global economy. These actions were—we can say now—absolutely unsuccessful in forcing Russia to reverse course in Ukraine. From this standpoint alone, this policy of isolation has been ineffective. In fact, I would say Russia is winning because of this economic isolation. The income from energy doubled for Russia this year. Conversely, elsewhere, we have a situation where everybody is feeling the pinch, particularly in Europe. We have rising inflation, collapsing standards of living, and the industrial base of many European countries is built on cheap energy from Russia. Without the energy, this base is eroding.
46 Luckbox | September/October 2022 clarity.andlengthforeditedbeenhastranscriptThis SENTIMENT
Russia.Michael
RUSSIA IS THE SECOND LARGEST PRODUCER OF GAS, AND THE THIRD LARGEST OF OIL RUSSIA’S 2021 GDP
KANEV: I will start with brief history remarks on the issue of in tegrating or isolating Russia. I do it not because I love history but because Russia’s regimes—and especially Mr. Putin—are strongly preoccupied with history issues, and history is framing their political decisions quite often. The West, for centuries, has had this rather naive, even dangerous, dream of integrating Russia into a rule-based international community. Russia was first integrated as a main player in the so-called concert of powers in the 19th century and then be came a permanent member of the U.N. Security Council in the 20th century. Regretfully, in both cases, Russia uses this integration, this position, these new powers, in order to subdue, oppress and even try to erase a big part of Eastern Europe from the map of the world—and rather successfully.
ASHFORD: The West shouldn’t isolate Russia. We fully agree and acknowl edge that there may be an excellent moral case for doing so, particularly given the barbarity of the Russian invasion of Ukraine. But there are many practical considerations in economic and political space that make it hard to believe that isolating Russia would be an effective approach for the West. Long-term political isolation of Russia and economic isolation are going to bring significant costs here at home for domestic politics in Europe and the United States. We have already seen this as the economic impacts of the Western sanctions are contributing to falling standards of living, adding to inflation, and have produced a backlash against incumbents in elections in France and turmoil in governments in Bulgaria and Estonia.
• What can I do to take advantage of my opponent’s tendencies?
• Fold when they apply significant pressure.
Tight Passive—players who play too few hands too passively:
By Jonathan Little POKER PLAYING STYLES
• Do not value bet the turn and river against tight players who fold all their worst hands and continue with all their better hands.
• When calling a raise, ensure you are getting at least 10:1 implied odds with small pocket pairs and 20:1 with suited connectors.
Hand of a Cash Game
• Is my opponent doing anything to take advantage of me?
TIGHT PASSIVE THE ROCK LOOSE AGGRESSIVE THE LAG TIGHT AGGRESSIVE THE TAG
• Always put your opponent on a range of hands instead of a specific hand.
• Do NOT value bet when you think you have the best hand most of the time and you think your opponent will fold most hands that you beat.
• Bluff on later streets when they have a marginal range and you think they will fold.
• If you only pay attention to your own two cards, your position and your chip stack, you are certain to fail in the long run.
Your Opponent
• If they think you are wild, play tightly.
• Intelligently avoid them and focus on playing against the weak players.
Jonathan Little, a professional poker player and WPT Player of the Year, has amassed more than $7 million in live tournament winnings, written 15 best-selling books, teaches at pokercoaching.com, and owns @jonathanlittledeckofdegeneracy.com.
• What are my opponent’s tendencies?
VALUE BET a bet that encourages action from opponents likely holding lesser hands STACK OFF to bet “all-in”
• Value bet relentlessly.
• Think about the action on every street of every hand before you act.
Cash Game Cheat Sheet
HANDSSTARTING TIGHT PASSIVE AGGRESSIVE LOOSE LOOSE PASSIVE THE CALLING STATION
Loose Aggressive—players who play too many hands too aggressively:
• How should I alter my play based on the effective stack size?
• Realize they often have marginal hands even when they apply pressure.
• Relentlessly steal their blinds.
What to Focus on During Each
• Pay attention to every single hand that takes place during your cash game session.
Your Play
• What do I know about my opponent?
Loose Passive—players who play too many hands too passively:
Your Stack
• Bluff them on scary boards.
• Don’t play the same generic style all the time.
This poker pro shares cash poker secrets and explains how to compete against four types of players
• Relentlessly steal their blinds. Against players who play well:
• What does my opponent know or think he/she knows about me?
• If they think you are tight, bluff a lot.
Play to Your Opponent
LITTLEJONATHANOFCOURTESYPHOTO:
• When the effective stack is greater than 40 BBs, try to play lots of pots in position.
• Fold to their aggression. Tight Aggressive—players who play too few hands too aggressively:
• Do not stack off with hands worse than top pair, top kicker.
• Should I play in an exploitable or balanced manner against my opponent?
trends September/October 2022 | Luckbox 47 THE POKER TRADE
48 Luckbox | September/October 2022 trends (PRESENTS;WIMMERDANNYANDTHRASHERSTEVEBEYOND)&(BOURBONPHOTOS: GAMBITQUEEN’STHE REUTERS)
Visit tastytrade.com/events for tickets. CALENDAR SEPTEMBER 15 Greenpeace Day 15-18 Bourbon & Beyond Music Festival Louisville, KY 16-18 Riot Fest Music Festival Chicago 20 National Voter Registration Day 20-21 Federal Open Market Committee meetings OCTOBER 5-6 Blockchain Expo 2022 North America Santa Clara, CA 7-9, Austin City Limits Festival 14-16 Austin, TX 8 National Chess Day 10 Indigenous Peoples’ Day 12-13 CBDC Summit Washington 13-15 The Atlanta Bitcoin Conference Atlanta 16 National Liqueur Day 17-19 World Blockchain Summit Dubai, United Arab Emirates 22 Bad Trader Tour New York 22-23, When We Were Young 29 Music Festival Las Vegas 28 MLB World Series Kick-off 31 Halloween
You Had Us at Bourbon
The world’s largest bourbon and music festival, Bourbon & Beyond, returns to the Highland Festival Grounds at the Kentucky Exposition Center in Louisville this year with big names in rock, Americana, bluegrass, blues and alt-rock—adding a fourth day for the first time. Headliners include Jack White, Alanis Morissette, Kings of Leon, Brandi Carlile, Pearl Jam, Greta Van Fleet, Chris Stapleton and The Doobie Brothers. Music aside, the festival offers some of the best food and spirits found in Kentucky. Promoters have written about the festival’s “unique bourbon and culinary experiences, featuring demos and tastings from master distillers and celebrity chefs.” In 2019, the festival attracted more than 91,000 attendees. Chess Can Thank Netflix People have been playing some version of chess for more than 1,500 years, making it one of the oldest and most widely played games in the planet. In fact, around 605 million people around the world play the game regularly, according to WebTribunal. That’s a lot of players, but 2020 brought even more to the game because of the pandemic and the popularity of the Netflix original mini series, The Queen’s Gambit. Monthly active users on chess.com more than doubled from 8 million to nearly 17 million from October 2020 to April 2022, according to The New York Times. Also during that time, chess became an official esport. The platform had around 30 million official members before the pandemic, but the number grew to 57 million within the span of a year. As of November 2021, the platform attracted 75 million members, according to The Gamer website. Sales of the physical board game increased 87%, and books on the subject soared 603% after The Queen’s Gambit was released. The game’s popularity has remained high this year. So get ready for another round of stats in the near future. A Tasty Tour tastytrade kicked off its Bad Trader Tour in July, attracting more than 300 attendees to Chicago’s Vic Theatre. The road show continues with a Sept. 17 stop at AVALON Hollywood & Bardot in Los Angeles. It then travels to New York for an Oct. 22 gathering at Gramercy Theatre. The event is free and will feature veteran traders Tom Sosnoff, Liz Dierking and Jenny Andrews, along with Julia Spina, Victor Jones and Jermal Chandler.
tacticstrades& NO. 26
September/October 2022 | Luckbox
Costless collar risk and reward
Stock changesideways,goesdoesn’tinprice P/L would simply be the net premium from the options
movementStock profit/lossResulting
Stock goes down but stays above the put P/L would be the final price - cost of shares + net premium from the options Stock goes down below the put P/L would be the cost of shares - strike price + net premium from the options
Costless Collar
Investors use a collar to hedge against volatility in a stock’s price, and the two options create a floor and ceiling on profits and losses. The strategy is routed as one order for a credit, or a small debit. That depends on the risk and return desires per investor, as the distance of the call and put from the stock price determines a net debit or credit. Routing as a small debit, investors can choose a call farther from the stock’s price than the put. To route this trade as a small credit, investors choose a put farther out of the money than the call.
A collar potentially creates a target price to sell a stock position. Instead of timing the market, the short call means if that price is reached before the option expires, the stock is sold. Another benefit is the protection to large down moves, enabling investors to mitigate losses or ensure they lock in a profit on a pre-existing stock position. These benefits provide certainty to investors of potential future payouts, taking guesswork out of investing.However, the strategy limits the potential profit on the stock position. If the stock goes beyond the strike price of the call, the investor misses out on profits above the strike price. For some, this trade-off is worth it. Consider a costless collar using a crypto stock Block (SQ). Assuming Block’s share price is $87, it would cost $8,700 to buy 100 shares and we could sell a call with a strike price of $100 for approximately $3.40 per share. To turn this covered call into a costless collar, we would then buy a put that is cheaper than the call, such as the $75 put for $3 per share. This makes our effective purchase price $86.60 per share. What would happen to this position if the stock price moved?
By Eddie Rajcevic
Costless collars cap the potential profits of a stock position, but lower the effective purchase price, while also capping the maximum loss. A costless collar is formed from a combination of strategies to create a “free” position protecting 100 shares of stock. Here they are:
$1000 Stock Price Profit/Loss$-1000$-500$50060 70 80 90 100 110 120 0
Stock goes up If stock price goes past the strike price, the profit/loss (P/L) would be strike price - cost of shares + net premium from the options
Eddie Rajcevic, a member of the tastytrade research team, serves as co-host of the network’s Crypto Corner and Crypto Concepts shows. @erajcevic11
A covered call, which is a two-part strategy consisting of long shares of stock and short calls. A protective put, which is a risk management strategy that enables investors to protect themselves from a stock’s near-term moves lower. The cost of the protective put should be canceled out by selling a call against the long stock position.
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Investors can express bullish or bearish opinions on cryptocurrencies by trading the CME’s affordable (and more secure) micro futures contracts By James Blakeway FUTURES A SAVVY FUTURES TRADER’S TAKE ON THE MARKETS
September/October 2022 | Luckbox 51
Gone are the days of trading futures in a crowded trading pit at the Chicago Mercantile Exchange.
T he Chicago Mercantile Exchange (CME) has for decades provided insti tutional investors and hedgers access to two-sided, leveraged products for markets underserved by other asset classes. These markets include currencies, metals (both precious and industrial), and soft commodities like wheat and corn. These days, the landscape has shifted to include products tailored for active retail investors. The introduction of micro-futures in a wide variety of markets provides access to leveraged products with more appropriate sizing for risk management. With the rise of cryptocurrency over the past few years, the CME sprang into action in 2018, looking to offer active investors a bitcoin futures contract (/BTC) that would provide access and leverage to the crypto market. While drafting plans for the product, the exchange settled on five bitcoins as the total contract size. That made sense given the aver age price of bitcoin for the first three quarters of 2017 was around $2,100. However, by the end of the year, bitcoin rose in popularity and its price was soaring. When the futures became available for trading on Dec. 18, 2017, the price of bitcoin ideas
trades&tactics actionable trading
BIG BETS in Smaller Packages
REUTERSPHOTO:
So, why would an active investor favor trad ing cryptocurrency futures over buying and selling bitcoin or ether in the cash currency markets?
In 2021, with bitcoin pushing new highs one after another, the futures contract reached a surprisingly high notional value of $346,675, with the contract price at $69,355.
tacticstrades& 52 Luckbox | September/October 2022 was over $17,500, meaning a single futures contract controlled $87,500 of bitcoin ($17,500 x five coins). While that remained an accessible product for institutional speculators and hedge funds, it placed bitcoin futures out of reach for most individual active investors.
Last year also saw the CME’s introduc tion of futures on the second most popular cryptocurrency, ether. The larger contracts (/ETH) launched in February 2021, controlling 50 ether per contract, which at the time totaled $86,500 in notional value with ether trading forThe$1,730.micro ether contracts (/MET) were introduced in December of last year when the cryptocurrency was closer to its all-time high. Like the micro bitcoin futures, micro ether contracts control 0.1 of an ether coin. When introduced, each contract was worth $429 in notional value, 10% of the $4,290 price for ether. By the end of July with ether at $1,735, each contract was worth $173 in notional value.
Last year, CME went back to the drawing board and crafted the micro bitcoin contract (/MBT) in an attempt to offer cryptocurrency futures to a larger number of active investors. Micro bitcoin futures became avail able March 10 of last year, each contract controlling 0.1 (10%) of a single bitcoin. So even at the peak price of $69,355, each futures contract had a total value of $6,935, making it far more accessible for individual investors.
Overall, bitcoin and ether futures provide active investors a more capital efficient, exchange-traded, secure and regulated way to play the crypto market to the bullish or the bearish side.
One huge benefit of the futures market is the ability to express a bullish or bearish opin ion on the cryptocurrencies. While some cash crypto exchanges and firms are starting to allow investors to sell short (bet on the price going down), most firms still only offer the ability to buy cryptocurrencies in the hope they will go up. Futures enable active investors to speculate in either direction for bitcoin and ether, all in the same account that holds an investor’s stock or options positions. Another benefit of trading cryptocurrency futures is they’re provided by the CME. If they’re traded at a reputable brokerage, inves tors know they are trading a product from a respected exchange. This usually wouldn’t be worth mentioning but with multiple stories of investors unable to access their funds when crypto companies hit financial troubles, it’s worth considering the validity and security of how investors trade crypto. Lastly, crypto futures enable active inves tors to trade the currencies with leverage, typically only requiring half the total value of the contract in margin to place a trade. That’s more than a typical futures contract, but the added volatility of cryptocurrency means the margins are higher for those contracts.
For the same reasons more investors have used futures products in recent years.
A couple of risks stand out with crypto currency futures, the first being the prod uct itself. The market has demonstrated how volatile bitcoin and ether can be. Investors should be cognizant of the level of risk they are comfortable with, especially when trad ing with There’sleverage.alsosome degree of liquidity risk— the ability to trade in or out of the futures at prices an investor chooses. That’s because of the lower liquidity of cryptocurrency futures, with fewer contracts trading per day than more popularWhileproducts.futuresliquidity is low, the options on futures liquidity for cryptocurrencies is non-existent, meaning investors will likely want to steer clear of the futures options.
James Blakeway, Luckbox technical editor, serves as CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade that provides fee-free investment analysis and trade ideas for self-directed investors. @jamesblakeway
The bitcoincontractsreimaginedlastdrawingbackExchangeMercantileChicagowenttotheboardyearandmicroforandether. Product futuresBitcoin Ethereumfutures MicrofuturesBitcoin EthereumMicrofutures Symbol /BTC /ETH /MBT /MET Multiplier 5 50 0.1 0.1 Notional value $114,875 $84,000 $2,298 $168 marginEstimatedtotrade $61,565 $40,338 $1,237 $84 Data as of Aug. 5
As with some other asset classes, like soft commodities (wheat and corn), the choices for active investors to trade currencies via exchangetraded funds (ETFs) are extremely limiting.
Next-level Currency Trading Options on futures contracts offer possible tax advantages and precise definition of risk By Pete Mulmat OPTIONS ON FUTURES tacticstrades& Product Euro British pound Japanese yen Micro euro Micro pound Symbol /6E /6B /6J /M6E /M6B Price $1.02105 $1.2078 $0.0074325 $1.02105 $1.20780 Contract size 125,000 euros 62,500 pounds 12,500,000 yen 12,500 euros 6,250 pounds Notional $127,631.25 $75,487.50 $92,906.25 $12,763.13 $7,548.75 Options available? Yes Yes Yes No No Data as of Aug. 5 Currency futures and options can add layers of diversification to an investment portfolio.
Meanwhile, active investors who rely on sell ing options found new opportunity in currency futures options in 2022, thanks to materially higher implied volatilities than in recent years.
Active investors should be cognizant of the size of the futures contracts and what each futures position or options position controls. For those looking to speculate on outright direction in currencies, the Chicago Mercan tile Exchange (CME) offers micro futures such as the micro pound (/M6B) and micro euro (/M6E) contracts (see table). Unfortunately, given those products are new and still gaining popularity, no options are avail able. Those looking to add a currency options position will have to stick with the larger contracts. Keep in mind that options, even futures options, provide the possibility for defined risk trades. Active investors can always buy an option to protect a short option position or sell another option to reduce the cost of buying an option, either scenario creating a spread trade.
W hile stock market downfalls and soar ing interest rates have dominated the financial headlines in 2022, it’s also been quite a year for the currency markets.
ETFs that represent the euro, pound and yen have limited liquidity for buy-and-hold inves tors and near-zero liquidity for active inves tors focused on options. Investors who want to speculate or sell option premium on curren cies are far better served by stepping up to the futures options market.
So, if a trader has a 24% personal income tax rate and makes $100 on a futures options trade, the tax due would be: ($100 x 60% x 15%) + ($100 x 40% x 24%) = $18.60. Compare this to $100 of profits on ETF options: $100 x 24% = $24. Over the course of a year that can really add up! Futures can be daunting, futures options more so, but they are often a natural progression for stock, ETF and options investors. Do the research and understand the products and sizing. Ulti mately, investors can use currency futures and options to add new layers of diversification.
The U.S. dollar saw a relentless rally as capi tal fled other currencies around the world into the greenback while the Federal Reserve was raising interest rates. This naturally means a fall ing price in global currencies as demand for them dropped in favor of the dollar. Three of the world’s major currencies and currency futures—euro (/6E), British pound (/6B), and Japanese yen (/6J)—all collapsed in price. Putting aside the macroeco nomic impacts on global import ing and exporting of a strong dollar, 2022 is a unique year for currency trad ers. Trend followers betting on a continued fall of global currencies were rewarded for days and weeks at a time.
Here’s a comparison: In early August, the total open interest (contracts) for Septem ber options for FXE, a euro ETF, was 19,558, approximately $180 million in notional value. That’s across all strikes of both call and put options. The same metric for September options for the euro futures was 119,522 contracts, with more than $14 billion in notional value.
For example, consider the euro futures contract, /6E, which controls 125,000 euros. In most months, the options strikes are listed in 0.005 increments, such as 1.03 to 1.025.
While the obvious benefit of trading currency futures options is access to a market underserved by the ETF industry, an addi tional perk is the tax treatment.
September/October 2022 | Luckbox 53
Pete Mulmat, tastytrade chief futures strategist, serves as the host of Splash Into Futures on the tastytrade network. @traderpetem
Futures options are subject to the “60/40 rule,” meaning that profits are taxed 60% at the long-term capital gains tax rate of 15% and 40% at the investors personal income tax rate.
That means if an investor buys the 1.03 and sells the 1.025, the total possible value of the spread is $625 (0.005 x 125,000 euros). One begins to see futures options can be versatile products for many active investors, even if the notional size of the contract seems daunting.
If that holds true, bitcoin’s price hit its “forever” bottom at $17,600 on June 18.
Meanwhile, the number of new addresses mostly fell during that time, as did the number of smaller wallets and wallets larger than $20 million.Thissuggests most of bitcoin’s network activity since June came from people who were already in the market. They’re accumulating larger holdings as small—likely retail—inves tors disappear and whales distribute some of their holdings.
On and around that date, bitcoin holders sat on massive unrealized losses. When normal ized for market cap as “relative unrealized loss,” June’s peak marked the fourth-highest readingWhatever.happened after those other three peaks?Bitcoin’s price never went lower.
B itcoin may seem destined for lesser things.Why?
Because the world is running out of cash for speculative ventures like cryp tocurrency as governments raise interest rates and tighten monetary policy. Meanwhile, the specters of criminal investigations and regula tory ambiguity are also casting shadows over theThat’sscene.more than enough uncertainty to give even the most aggressive investor a moment’s pause, but Bitcoin has one feature no other investment has: A blockchain that provides a pseudonymous record of all transactions. Analysts can mine that public, verified data on bitcoin transactions to discover the rela tionships, behavior and actions of people who hold and use bitcoin as prices go up and down.
Now, no coins have been spent or sold in the last year from around 70% of bitcoin wallets. That’s the case despite the value of bitcoin doubling then falling by a half during that time.
These investors bought tens of billions of dollars worth of bitcoin in the middle of aggressive rate hikes, war and a collapse of some of the largest crypto businesses.
Strong hands getting stronger
Since June, the network has seen growth in the number of wallets of all sizes larger than $2,300.
To some extent, this shift reflects large movements of bitcoin out of exchanges and lending platforms into the self-custody of personalConsiderwallets.itcrypto’s version of a flight to safety.
By Mark Helfman Is Bitcoin at the Bottom?
Despite the looming disasters that may result from recent attempts at austerity and regu lation, bitcoin’s network shows the same behavior and technical signals as in previous, generational market bottoms.
The vast majority of bitcoin holders didn’t sell after a rise of 50% and a drop of 75%. They held through an epic rise and record-break ing losses. They saw a meltdown of historic proportions and still haven’t sold for months, possibly years.
If there was a time to panic-sell, that time has long since passed.
But regardless of the cause, the result is the same: more bitcoins in the hands of people who seem to want it more than they want their government’s money.
Bitcoin’s unrealized losses
0.51.5210 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Relative Unrealized Loss Price (USD) $0.02$0.06$0.10$0.40$0.80$2$6$10$40$80$200$600$1K$4K$8K$20K$60K$100K
Growing conviction among believers
tacticstrades&
Certainly, new owners may sell bitcoin as its price goes up. But what about down?
There is ample evidence that the sellers have left the market.
Barring economic catastrophe, this analyst believes the price of bitcoin is unlikely to go lower
Source: glassnode
Around the same time, bitcoin’s network also saw massive realized losses as lending platforms liquidated assets and speculators panic-sold en masse. On June 13, the network collectively realized $5 billion in losses, its largest ever.
While that may signal capitulation in the broad sense, the true believers still hold strong.
So, what does the data show?
54 Luckbox | September/October 2022 CRYPTO CURRENTLY THE STATE OF DIGITAL ASSETS AND DECENTRALIZED FINANCE
A few weeks earlier, the network shed $3.5 billion in losses. Bitcoin’s network realized $36 billion of cumulative losses in June.
Even the most ardent fans might sell their bitcoins if the financial circumstances get bad enough. You can’t eat bitcoin.
Mark Helfman, crypto analyst at Hacker Noon, edits and publishes the Crypto Is Easy newsletter at cryptoiseasy.substack.com. He is the author of Bitcoin or Bust: Wall Street’s Entry Into Cryptocurrency @mkhelfman
BITCOIN E
OrMaybe.maybe bitcoin’s price will go up because it has nowhere else to go. Everybody who wanted to sell has already sold, and everybody who bought will need for its price to go a lot higher before they sell. In that case, no amount of tightening will push bitcoin’s price lower than $17,600. If anything, that tightening may stoke anger among tradi tional investors who realize their assets have only as much value as their governments allow. What happens when bitcoin’s price goes down only a little while the stock market goes down a lot? At that point, disgruntled investors may make a pivot of their own to an asset that not even the U.S. Federal Reserve can control.
&
NATHEREUMVAILABLEOWAT
Given bitcoin’s historic volatility, the range of possible prices is always wide. Does it seem too far-fetched to think its price will never go lower than $17,600?
For those who think markets can go up only when new buyers arrive, there’s no evidence that new buyers have arrived. Trading volume, network usage, new wallets and exchange inflows remain subdued.
September/October 2022 | Luckbox 55
For those who believe markets bottom when the sellers leave, there’s ample evidence that sellers have left. Until new sellers emerge in volume, it’s hard to see how prices can fall much lower (barring a financial catastrophe).
There’s also a strong headwind facing anybody who thinks crypto’s going to go on another of its amazing runs: Nobody has any moneySidelinedanymore.cash is great. If inflation persists and monetary policy keeps getting tighter, that cash will come off the sidelines—but it probably won’t end up in the crypto market. More likely, it will end up paying off loans, buying food and going wherever cash-strapped would-be buyers need for it to go. At the same time, even the most ardent bitcoiners might sell if their financial circumstances get worse. You can’t eat bitcoin. Some analysts think the U.S. Federal Reserve will tighten so hard it “breaks something” and has to reverse course, print more money and send asset prices up again. That’s what happened in 2018 when Jerome Powell, then secretary of the treasury, raised interest rates four times before revers ing course to begin lowering them the next year. They say bitcoin would benefit from another so-called “Powell pivot.”
$17,600 Bitcoin’s “forever” bottom price?
This time is different
By Tom Preston NORMAL DEVIATE
56 Luckbox | September/October 2022 tacticstrades&
Covariance measures how two variables, like bitcoin and ether, move together. If the covariance of two cryptos is positive, it means that when one crypto has a large percentage price change up, the other does, too. Correla tion takes covariance one step farther and shows the strength of that relationship in a range between -1 and +1. As a number, correla tion is more useful and easier to interpret, and covariance is equal to correlation times the volatilities of the two assets. That’s why we use it in the formula: Let’s see how the formula works. If bitcoin has a volatility of .90 and ether has a volatil ity of 1.10, bitcoin’s correlation to ether is .92, and the weights of each are 50%, the volatil ity of the bitcoin plus ether portfolio would be .98. That’s higher than the volatility of bitcoin.
Tom Preston, Luckbox contributing editor, is the purveyor of all things probability-based and the poster boy for a standard normal deviate. @thetompreston
Going long on
That trip down memory lane shows why bitcoin specifically, and cryptos in general, are some of the more volatile assets. As the leader of the crypto asset class, bitcoin’s volatility is certainly greater than the lead ing stocks in equities or bonds. That’s why experienced stock and bond investors might hesitate to put money into cryptos—they’re just too volatile. But there’s a way to reduce the volatil ity of a crypto position that’s familiar to most investors. Diversification in stock and bond portfolios reduces non-system atic risk. There’s another way to diversify, though, that reduces volatility with volatil ity. Combining an investment in bitcoin with a smaller short position in another crypto like ether can significantly reduce the vola tility of the crypto exposure. There’s a formula pulled from statistics that shows how it’s done. The formula determines the combined vari ance of two variables using four inputs.
2 is the variance of an asset’s returns and is volatility squared. W is the percent age weight the asset has in the portfolio. For example, $1,000 of bitcoin and $1,000 of ether in a portfolio would each have 50% ($1,000 / $2,000) weight. is the correlation between the percentage price changes in the two assets. Plug values for those inputs into the formula to get the variance ( 2) of the two-asset portfolio, then take the square root of the variance to get the volatility ( ). When adding variances of two variables (stocks), it’s necessary to factor in the rela tionship between them. The reader might see that the previous formula is a little different than what’s found in a stats book. Tradition ally, the formula for the variance of two assets uses their covariance, not their correlation.
But what if the ether position was short and about 5% of the portfolio? Using .95 for the weight of bitcoin and -.05 for the weight of ether, the volatility of the portfolio would be .80—lower than both bitcoin’s and ether’s volatility. Because ether has a higher volatil ity than bitcoin, its impact on the volatility of the bitcoin/ethereum portfolio is greater. It doesn’t take much short ether to reduce the risk of a bitcoin position significantly.
Now, there are a couple of caveats. First, the investor has to be able to short ether. It’s possible to do so, but not every broker or crypto exchange allows it. Second, the long bitcoin/short ether position assumes that bitcoin will outperform ether if they both rally. That is, the investor has to believe that bitcoin will maintain its dominance in the crypto space. If ether outperforms bitcoin, or ether rises and bitcoin falls, that could lead to significant losses. Beyond crypto, this method of reducing risk can be applied to equities and bonds, too. Adding relatively small short positions in more volatile, highly correlated products can reduce the risk of a portfolio, and the amount of risk that’s reduced can be quantified by that formula.
W hen it comes to crypto volatility, fight fire with Rememberfire. when bitcoin was under $5 back in 2011? Or when it was over $50,000 back in 2021? How about this year when it lost half that value?
An interesting property of cryptocurren cies is their infinite divisibility, making specific dollar investments possible. For example, an investor could buy 1¢, or $1, or $10,000 of bitcoin. It also means that an investor can work with small amounts of crypto, say buying $95 of bitcoin and shorting $5 of ether. That type of exposure might be more palatable to an investor looking to get some experience in the crypto market.
Crypto Too Volatile? Fight Fire With Fire
pricetoshortcryptocurrencyoneandonanothertendscanceloutthewildfluctuations
I began trading during the stock market’s great bull run in 1992 and made a lot of money for a 21-year-old college kid. Then I got busy with a career and traded mostly part time. I continue to trade part time, mainly in index options.
How did you start trading?
I always have some sort of short strangles in the index options. Sometimes, I buy the index futures to hedge one side. Once, nearly asleep, I bought an /ES future instead of selling it for the hedge. Next day, /ES opened up, and that fat finger sleepy mistake made me a couple thousand dollars. But note to self: Never trade sleepy with eyes half-closed, as more times than not one is unlucky and loses a lot of money. For the past few years, I have traded /MES and /MNQ as they are smaller and I can be more than Johnny One-Lot.
Have you traded cryptocurrencies? I have only made three small scalp trades in cryptocurrencies. It is a big product and too volatile for my appetite. The products that do not have options are tough to trade, as then it becomes a 50-50 probability at best. I would rather mine bitcoin on the side as a business than try to find value in crypto currency trading. MALHOTRA
10% to 15% Favorite trading moment?
TRADER MEET SANJEEV
Do you know a trader who we should feature on this page? Have story ideas?
Let us know: tips@luckboxmagazine.com 5 1. Printers (color & BW) 2. Fire TV to watch tastytrade 3. Main screen: Daily trading in the Deltasmorning.andvegas, too. 4. Side screen: Always have my solar generator on it, and sometimes news 5. Polycom conference phone
Favorite trading strategy? Index options, strangles—mainly due to SPAN margin. [SPAN margin calculation results in lower capital requirements for futures and futures options trades compared with equiv alent stock and exchange-traded fund options positions.]
tacticstrades& September/October 2022 | Luckbox 57 1 4 3Home/Office2 location East Brunswick, New Jersey Age 51 Years trading 22
What percentage of your outcomes do you attribute to luck?
Average number of trades per day? 13
“Any and/or all violations,” Adamske wrote, “were communicated directly to Victoria.”
“We disagree with the CFTC’s action,” Phil lips said via email. “Over the past eight years, PredictIt built a thriving political trading community and [has] been a good actor in an industry rife with bad ones.”
Phillips maintains that all of the active markets on the site are not only within the terms of the no-action letter but also consistent with commission interpretations conveyed to PredictIt over the past eight years.
The Commodity Futures Trading Commission withdrew its longstanding no-action letter for political prediction market platform PredictIt. asked its co-founder what that means
PREDICTIT MARKETS WITH THE HIGHEST TRADING VOLUMES > GOP 2024 presidential nominee? 34.2M > Democratic 2024 presidential nominee? 9.9M > Balance of power after the 2022 election? 3.4M > GOP Senate seats after midterms? 3.1M > Who’ll be Speaker in the next Congress? 2.9M
However, PredictIt’s future, and the future of the community banded around it, seems as uncertain as some of the market questions featured on the site. On Aug. 4, the CFTC’s Division of Market Oversight withdrew its no-action letter and gave PredictIt until Feb. 15, 2023 to close out or liquidate all of its remaining listed contracts and positions.
A lot has happened since the Commod ity Futures Trading Commission (CFTC) granted no-action relief to Victoria University of Wellington to operate a political event contracts market in 2014. The resulting platform, predictit.org, has served as the foundation for a community of forecasters, researchers, journalists and politicians eager to glean insights into—and profits from—event outcomes.Inaddition to the academic research result ing from PredictIt’s market activity, span ning topics from market theory to trader psychology, successful traders have managed to supplement their incomes thanks to their prognostication prowess. Others have ditched their day jobs entirely in favor of pursuing fulltime prediction market forecasting.
tacticstrades& 58 Luckbox | September/October 2022 REUTERSPHOTOS:
“DMO has determined that Victoria Univer sity has not operated its market in compliance with the terms of the letter and as a result has withdrawn it,” the CFTC’s release said.
Yet John Phillips, the co-founder of Predic tIt and CEO of Aristotle, a political data, consulting and software company, said he didn’t know what spurred the commission to take action against the prediction market plat form.
Steven Adamske, director of the CFTC’s Office of Public Affairs, said via email that the commission was “unable to talk specifics about the compliance issues other than to say that the university was not in compliance with the previously issued No-Action Letter.”
Uncertain Political Futures
THE PREDICTION TRADE
HOW PREDICTION MARKETS WORK Prediction markets use real money to forecast outcomes of events. Contracts trade between 1¢ and 99¢, and the price reflects the market’s forecasted proba bility of an event occurring. When an outcome is reached, correct contracts pay out $1, and incorrect contracts become worthless.
In the meantime, traders and other members of PredictIt’s ecosystem can visit savepredictit.org to access a portal to write letters to members of Congress and the CFTC to share their thoughts about the no-action letter’s withdrawal, Phillips said.
“The people at the CFTC work really hard, and we’ve always said that their oversight is necessary to run a safe and secure exchange for our traders,” he said. “But they also need to hear from the people who use PredictIt and our data.” We’ll continue to pursue every avenue to keep political prediction markets operating.
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 to find out who is who. It’s unscripted and likeunpretentious—sometothinkofitas rants, but refined.
“We hope we won’t have to close the 2024 markets prematurely, and there’s still time to get this right—to reverse this action,” Phillips said.
Pending regulatory approval, the CME Group is scheduled to intro duce event futures contracts in September on 10 frequently traded energy, currency, metal and equity indexes.
CME GROUP TO OFFER EVENT FUTURES CONTRACTS
“We’ll continue to pursue every avenue to allow political prediction markets to continue to oper ate. Aristotle has filed for an entity to be licensed as a DCM [designated contract market].”
More TPT theWatchpodcast
The Prediction Trade If you can trade it, or bet on it, you can bet they'll talk about it on The Prediction Trade the only podcast for gamblers, traders, investors, math geeks, data freaks 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 and the tastytrade financial network's YouTube channel.
That deadline has some concerned because it falls before the natural resolution of some of the site’s most widely traded markets. Who will be the next Republican and Democratic pres idential nominees? Which party will win the presidency in 2024? Will President Joe Biden resign during his first term? Nearly 50 million shares have exchanged hands forecasting the outcomes of those events. But much like the markets, the site’s fate is not a foregone conclusion.
Truth or Skepticism
Listen Here Despite the CFTC action, trading continues to be fully operational on PredictIt for the time being—albeit the site is halting the addition of any new markets, according to an Aug. 4 notice to traders. But if the CFTC action isn’t amended or reversed by Feb. 15, trading on PredictIt will officially cease.
tacticstrades& correlations to bitcoin are shown in the table Correlating with bitcoin.
Some strategies with bullish direc tional assumptions also have the potential to profit even if the under T The crypto market has had a turbulent run in 2022.
Besides custodial wallets for crypto trading, several traditional retail platforms also offer publicly traded stocks and exchange-traded funds (ETFs) that are correlated to majorExamplescryptocurrencies.includethe
cryptocurrencies.correlatetradedstocksplatformsretailofferandexchange-fundsthatwith Oct 2021 to present BITO COIN MARA /BTC correlation 0.96 0.66 0.68
Major cryptocurrencies, such as bitcoin and ether, are down nearly 50% since January, compounded with a slew of bank ruptcies at major decentralized finance companies, including Three Arrows Capital, Voyager Digital and Celsius
60 Luckbox | September/October 2022
ProShares Bitcoin Strategy ETF (BITO), the cryptocurrency exchange Coinbase Global Inc. (COIN), and the digital asset technology company Marathon Digital Holdings (MARA), whose Correlating with bitcoin Bitcoin futures are used as a proxy for bitcoin to show the correlation with the ProShares Bitcoin Strategy ETF, the cryptocurrency exchange Coinbase Global and the digital asset technology company Marathon Digital Holdings.
Trading WithoutBitcoinBitcoin
When used responsibly, the capital efficiency of leverage is a powerful tool that enables traders to achieve the same risk-return exposure as a stock position with significantly less capital.
WhileNetwork.theimmediate future of crypto remains unclear, this recent turbulence and potential “bottom ing out” of the crypto sector has left some investors interested in bullish exposure to this emerging market. Retail investors can obtain long exposure to cryptocurrencies in a number of ways, many of them more convenient and potentially less risky than the traditional route of estab lishing a digital wallet and linking it to a crypto exchange.
Let’s focus on how to obtain synthetic exposure to bitcoin using ProShares Bitcoin Strategy ETF options, which are available on several retail platforms. Options are appealing to more advanced investors because they’re leveraged instruments, meaning they have the potential to gain or lose much more than the equivalent unleveraged instrument, such as shares of stock.
THE UNLUCKY INVESTOR A MATHEMATICIAN’S GUIDE TO SUSTAINABLE TRADING—NO LUCK REQUIRED Retail investors can obtain long exposure to cryptocurrencies without establishing a digital wallet and linking it to a crypto exchange
By Julia Spina
Several
• Short BITO ATM Put: Sell one ATM put option on 100 shares of bitcoin ETF, which carries more risk than purchasing shares but also has the potential to profit if the underly ing is relatively unchanged. Compared with buying BITO shares, the covered call and short put require comparable amounts of capital upfront but may also profit if the underlying remains relatively sideways. In the event bitcoin has a strong rally, the covered call accu mulates 88% as much profit as the BITO shares while requiring 7% less capital.Thelong call is the least likely to profit, but in the event of a strong bitcoin rally it generates roughly 30% as much profit as the BITO shares while requiring 93% less capital.The appropriate strategy ulti mately depends on the preferred amount of capital at risk, the profit goals and the strength of direc tional assumption. For a strong bullish directional assumption and low capital preferences, the long call may be more appropriate. For a more moderate bullish directional assumption and higher capital pref erences, the short put may be pref erable. Julia Spina, a member of the tastytrade research team and author of The Unlucky Investor’s Guide to Options Trading, holds degrees in engineering physics and applied mathematics and a master’s in physics. @financephoton Going bullish
• L ong BITO Covered Call: Purchase 100 shares of the bitcoin ETF and sell one ATM call option against those shares, which reduces the capital requirements of the shares over time and generates a small profit if the underlying is unchanged.• Long BITO ATM Call: Purchase one ATM call option on 100 shares of the bitcoin ETF, which is less expensive than purchasing 100 shares outright.
Here’s a comparison of strategies that offer bullish exposure to bitcoin.
Note that the capital requirement for a short put represents the amount of capital the broker reserves for the duration of the trade, which will be returned if the position is profitable.
requirementsCapital Probability of profit Profit given a 10% increase in BTC sfter 31 Days Max loss Long BITO (100 shares) $1,473 50% ~$147.30 $1,470 Long BITO Covered Call (ATM, 31 DTE) $1,370 59% $130 $1,370 Long BITO ATM Call (31 DTE) $102 31% $45 $101 Short BITO ATM Put (31 DTE) $1,316* 66% $84 $1,316
* Note: The capital requirement for a short put represents the amount of capital the broker reserves for the duration of the trade, which will be returned if the position is profitable.
L ong BITO (100 Shares): Purchase 100 shares of the bitcoin ETF (worth roughly .062 BTC).
lying price is unchanged. For this example, let’s compare the following strategies that offer bullish exposure to •bitcoin.
Quotes are roughly08/16/2022fromat10:30AMCT
tastytrade, Inc. does not provide investment advice or make trade recommendations. This content is intended only for informational and educational purposes. Past performance is not indicative of future results. Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before investing in options.
visit Backtesttastytrade.com/lookbackyourtradesforFREE GET REAL ANALYSIS!TRADETIME
Eddie Rajcevic, a member of the tastytrade research team, serves as co-host of the network’s Crypto Corner and Crypto Concepts. @erajcevic11
when choosing a crypto is its utility. When crypto was introduced, it was primarily a store of value and a means of transacting. Nowa days, a variety of cryptos represent a block chain’s utility. This utility can come in the form of lend ing and borrowing platforms, decentralized exchanges, NFT marketplaces and more.
The correlation of the aforementioned cryptos to the broad market index, the S&P 500, was much lower at press time than at the start of 2022. The correlation is 0.4 on aver age, indicating a weak positive relationship between cryptos and equities, which helps when looking to diversify.
For example, Aave and Compound are lend ing platforms that enable investors to earn a yield on assets that would otherwise be sitting idle in their accounts. The corresponding cryp tos for these platforms, Aave and Compound, provide a way for investors to gain exposure to current and future utility.
The last thing investors should consider
Investors ask these questions and more. But instead of relying on somebody else’s opinion, they can do some simple research to determine which crypto may provide the best fit.
TACTICS: BASIC Choose a crypto by analyzing market cap, volatility, correlation and utility By Eddie Rajcevic
Choosing a crypto isn’t too different from choosing a stock. By analyzing a crypto’s market cap, volatility, correlation, and utility or use case, investors can make well-educated decisions.
When adding crypto to a traditional equities portfolio, evaluate the strength of its relationship with stocks.
Market cap and volatility have a strong rela tionship, so a crypto with a large market cap tends to be less volatile. Bitcoin and ether tend to be the least volatile, whereas Shiba Inu and Stellar Lumens are the most volatile.
tacticstrades& September/October 2022 | Luckbox 63
W ith hundreds of cryptocurrencies widely available, it’s challenging to choose the “right” one. Is bitcoin the best long-term investment? Does ether have more potential now that it’s switching to proof of stake? What’s the next dogecoin?
3-Month correlation of daily price change
But as long as investors keep their position size small (less than 5%), the differences in volatility should not have a large impact on the day-to-day volatility of a portfolio. Because crypto is likely to be an addition to a traditional equities portfolio, it’s important to consider the strength of the relationship between a crypto and stocks. When the prices of two entities move up or down together, they’re said to be correlated.
4 CriteriaCrypto
Begin by considering the crypto’s market cap, which is the current market price multi plied by the circulating supply. The larger the market cap, the safer the crypto. Examples of large-cap cryptos include Bitcoin, Ethereum andMid-capCardano.cryptos are more volatile than their large-cap counterparts but theoretically have more growth potential. Examples include Chainlink, Aave and Enjin. Small-cap cryptos are the most volatile, meaning they can go up 50% to down 50% in a matter of hours or days. Examples include Basic Attention Token and Compound. By determining their tolerance for risk and desire for growth, investors can use market cap to narrow the choices of crypto. The next factor to consider when choosing a crypto is volatility. For many investors, crypto holdings will make up only a small fraction of their investment account. But even then, a vola tile asset can cause unsavory profit/loss swings.
64 Luckbox | September/October 2022 IMAGESGETTYPHOTO:
But Luckbox’s coverage won’t end at the ballot box. We’ll take the temperature of hotly contested races in the Senate and the House, take stock of the state of the 2024 presidential race in the prediction markets and reveal what the midterms mean for active investors.
The November Luckbox will also examine how the shift to rankedchoice voting can correct some of the ills that result from a primary with a large field of candidates. Without it, a candidate can win despite strong opposition from a majority of voters. Plus, if a voter’s first choice is eliminated, the second choice remains in the running and often has a chance of winning. Thus, the practice supports majority rule. Ranked choice also discourages ruthlessly negative campaigning because candidates shy away from alienating voters who might otherwise consider them as a second choice.
Politics, Policy, the Markets & the Midterms
As Americans prepare to cast their ballots in the midterm elections, the November issue of Luckbox digs into policy, politics and voting reforms.
We’ll explore the ways open primaries give a stronger voice to the growing ranks of independent voters, encourage candidates to appeal to the entire electorate instead of a base of core partisans, and enable nearly everyone in the electorate to benefit from the public funds spent on primary elections.
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