MacroTactical Crypto #21: Tortoise v. Hare, and More and More

MacroTactical Crypto #21

Tortoise v. Hare, and More and More

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Today’s note is 2,600 words (10-minute read)

Tortoise v. hare, and more and more

Those familiar with my writing will know that my notes often take one of two shapes. One, a long-form essay on a single topic. Or two, a series of shorter comments on a variety of often unrelated topics. Most MTC notes have been type 1, but this note is a type 2. Here we go.

Regulation is boring but also important

I have generally steered clear of crypto regulation as a topic because it’s mostly boring and I’m not a lawyer. That said, there is a ton of stuff going on that you should know about so let me summarize what I think matters.

Let me set the stage first. Crypto regulation has evolved at a paleothically slow rate as prosecutors are just getting to cases from 2017, legislators mostly ignored or failed to understand the opportunities and threats posed by crypto, and innovators and Big Crypto kept pushing forward without regulatory guidance. About the only thing that has been established is that bitcoin is not a security. The rest of the policy debate is up for grabs in the United States.

Part of crypto’s competitive advantage and growth potential comes from regulatory arbitrage. It’s cheap to send money cross-border using crypto because the blockchain bypasses national security and anti-money laundering rules. There are plenty of perfectly frictionless payment systems in the United States (like Venmo) but if someone in Mexico wants to send me $10k, it’s an expensive pain in the butt. Bitcoin solves this as it bypasses the main surveillance channels used by federal authorities.

Another regulatory arbitrage exists as many projects issue tokens that are very much like securities but bypass expensive SEC requirements by pretending they are not. Regulation that clearly defines what is, and is not a security, is needed. There are many viewpoints on which parts of the crypto ecosystem qualify as securities. For example:

·       SEC charges Ripple and two executives with conducting $1.3 billion unregistered Securities offering.

·       SEC chair Gensler has stated that most cryptocurrencies are securities.

·       The much ballyhooed bill from pro-crypto senators Lummis and Gillibrand (summary here) says almost all cryptocurrencies are NOT securities. If you want to know just how in-group the writers of this bill are… The bill is 69 pages long. I mean… C’mon.

Cynthia and Kirsten, embracing the nonsense

There was a ton written about this bill in the crypto press, but I would scale back the excitement level as the path from release of a bill to passage is long, winding, and messy. No shot this thing is passed in 2022 and by the time it’s voted on in 2023 (if at all) it could be unrecognizable.

Defining what is and is not a security is important. Crypto exchanges are not stock exchanges. They cannot list securities (yet). Crypto that is deemed to be a security will probably be delisted from US exchanges. There is a low, but not zero chance that ETH is considered a security at some point, but this is all happening in slow motion.

Question: Is this a tortoise and hare story? Where the regulators finally catch up? Or is it more like the Uber vs. City Hall story where the hare offers such a powerful and attractive product that legislators rewrite the rules to allow the disruption?

On the tortoise side of the argument: The SEC announced yesterday they are probing the Binance ICO from 2017! BNB is the third-largest unstable coin, after ETH and BTC. On the hare side, Big Crypto has a lot of ammo to influence regulators and if you know anything about the US legislative process, that matters. A lot. For example:

The question of whether or not something is a security is centered on “The Howey Test”.

What Is the Howey Test?

The “Howey Test” is a test created by the Supreme Court for determining whether certain transactions qualify as “investment contracts.” If so, then under the Securities Act of 1933, those transactions are considered securities and therefore subject to certain disclosure and registration requirements.

What Is a Security?

The Securities Act and Securities Exchange Act have broad definitions of the term “security” and the whole thing is pretty spongey. When the world was mostly stocks and bonds, it was pretty easy. Now, it’s not. A transaction is an investment contract (which is a type of security) if:

  1. It is an investment of money
  2. There is an expectation of profits from the investment
  3. The investment of money is in a common enterprise
  4. Any profit comes from the efforts of a promoter or third party

This video does its best to describe Ethereum as a security. I dunno. I doubt it. But it’s more arbitrary than you would want it to be.

The regulatory tortoise will keep chasing the crypto hare. Let’s see who wins.

The fact that the Lummis, Gillibrand Responsible Financial Innovation Act had 69 pages is just another chapter in the hilarious and absurd use of meme numbers 69 and 420 in the world of crypto. That reminded me of one of the very first crypto pieces I wrote (MTC3) about fun with numbers in crypto that included this screenshot:

I’m going to reproduce a bit of that note here because I think it’s super interesting and I don’t think many of you were reading my stuff way back then.

Round Number Bias

In bitcoin, like in every other market, the market loves to leave orders on the round numbers. This is because human beings are not altogether rational. We exhibit all sorts of predictable human bias, including Round Number Bias[1].

When you fill your car with gas, do you sometimes have the urge to round it off to the nearest dollar, even though you are paying with a credit card? Do you get a tiny thrill watching a car’s odometer roll over from 99,999 to 100,000? For many amateur marathon runners, a finishing time of 3:59:58 is a great success while 4:00:02 is a disappointment. People will push themselves to the absolute physical brink to break the four-hour barrier. And it works! See here:

Distribution of marathon finishing times


Human beings tend to pay attention to round numbers and treat them as special or more important than other numbers. This is good to know for traders because if you are rational, you can position yourself ahead of these round numbers knowing the probability of a fill is higher for a limit order at (for example) 68,998 than at 69,001.

I analyzed transaction level data from Gemini to see what pops out. First, I built a histogram using the last two digits of every high and low in the bitcoin hourly data back to 2018. The excel sheet has 33,840 rows. The output looks like this:

Distribution of highs and lows by last two digits (bitcoin hourly data, 2018 to now)

You see that it is much more likely for a high or low in bitcoin to fall on a round number. For example, 65,010 is more likely to be a high or low than 65,008 or 65,012… While 65,050 is much more likely to be a high or low than those other levels. Prices ending in 00 mark tops and bottoms at a much higher frequency than one would see in any random distribution. Note, however, that there is no 69 bias in this data.

The chart for bitcoin is similar in shape to what you see in other markets. For example:

Distribution of daily highs and lows in TSLA (by the cents, or last two digits of the price)

Excerpted from “Alpha Trader“, used with permission of the author

Even heavily institutional markets like FX show this sort of predictable, nonrandom, lumpy distribution, though the effect is much smaller in currencies. Now, looking at the last three digits of the bitcoin hourly highs and lows, we get:

Distribution of highs and lows by last three digits (bitcoin hourly data, 2018 to now)

Interesting that the 500s (for example, say, $12,500, or $67,500) are more frequent than the round thousands in bitcoin.

The takeaway is simple once you know where the uneven parts of the distribution lie. If you leave an order to buy bitcoin at, say $47,301, you are statistically more likely to get filled than the person with an order at $47,300 or $47,299 because the majority of buy orders will be on the round number at $47,300. Most days, you’ll probably get filled at any one of those three levels, but the occasional time you get filled at 01 when you would not have got filled on or below the round number can have a big impact on your performance. It can be the difference between a red or a green P&L day.

On the flip side, if you are leaving stop loss orders, always leave them on the correct side of the round number. Sell stops should be below 00 and buy stops should be above.

A non-ouroboros use case!

A tired but perennial argument from crypto and blockchain skeptics is that there are still no use cases after 13 years. Beeple disagrees. JP Morgan disagrees. Axie players disagree. 3LAU disagrees. Sure, some of the use cases are ouroboros DeFi apps and self-referential stuff like coins wrapping other coins etc. But there are also tons of use cases already in place and I really don’t think a password-protected xls will suffice in all these cases.

I was talking to a guy I know who runs a crypto hedge fund in Australia. They focus on seed round stuff with a particular interest in real-world use cases. A cool use case we discussed, which is admittedly skeumorphic, but practical and rather useful, is using NFTs as certificates of authenticity for high-value collectibles.

Penfolds wine (particularly Grange and Bin 707) is hugely popular in China. As you would expect, there is also a rampant counterfeit market for the popular wine. Hundreds of thousands of bottles of fake Grange wine are sold in China every year. Here’s a quick background article. While the wine comes with a sticker that is supposed to authenticate it, the stickers are easy to fake and don’t provide much protection. If each bottle of wine came with an NFT that matched an etching on the bottle… Problem solved.

Startups are working on ways to create NFTs that pair with valuable and collectible items so that when a buyer purchases the item, they also get the NFT. When the seller is ready to sell to another collector, they must present both the product (which is indelibly stamped with a QR code or number or whatever) and the associated NFT.

The system is being applied to jewelry and high-priced watches, too. If you are a programmy wonk, check out this article for a full explanation: If not, here’s the non-technical summary (excerpted from the article):

Why is an NFT a Good Replacement for Paper-based Certificates?

  1. It’s permanent: Unlike paper-based certificates that deteriorate with time or get lost when the watch changes hands, NFT tokens are permanently recorded in the Ethereum Blockchain. Over time, the watch manufacturer may cease to exist, but records of the watches that it manufactured live on as NFT Token on the Ethereum Blockchain forever.
  2. It’s unfakable: A watch buyer simply needs to visit Etherscan to view BreitLex’s Smart Contract, the BreitLex NFT tokens minted, and then cross-reference the watch details on IPFS to be assured that it is authentic.
  3. Its history is known: Details about how the watch changed hands are well documented as part of the token’s transaction. Now you know that you are the 4th, 5th, or nth owner!


Again, don’t be blinded by number go down. There’s still tons of cool stuff going on in blockhain and Web3 world.

Seven Signs of the Bottom

The signs of the top in crypto were obvious to anyone who lived through 1999 or who has read a book about manias and crashes. The volume of anecdotal signs was blaring at high volume for most of Q4 2021. I’m starting to think about what the anecdotal signs of a bottom might look like. Here are seven I thought of so far. There are actually eight, but one of them ain’t happening. Please let me know if you think of others.

1.     Bankruptcies. This is how the 2000 bubble burst bottomed. WCOM, Enron, and the many other bankruptcies that rug-pulled investors from late 2001 to mid-2002 were the beginning of the end of the bear market. Worldcom was the largest bankruptcy ever when they filed on July 19, 2002. The NASDAQ bottomed three months later, in October. We are not yet anywhere close to seeing bankruptcies in crypto. Here’s an interesting Jim Chanos take on “the predatory and unsustainable” Coinbase business model.

2.     Tom Brady drops the laser eyes.

3.     Staples Center goes back to being called the Staples Center. Enron Field changed its name to Astros Field on February 28, 2002, six months before stocks bottomed. Stadium naming is the classic sign of loose money overconfidence and capital misallocation. I wrote about it here as an important behavioral reason to sell crypto last year.

4.     Matt Damon apologizes.

5.     Tesla sells its bitcoin.

6.     MSTR sells their bitcoin (not gonna happen!).

7.     The Economist publishes a bearish crypto cover.

8.     Ex-TradFi employees quit their crypto jobs to go work at banks again.

Most of the behavioral signs of the bottom will mirror the behavioral signs of the top. Keep an eye out for them and let me know what you see!

Final thoughts

July 6, the SEC finally makes a ruling on Grayscale’s spot bitcoin ETF application. Could be exciting! Probably won’t be. But could be! Here’s an article.

Epic Games debuted the first blockchain video game in the Epic Store this week. It was a game called Grit, by Gala Games, and there was minimal fanfare. I told a couple of crypto friends about it, and they shrugged. This is pretty amazing to me. If this announcement happened six months ago, GALA (the Gala Games token) would have tripled, I’m sure of it. Epic has 194 million users!

Instead… GALA went from 8 cents to 8.5 cents and back to 8 cents. You certainly cannot argue GameFi is bubbly anymore!

Perhaps this review from Kotaku didn’t help (!).

For the record, my 14-year-old son watched the trailer for the game and offered an opinion similar to the Kotaku headline (but nicer wording).

Market and Trade Ideas Update

There are some weeks when nothing happens and some weeks when decades happen. As bitcoin zigs and zags around 30000, this past week was the former. If the market and trade ideas update is interesting, I will put it at the start of MTC and if it’s kind of boring (like today) … I’ll put it at the end.

My ETHBTC short (see MTC20) is small in the money as BTC hugs the 30k line and ETH grinds modestly lower. My bullish BTC view is tiny in the money (30300 entry) but I’m not white-knuckling that since it’s more of a swing trade / investment time frame. I want to scale into medium-term BTC longs from 30k down to 20k. This is outlined in MTC #11.

That’s it! Thanks for reading.

Don’t follow the crowd. Don’t fight the crowd. Think for yourself.



[1] Long-time readers know I am weirdly fascinated by this topic. When I die, I’ll be remembered as either the “Turnaround Tuesday” guy or the “Round Number Bias” guy. Or Brent.

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