Hello Crypto family,

It has been a little while since Gordon wrote here. He's been very busy writing published articles across the werld-wide-internets-mail, but the ideas have been brewing, and in today's rough trading climate, maybe it's time for a short break to talk about something that is important.

Perhaps this will help get some of you/us/all of us through the tough market movement that lies ahead.

Even if we get a massive bull move once the market is sick of this price manipulation capitulation, margin calls, leveraged liquidities... there will be times that make you scratch your head, trying to figure out where that beautiful crypto revolution we were all promised, has gone.

I'm going to start by being, in my opinion, very fair to the larger crypto market on the whole.

Every asset that is well-researched, that includes a team you can research, has survived initial exchange listings, still has a following, and has a proven record of taking security on-chain seriously, has a legitimate place for someone to seek it out as an investment, or at least short-term gains. It isn't mine, or any maxi's right, to discourage people seeking out investments they believe in.

With that said, this means that there will be trends, and a LOT of money going into projects that have their waves of interest, only to get shoved down... WAY down, in volume and liquidity, by the next shiny thing. When we deal with a market that spends billions of dollars based on the assumption that on-chain proof of owning a picture, is a future investment, you have to assume fads are going to come and go. Maybe a million dollar Ape is worth $10M in 10 years because it was bought/sold to 'x' celebrities? Who knows? Maybe the market simply comes to rational realizations, that people get excited when they are professionally marketed to, and the initial pumped, inflated value of certain assets are just that: pumped, and well-marketed?

So, the serious investor, both long and short term, needs to have a certain confidence in their assets to decide whether it is worth taking big risks.

I am less concerned about risks in long-term crypto projects, than I am about the political climate, because it is so horribly dishonest, disingenuous, and powerfully capable to manipulate, control on/off ramps, lock people's options up if they don't serve the purpose of the state, etc. For years, people have been  overly confident in the resilience of "they can't take my 'x' coin", when it has always been clear to Gordon that management of assets, security, and govt manipulation were always the biggest threats to actual spot value.

All of this brings me to the topic at hand: understanding the underlying value of an asset, and why parallel markets do a great deal of harm to real, valuable digital assets, and at the end of the day, why the fundamentals still matter.

Parallel Asset Markets

When I talk about parallel assets, I am defining things that you can trade, in crypto, that represent 'the thing you want to trade', but aren't really the thing you want to trade. Now that I've intentionally made it more complicated- lol... it's going to come down to derivatives, ETFs, and variations or sub-topics.

Derivatives allow you to trade based on the market value of an asset, without directly trading the asset. The real asset is trading on "spot" markets, which are defined as providing instant "spot" value of a real crypto asset.

A real asset, traded on spot markets, like Bitcoin, Ether, Litecoin, Dogs and others, can be purchased, and are registered in your exchange wallet (which is handled differently on different exchanges. But, for the most part, when you purchase these at spot, you can go to your exchange wallet, and withdraw that asset. It was yours to buy, and the exchange allowed you access to that asset, providing you the ability to send it wherever you wish.

With a derivative, you may see a very similar trading environment, but the wording is probably slightly different. With spot, you might see the very logical "buy" and "sell", to represent buying and selling crypto. Both in spot and derivatives, you will probably see limit and market orders. You may even be able to ramp up the leverage in both cases, depending on the exchange. But, with derivatives, "buy" and "sell are often replaced with "long" and "short". The best way to understand the reasoning behind this, is to think of trading crypto at spot, as investing, and doing the same with derivatives is pure gambling. Even if you are keeping risk low, know the market well, and are incredibly smart about managing risk/reward, derivatives are always favoring the exchange, like gambling favors "the house" or casino.

With a derivative, you likely have access to big moves, and a lot of volume and liquidity, which helps prevent getting stuck in a position without others providing liquidity to sell. But, there is absolutely zero underlying value to your purchase. You cannot go somewhere with the value you have spent on a derivative. It is the platform and its investors who loan funds, guaranteeing that if you guess the right price to sell, that you will get paid the equivalent value when you close the position. You never "own" anything of value, other than a future promise to pay you profit when you guess right, and an absolute promise to liquidate your initial investment if you guess wrong.

A lot of people do not understand the fee structure in derivatives, and this is not that time where I go into "that", and I am not outlining the difference in spot and derivs for the purpose of steering you away from gambling. It is a free world; you have every right to do what you wish with your money. Just don't be unclear about thinking you own something of value, if you don't. A derivative is a loan disguised as an exchange ledger, and there is solid math underlying how high a risk you are taking at any given time.

Another category of parallel assets, are ETFs, or Exchange Traded Funds. These can take different forms, and they represent an underlying investment from the entity that provides exposure to their investment. To simplify the idea, let's say that an ETF is a company "ETFCorps",  that wants to sell people the market value of their crypto, let's say Bitcoin (bc that's what we're going to see most often). Let's say ETFCorps initially owns $1B in Bitcoin. They are approved to list as an ETF on the stock market. Investors are now able to trade Bitcoin, without ever owning any Bitcoin. They believe that buying/selling, self-custody of Bitcoin is tricky, risky, dangerous, but everybody's talking about it, and most of the market believes it is just going to go up over time. They want a way to invest, without having to figure Bitcoin out for themselves. They may see other benefits to owning Bitcoin in this manner, through a broker that manages their portfolio, or through their own stock trading account.

The important thing to understand: no matter what happens in the market, how well someone may earn on that ETF, at no point in time do they own the truly valuable (or terrible, if it goes down) asset. They own ETFCorps' exposure to that asset.

For right now, in the US, the only ETFs allowed, are Futures ETFs, which in my humble, yet professional opinion, are 10X worse than a spot ETF. With spot, you can watch the Bitcoin market, buy low, sell high, and profit is profit. With Futures, you are gambling, guessing, on the future price of Bitcoin, buying useless offers for pre-set future prices, longing if you think it will go up "x" amount, shorting if you want to gamble on contracts for it to go down "x" price.

Futures have an expiration date, which is the thing that locks in the value to those who are going to come and liquidate your position more than 50% of the time. With futures, not only do you never have an actual asset that you own, of any transferable value at all, but you are guessing what your useless contract will be worth at a fixed time in the future, that no one can possibly know.

The only real value in futures, is in the logic why they were created in the first place. The best example is farmers and crops. No one knows what the weather is going to do to next year's yield, so if they can lock in a fair market price with the people they sell their crops to, no matter what happens in the future, they are guaranteed to have a sale that will keep them in business. If the weather is kind and they have a magnificent yield, then the buyer got a bargain, but the farmer is still okay. If the weather tanks and it is a horrible year for their crops, at least they are protected from getting wrecked by prices. It is a hedge against real future volatility that no one can afford to see happen. The idea of applying this in a scenario where no one owns anything of value- the trade of crops needed for sustenance, for example, is incredibly important to understand.

I bring this around to something SO important to understand. Let's put this all together.

Choose your assets wisely. Even if you are a day trader, you want to either plan a percentage of profit-reward versus loss-risk, so over time, you earn more than you lose, or you want to be determined to be completely confident in your assets if you are stuck holding them for an extended time. If you buy based on pure TA and not any fundamental values of a specific asset, there is going to come a time, where you guess wrong, and you are stuck with something you wish you could unload. Over time, the true value of most crypto comes to light, and if the only determining value was that it was well-hyped and ready to pump, when the glitter is gone, most of these sit well below -97% until they maybe pump again, or get delisted.

It may seem like choosing good crypto projects and knowing the real underlying value of derivatives (or lack thereof) are two separate things, to which I'm going to start sounding like a Bitcoin maxi again.

If your intention, in a market, is to have some fun, whimsy in the promise of potential gains, willingly accepting the risk of losing it all for a fun game of chance, then my only concern for you, is that you are informed, aware of the risk you're taking, because there's nothing protecting, or even fully guaranteeing the safety of the value of your leveraged, derivative positions. Whatever tax or deferral advantages that may come from trading ETFs cannot erase the fact that at the end of the day, if it was an interesting item worth trading in your portfolio, perhaps there's a reason "they" don't want you owning the actual asset- the real thing of tangible, digital value.

A similar, almost identical scenario, is an approach that has been taken to (roughly) swerve the need for ETF approval, where a company goes public, for people to invest in shares of the company, just like stocks, but the entirety of the company's value is in Bitcoin. In this case, you are exposing yourself to the same risk as the asset, but you do actually own something- shares of the company that owns Bitcoin.

Here's where I think it gets meaty and everything comes together...

I know there are a lot of people out there who might say, that if your goal is to make a profit, who cares what you actually own? Others will say, if you're a true Bitcoin maximalist, your goal isn't to gain wealth in fiat, but to simply acquire more bitcoin. It won't be the last time I approach this topic. If the latter is true, then really, the goal is clear: more bitcoin at whatever the cost. But, there is an extreme, to which maxi's take this. Anyone who dare dip their toes back into fiat for any reason, are mere traitors to the cause; send them to the end of the peer!

Burn the witch!

The thing is; for some, you really may not know just how tight their budget, extreme their personal family crisis, challenging storms weathered. You don't know how difficult it might be for some people to acquire a meaningful amount of an asset. While you may preach on social media that anyone who owns 1/10th of a bitcoin now, will be among the wealthiest in the world in 10 years, that is an incredibly big risk for someone to take, to simply reach that goal, or 1 full bitcoin, or whatever the case, and wait a decade to see if a stranger was right.

This post is not about convincing someone to avoid derivatives, to only buy bitcoin, to only HODL, or to run towards day trading. My greater purpose,is for everyone, HODLer, trader, gambler, to understand the true, underlying value of an asset.

I am not here to benefit in some clever way, with some referral or to get anyone to sign up to a link. My motive is to pour out a little truth. 

Bitcoin is unique. Beyond being the first at what it accomplished, it is built upon real merit, and physical infrastructure that guarantees a certain level of fault tolerance that critics will claim can harm the environment, while others will opine that it is antiquated. It doesn't need to prove itself to either camp, because there is something lost on those who truly believe these two things. We're talking about a form of digital scarcity that has caught on, and has lasted 13 years that most other coins will not survive in their own trajectory.

But, even so, I don't care if I have convinced you. Let's say there's 20 other items in crypto that will find real, tangible "must have to survive the future financial meltdown" characteristics. One of those qualities must, MUST be, a tangible, attainable form of digital scarcity that can place pressure against the price, but at the same time, provide for enough units of exchange to always be useful in the future.

With Bitcoin never quite reaching it's last fraction of a coin mined, it will never provide more than 21 million bitcoin. But, a single bitcoin can be divided down to a single Sat, or 0.00000001th of a bitcoin. This makes it hard to imagine ever running into a transaction that couldn't be resolved to a fair rounded price if Bitcoin were a world reserve currency.

The scarcity is really the heart of this post.

If the only way it were possible to trade bitcoin was in actual bitcoin- no derivatives, there would already be a shortage of coins, and the price would already be shooting sky high. But, for the past 7+ years, billions and billions of dollars of trading volume has centered around derivatives, with exchanges that offer low-fee incentives and high margin leverage to entice people into trading contracts of... nothing, chasing after profit that is easily liquidated. The exchange may own a large portion of the underlying asset, but they can also get people investing into a pool that factors the risk from everyone's trades, to make sure people are liquidated before they cut into the value of actual assets held.

What is the Impact of Derivatives on True Digital Scarcity?

Some people speculate that exchanges all provide "fake" bitcoin, and in some ways it is true, but in others it is not. Most exchanges trading spot hold a certain amount of bitcoin live, or in their hot wallets, providing real, direct liquidity, while holding a certain amount in cold storage, as a security to what is being traded. Others, especially in futures and derivatives, are solely about providing volume to back profits won, and this can be their own assets, or a liquidity pool where others contribute crypto assets as a loan, in order to earn interest.

The biggest money has yet to enter crypto. There are many crypto whales, but the biggest whales have been slow to enter the market. They're keen to model crypto in their own image. But, there's a reason that ETFs and other Bitcoin-backed funds, are seeking clever ways to offer exposure, without ownership. The underlying asset is finite, and crypto itself is an entirely new asset class without any prior market to compare. If you consider the amount of bitcoin that is likely to lock up, HODL, remain in cold storage, and compare this to how much new bitcoin is mined, you can figure the billions of dollars it would require to cause massive price spikes with market buys.

Even if exchanges have tens of thousands of bitcoin as back up, much of this will remain in cold storage, and while I'm sure some exchanges will play some risky games with collateral, most are going to allow scarcity to build so they remain liquid, and people are still able to withdraw as needed.

If every crypto project, including Bitcoin, had a flexible supply, expanding supply, or like some tokens, an uncertain supply, then the truth is, no one could ever predict how high a future value might rise, because there would always be the possibility that new supply could depreciate the value of each unit. Projects like Ether and Doge can always have potential short term pumps, and there are enough people who believe in them, that the price can remain strong through volatility, very similar to Bitcoin. But, as big money enters the market, there's only so many billions to stay within assets that are being acquired, held as bonds, protecting corporate profits as a hedge, replacing gold as a store of value.

Derivatives, allow much of the buying power to spread thin across numerous exchanges where the same money that could already be pushing against scarcity, is instead wasted on liquidity made nearly out of thin air. Ironically, many of the things that crypto-critics who truly do not understand digital value, claim as proof that crypto has no tangible value, would be a relatively accurate statement for derivatives. The fact that there is a lot of value built up into these markets, means the wheels will turn and the interest is there, but in truth, it is credit, lending, borrowing, and price-guessing, where no one gets anything of value, except the exchanges, when positions are liquidated. In the meantime, there is no question that it is harming the potential price value of the real items.

People often confuse volume, liquidity, trading in general, as being the same challenge to Bitcoin's market price. Volume and liquidity of themselves, are a good thing. But, we'd see much greater efficiency and real price discovery, if the crypto landscape was based solely around the actual asset, and not gambling on the price in parallel.

Gordon made his point. Did you hear it? I hope it makes some sense.

For those who endure to the end, congrats and thanks!

And for now, Crypto Gordon Freeman, the free man, until next time... out.