A Sober Look At The Cryptocurrencies Bitcoin and Ethereum

One of our more profitable trades this year was in the cryptocurrency Bitcoin.

Bitcoin Inventory


We caught it breaking out of a long term triangle pattern and rode it to the very top of its trend. We then successfully exited our position right before Bitcoin began breaking down last week.

For those unfamiliar, Bitcoin is a digital asset and payment system — a virtual currency. It’s considered a cryptocurrency because it doesn’t require a central bank to handle its transactions. It’s all self-contained through technology that encrypts and records a ledger over a distributed computer system. This technology is called the blockchain.

The benefit of blockchain technology comes from its transparency. Everybody can see every transaction. The whole system is also decentralized. There’s no single institution or bank that controls the transferring of assets back and forth. This (advocates claim) removes the possibility of corruption, theft, and a whole host of other common problems that come with your standard financial system.

Bitcoin and its fellow cryptocurrencies (a number have been launched since) have become popular as alternatives to the standard fiat currencies of governments around the world. In some ways they’re treated in a similar way to gold and other precious metals. Don’t trust the government? Scared of inflation or other market problems? Then pile into these alternative currencies.

Our Macro Ops team member Tyler actually produced an entire SitRep discussing Bitcoin, blockchain technology, and its benefits. If you’re interested in learning more, you can check out that presentation here.

Now we like the idea of Bitcoin. Its blockchain technology is impressive and can be used in a variety of different applications.

We’re also fans of the engineers who created it and maintained it for this long. The whole “Silicon Valley” mentality of disrupting standard systems and finding new and better ways to do old things is inspiring. This attitude is what created cryptocurrencies in the face of centuries old banking systems. This ability to think outside the box, dismissing all previous assumptions, is one that’s also useful to take and apply to our own market analysis as investors.

But here’s the problem. A lot of times these engineers take the disruption mentality too far

I’m sure you’ve heard some of the ridiculous Silicon Valley techno utopian fantasies that float around from time to time. Our favorite is the “tech island” concept that gets proposed every few years. It usually comes from a group of techies whose heads get too big as they start spouting off the benefits of a sovereign island with no rules and regulations. Just innovation.

They completely disregard the benefits of the institutional structures our society has built thus far. They take the concept of disruption and stretch it, claiming that everything that’s been created in the past is wrong and needs to be redone.

But this makes no sense. There’s usually a reason certain systems are in place and have been in place for a number years. While having the disruption mentality may give you fresh eyes to find solutions to old problems, taking it too far becomes harmful to the process. You become the obnoxious intern fresh out of college lecturing 30 year veterans on how to do their jobs. Sure you can make suggestions for improvement, but in reality you don’t know shit compared to them and you need to learn.

Tesla may have completely turned the auto manufacturing process on its head and revolutionized the industry, but do you think Musk completely disregarded Henry Ford to do so? Hell no. He was a dedicated student of the man. Musk studied past manufacturing process down to the tee, broke out the first principles, and built from there. He’s far from ignorant and understood the old way was in place for a reason, but could be reinvented and improved upon.

The impractical side of the disruption mentality is a problem. It creates unrealistic beliefs that lead to booms and busts. And that’s exactly what we’re seeing in the cryptocurrency space.

The advocates of these currencies have come to the point of pushing fantasies. Their long-term goal is to create a system completely free of human intervention — with machines doing everything. In their minds, the humans are the problem and rigid automation is the solution to creating a “perfect” system.

A large percentage of cryptocurrency investors believe in this vision to some extent. This belief is part of the reason you’ll see massive runs in the price of these assets. But it’s also why you’ll see crashes too.

A potential crash is what our team at Macro Ops saw coming right before we exited our Bitcoin position and prices dropped.

The problem wasn’t actually in the Bitcoin market though, but instead in the Ethereum market, another cryptocurrency. This market works in a similar way, with investors exchanging Ether instead of Bitcoin.

The story of the crash starts with the creation of a new “revolutionary” kind of venture capital firm — the Decentralized Autonomous Organization (DAO). Its goal? To be the first VC with no executives. Computers would run everything. (Because humans are the biggest problem right?)

The firm used Ethereum technology to run its operations. Investors would join the fund by submitting Ether to it. Once they bought in, they would receive voting rights in proportion to their investment. Companies that wanted to be funded by the VC would submit their proposals which all the DAO investors would vote on. Whichever proposal won the voting round would be accepted and funded. All this was carried out through Ethereum technology.

It was a decentralized, democratic system with full transparency — a brand new kind of investment firm. People considered it a beautiful extension of the technology that undermined cryptocurrencies. It excited them. And they piled in. DAO quickly raised $152 million from investors around the world.

But then the unthinkable happened. The fund was robbed. A hacker exposed weaknesses in DAO’s Ethereum construct and stole over $50 million.

The hacking successfully put an end to the DAO. And what’s more, it casted doubt on the security and durability of the entire Ethereum system. The beliefs of cryptocurrency investors took a beating. And that beating transferred to virtual currency prices.

This was when the price of Bitcoin started to fall and we exited our position. But Bitcoin’s drop was minor compared to the drop in Ether prices. The price of Ether was nearly cut in half from the incident.

Kraken Ethusd


A nearly 50% drop in two days? That’s rough…

And it’s also a great example of what we mean by techno fantasies creating booms and busts. But it’s nothing new. It’s really the same thing that drives all bubbles and busts. Hope, greed, and fear.

This isn’t even the first time cryptocurrencies have run into problems like this. You may have heard of the collapse of Mt. Gox in 2014. It was the world’s largest bitcoin exchange that had to shut down after being robbed of over $450 million worth of bitcoins.

But it’s funny because even though the same lessons are taught in each one of these fiascos, people never learn. The DAO experience is a good reminder.

The first lesson is in the unavoidability of human intervention in the systems we create. Soon after the DAO robbery, Ethereum developers were actually able to catch the hacker and freeze the funds he stole.

Great. Problem solved right?


This is where a giant debate erupted among the Ethereum community. Returning the stolen money to investors would require a manual change to Ethereum’s underlying technology. This is a huge deal because it would require human intervention. Which would defeat the whole purpose of a completely autonomous system right? It would ruin the system’s sanctity and fly in the face of the principles it was built on. This made the decision a polarizing one. It’s ironic because the community is now stuck in political battle, just the kind they hate and created cryptocurrencies to avoid.

It’s stupid to think that we can avoid all intervention in a system we created ourselves. There are always inherent human biases that go into the construction of anything. In that sense, nothing we create can be “perfect” and free of human touch. This fact will almost always cause the need for a human to step into a system at some point down the line.

Part two of this unavoidable human intervention concept is the legal side of the DAO robbery. Who’s responsible for the stolen funds? Should the developers of the DAO be held accountable? They’re the ones that made the shitty code with the holes in it right? But wait a minute… they were just developers! The system was completely run by machines! The goal was no executives remember?

Ha… good luck telling that to investors.

When shit hits the fan, people want someone to blame. Chalking it up to computer problems is not going to work. Emotions come into play, people get pissed, and a machine does not suffice as a scapegoat.

This leads us to the second lesson behind the DAO failure — regulation. As we discussed before, the Silicon Valley crowd loves to push the disruption mentality too far and pontificate about things like tech islands without any rules or regulation. Where pure innovation can supposedly flourish. This same mentality carried over into cryptocurrencies. The thought was that a completely machine based system wouldn’t need regulation liked standard banks. This would lead to fewer costs and a far better efficiency.

This is a nice sentiment. But in reality, regulation is necessary. Now we agree overregulation is bad, which is what much of the financial system is suffering from now, but zero regulation is just as dumb. To think cryptocurrencies could somehow avoid any type regulation is stupid. And it again goes back to what happens in cases of fraud and stolen assets. There needs to be rules in place so that the right people are prosecuted and victims compensated.

And it’s funny because the cryptocurrency community is starting to realize this. They’re starting to realize why the original banking system is there in the first place with all its rules. Turns out not all parts of the system are worthless and in need of “disruption”. Surprise, surprise…

We’re now seeing posts like the following in various cryptocurrency circles:

“We are an anonymous collective concerned with the lack of regulation in the cybercurrency sector.

We have contacted the SEC (Securities Exchange Commission) to raise awareness of the developments in Ethereum and specifically concepts like the DAO. While we generally support the innovations in cryptography and cybercurrency, the current “wild-west” environment presents dangerous pitfalls for potential investors, as the DAO attack has shown. As such, regulation is required to protect investors in the United States and abroad. We are currently in contact with investigators at the SEC, the ESC (European Securities Committee) and the MAS (Monetary Authority of Singapore) to explore this matter.

We urge the community to reach out to both the above mentioned authorities, as well as their own national regulators to explore possible measures to protect investors and to establish liability for fraudulent investment schemes. Please see below an excerpt of a Tip Complaint Referral Form Submitted to the SEC. Further information will follow shortly.”

Ha! Crawling back to some form of regulation huh?

So why is the silliness in the cryptocurrency space important to us as global macro investors? Well first off because this virtual currency is another market we trade.

But more than that, this is a wonderful exercise in getting into heads of investors and determining why booms and busts occur Our metaview of this entire cryptocurrency situation helped us ride Bitcoin to highs and jump out before it faltered. We understood the investor motivations and false beliefs helping to drive the boom. And we knew any crack in that belief, such as another hacking incident, would send prices in a downward spiral.

It pays to be one level above the hope, greed, and fear that drives markets. Being objective and rational, while still understanding the emotional pushes and pulls that affect other investors, is the key to success.

[The above is a passage taken from our weekly Market Brief. To learn more about the Brief and all the Macro Ops Hub has to offer, please sign up here.]




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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.