life. money. probability.
STORIES OF FRAUD, DRUGS AND MURDER-FOR-HIRE
A New Tax on Trading? A Professional Political Bettor Turns $400 Into $400,000 Dark Rum, Dark Chocolate and Cigars
the control freak's guide to life, money & probability
13 Beneath the Deep Web: The Darknet
Everything evil proliferates in the offlimits outer reaches of cyberspace.
15 The Darkest Markets
The demise of the notorious Silk Road gave rise to more daring dark markets.
18 Operation Bayonet
How an international coalition of cyber police busted the bosses of some sinister darknet marketplaces.
24 Tracking the Darknet
Luckbox contributors analyze the ongoing online crimewave.
26 Crypto Crime Stats
Darknet market activity was more pronounced last year than ever before.
ONLINE DRUG MARKETS
28 Why You Should Use the Onion Router
Looking for good in the darknet? Begin by embracing its dominant browser.
The deep web and the darknet lie beneath the surface of the internet.
FINANCIAL FRAUD ILLEGAL PORNOGRAPHY
30 Taxing the Trade
The clash over a proposed levy on securities transactions.
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editor-in-chief ed mckinley managing editor yesenia duran assistant editor mike reddy technical editor mike rechenthin contributing editors vonetta logan, tom preston creative director jacqueline cantu Seeking perfect pairings.
life, luxury & the pursuit of happiness
actionable trading ideas
essential trading strategies
THE POLITICAL TRADE
33 Dark Rums
36 I Made $400k Trading Political Futures
49 How Gold Fits 50 Trading the Trading Posts
57 Trading the Gold-Silver Ratio
contributing photographer garrett roodbergen editorial director jeff joseph comments & story ideas email@example.com contributor’s guidelines, press releases & editorial inquiries firstname.lastname@example.org advertising inquiries email@example.com subscriptions & service firstname.lastname@example.org
media & business inquiries publisher: jeff joseph email@example.com
Luckbox magazine, a tastytrade publication, is published at 19 n. sangamon, chicago, IL. 60607
59 Pairs Trading with Futures
39 Just Say No to the Darknet
53 ETFs, Move Over: Smaller Futures are Here
60 Trending Together
editorial offices: 312.761.4218
40 Market Malaise
54 Changes at Exchanges
63 Understanding Delta
41 Man Up to Yoga
printed at Lane Press in Vermont luckboxmagazine.com
FAKE FINANCIAL NEWS
10 A Good Girl on the Darknet
ARTS & MEDIA
42 Hunger Games
43 Atlas Obscura & Better Eating
64 When Beer Goes Viral
2019 Best New Magazine Folio Award for Custom Content
44 Meet Harvinder Singh Dhillon
THE POKER TRADE
46 Top 5 Mistakes CALENDAR
47 April Star Trades 4
luckbox magazine content is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities and futures can involve high risk and the loss of any funds invested. luckbox magazine, a brand of tastytrade, Inc., does not provide investment or financial advice or make investment recommendations through its content, financial programming or otherwise. The information provided in luckbox magazine may not be appropriate for all individuals, and is provided without respect to any individual’s financial sophistication, financial situation, investing time horizon or risk tolerance. luckbox magazine and tastytrade are not in the business of executing securities or futures transactions, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. luckbox magazine and tastytrade are not licensed financial advisers, registered investment advisers, or registered broker-dealers. Options, futures and futures options are not suitable for all investors. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any securities or futures transaction or trade. For simplicity, the examples and illustrations in these articles may not include transaction costs. Nothing contained in this magazine constitutes a solicitation, recommendation, endorsement, promotion or offer by tastytrade, or any of its subsidiaries, affiliates or assigns. While luckbox magazine and tastytrade believe that the information contained in luckbox magazine is reliable and make efforts to assure its accuracy, the publisher disclaims responsibility for opinions and representation of facts contained herein. Active investing is not easy, so be careful out there!
PHOTOGRPAH BY GARRETT ROODBERGEN
@luckboxmag LUCKBOX OF THE MONTH
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DEEP WEB—DARK ALLEYS
life. money. prob
APRIL 2020 Free Digital Subscription getluckbox.com
Take a little walk to the edge of town And go across the tracks Where the viaduct looms Like a bird of doom As it shifts and cracks Where secrets lie in the border fires In the humming wires Hey man, you know You’re never coming back —Red Right Hand, Nick Cave (1994) This issue’s theme—darknet markets—didn’t come to us as a brainstorm. It was more like a product of evolution. The process began when the owner of the New York Stock Exchange expressed interest in buying eBay. The proposed acquisition quickly fizzled, but it left us thinking about highly profitable online marketplaces, many of them devoted to a single niche. Examples include StockX, an online exchange for new and used premium sneakers; Reverb for musical instruments and gear; and Cardpool, a gift card exchange. But as we dug deeper, things got darker. We came upon the deep web and its underbelly—the darknet markets, where illicit goods, guidebooks, drugs, and deeds are bartered, bought and sold like crafts on Etsy. Digital currencies help obscure the buyers’ and sellers’ identities. Then we found that this underground economy just keeps growing. Darknet crimes made possible by cryptocurrency reportedly increased 533% last year to $4.5 billion.
Those misdeeds included financial fraud, credit card theft and drug sales. Meanwhile, dark online markets that operate like illicit versions of Amazon have come and gone. They’ve included such infamous examples as Silk Road, Dream Market, evolution, Hansa, Hydra, AlphaBay and Wall Street Market. Some have attracted thousands of listings and hundreds of thousands of users. Transaction volume has topped nine figures. The stories of those marketplaces and the law enforcement agencies that have pursued them make for compelling reading. There’s the story of Ross Ulbricht, the libertarian tech entrepreneur who landed in prison with a double life sentence for creating the notorious Silk Road. Then came the tales of criminal arrogance displayed by his darknet market successors. And how about the puzzling ignorance of Tina Jones, an Illinois woman now serving a 12-year prison sentence? She sent $12,000 in bitcoin to the darknet murder-for-hire (scam)site Sicilian Hitmen International Network to have the wife of her boyfriend killed. Despite whack-a-mole enforcement efforts and ongoing DDoS (distributed denial of service) attacks, business is booming on the darknet. In two years, Empire Market has passed 1 million users. A new entry, White House Market, boasts that it’s “locked down like a fortress” against the efforts of law enforcement. White House claims 60,000 users and brags about nearly 100% uptime in its first six months. As the markets evolve
STORIES OF FRAUD, DRU AND MURDER-FOR-HIRE GS
A New Tax on Tradin
g? A Professional Political Bettor $400 Into $400Turns ,000 Dark Rum, Dark Chocolate and Cigar s
they become more efficient. And that evolution is documented in fascinating detail in this issue of Luckbox. Eileen Ormsby describes the aftermath of the Silk Road shutdown—the way fledgling dark marketplaces scrambled for market share at first but soon grew significantly (p. 15). Jack Rhysider documents the push by an international coalition of law enforcement agencies to bring the bosses of dark marketplaces to justice (p. 18). But not everything on the darknet threatens law-abiding society. In this issue, Tim Summers explores the useful side of the darknet’s penchant for privacy and provides some actionable tips (p. 28), and Vonetta Logan describes a lighter side of the darknet in her column (p. 10). Nothing’s all bad, but the darknet comes close. Ed McKinley editor-in-chief
Jeff Joseph editorial director
Thinking inside the Luckbox Luckbox is dedicated to helping hard-working, active investors achieve skill-derived, outlier results. How? 1 tune out the noise and false prophets in the investment world and take control
2 probability is the key to improving outcomes in the markets and in life
3 timely investment themes, sectors and stocks matter only because they tend to produce greater volatility
4 greater volatility brings greater opportunity
5 options are the best vehicle to manage risk and exploit market volatility
6 don’t rely on luck—know your options—luck smiles upon the prepared
luckbox | april 2020
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WHAT IS THIS THYNG?
Open Outcry These articles hopefully will wake people up to the Chinese becoming the largest economy of the world with the threat to undermine the Western nations. They are doing it in ways that are not obvious to most. It is unbelievable. We can’t let them do it. —Gerry Schacher, Edmonton, Alberta
Take the reader survey. Luckbox may publish your comments!
What a bright innovative magazine. You shed the boring rich old man coat to bring something different to the table. Good job! —Julia Fleshman, Siloam, NC
THYNG, an augmented reality app, links Luckbox magazine articles to additional digital content. Simply scan any page with a THYNG icon to view video footage on a digital device.
I really enjoyed The Fake Issue. And The China Issue has the same focus upon a theme that makes for enjoyable reading, especially in that the theme is handled by so many diverse viewpoints. —James Moyer, Ephrata, PA
Luckbox Reader Survey Do you believe the Democratic Party will have a brokered convention?
Have you ever traded real money in an online prediction market?
Yes 52% No 48%
Yes 13% No 87%
How often do you listen to podcasts? Daily Weekly Monthly Rarely or Never
22% 15% 26% 37%
1 Download the free THYNG app
2 Luckbox readers are tuned in. Some 63% listen to podcasts every month, compared with an estimated 32% of all Americans. Source: Edison Research
Select the “Targets” mode, scan any Luckbox page that contains the THYNG icon
two ways to send comments, criticism and suggestions to Luckbox Luckbox has launched a political prediction market podcast called The Political Trade. (See p. 36).
3 Email firstname.lastname@example.org Visit luckboxmagazine.com/survey A new survey every issue.
Watch the page come to life with enhanced content!
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“We have a bitcoin price target for the end of wave 1 of ~$100,000 sometime in or near 2020.” —Ross Ulbricht, founder of the infamous darknet market Silk Road
SEE PAGE 12
Ulbricht predicted the price of bitcoin will reach an all-time high this year. He made his prognostication from the cell where he’s serving a double life sentence, plus 40 years without the possibility of parole, for crimes related to his website—so he has plenty of time to learn Elliott Wave Theory.
“The combined attacks that we receive are the strongest [DDoS attacks] in darknet history. Regardless of this, we are always adapting … and our uptime is improving. Since Day 1 there has been a lot of FUD (fear, uncertainty, and doubt) directed at us, but regardless … we plan to stay online for many, many years to come.” —An anonymous (and optimistic) administrator of the Empire darknet market
SEE PAGE 12
Cryptocurrency crime losses increased 533% last year to $4.5 billion 66% of darknet vendors offer stolen financial products 80% of U.S. retail banks harbor illicit crypto money services businesses Source: Cryptocurrency Anti-Money Laundering Report, Q4 2019, Ciphertrace
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43% of bartenders named dark rum as the spirit most likely to premiumize in 2020. Source: Bacardi’s Global Brand Ambassador Survey
SEE PAGE 34
“While the novel coronavirus can be scary, Americans should remember our history with these outbreaks gives us confidence that we have the knowledge, tools and talent to address COVID-19.” —Surgeon General Jerome Adams
SEE PAGE 64
38% of beerdrinking Americans would not buy Corona under any circumstances now.
“The financialtransaction tax, though small for each individual transaction, the weight of such for each transaction would hurt middle-class Americans and their savings for retirement.” —Rep. Patrick McHenry, R-N.C., ranking member of the House Financial Services Committee
SEE PAGE 30
—Results of a dubious survey distributed in late February by 5W Public Relations
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FAKE FINANCIAL NEWS
A Good Girl on the Darknet A Luckbox columnist slips into darkness and sees the light By Vonetta Logan
magine you’re at your desk when you get a text message on your phone. Oh, is it the cutie from the tiki bar? Nope. It’s Chase bank, and they want to know if you intended to purchase all-season tires and a latex female anatomy simulator. You hurriedly reply, “NO.” Then, the phone rings and your bank says that for your safety, your credit card has been cancelled and a new card will be sent to you shortly. You grab your purse, man bag or fanny pack and open your wallet. Your bespoke metal credit card (points and miles, gang!) is still safely ensconced in your wallet. You didn’t get that drunk at the tiki bar last night. How did criminals get your info? Was it
the sketchy WiFi at the coffee house? The derelict gas station with the cheap prices? Your no-good ex? Chances are it’s none of the above, and you’ve been hit by a smooth criminal on the darknet. Each month, this reporter eagerly awaits her assignment from the Luckbox editors. But when the mission, should I choose to accept it, was to “surf the darknet,” nervousness set in. Like you, dear Luckbox reader, I thought the darknet was tantamount to the bleachers behind my high school: full of drugs, illicit sex and maybe a live animal or two for sale. Robert Gehl of inverse.com writes, “In brief, dark websites are just like any other
website. They can be viewed by a standard web browser like Firefox or Chrome. The difference is that they can only be accessed through special network-routing software, which is designed to provide anonymity for both visitors and publishers of these sites.” So in short, the darknet is any internet content that you need special software or authorization to access. Way back in the early 2000s, Roger Dingledine, an unfortunately named graduate of MIT, worked with about six others to launch the Tor project (“The Onion Router”), as a way to create a space on the internet that was as private as possible. Harmon Leon of the Observer writes: “Almost every step along the internet is an opportunity for your data to be sold to a third party. Target ads trumpet the fact that our web searches are being tracked.” That’s why you don’t click on those ads for latex female anatomy simulators. A Luckbox writer, who wishes to remain anonymous because of their dark skills, helped this elderly millennial traverse the darknet. We downloaded Tor by searching for it on Google. Once installed, the first thing you notice when using Tor is how slow it is. Like, dial-up at Nana and Pop-pop’s slow. Gizmodo’s Bryan Menegus writes, “The dark web mostly resembles the internet of 20 years ago. A lot of (sites) are just annoying
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GIFs and stupid sounds. Amateurish graphics scrawled against a digital landscape that’s purpose-built to be undiscoverable by the overwhelming majority of people.” So the dark web is just reddit? After we installed Tor, I asked if you could just type “crimes” into the browser to find the good stuff, but it’s the darknet, so nothing’s indexed. We then searched for “darknet market links” on the “clear,” or regular, web to find the links to .onion sites. You have to know exactly what you’re looking for, and even then, most of the links were broken or Bad Gateway 502 errors. We plugged in a working link to one market site, and that’s where we found an online guide to internet crime. We paid $5 in bitcoin (BTC) to get a link on the clear web to a file-sharing service and just like that, 56GB of crime advice was at our fingers. My coworker printed out a small portion of the file and I pored over “Carding Guide All my Knowledge” a veritable master class on which credit cards are best for stealing, how to take over someone’s account and how to know when your stolen card has been “burnt” (closed/cancelled). But my newly purloined crime guide wasn’t as exciting as I thought it would be. Turns out credit card fraud is a lot of time on the phone with customer service, looking up background records and trying to figure out genealogy. What is your mother’s maiden name? Press 1 if you’d like to commit a crime. And nothing is guaranteed. Great! You just scored $5K worth of merch from an online retailer. Now where do you ship it, and how do you pick it up? If you can persevere, crime does pay. The cost of cybercrime is rising. According to the 2019 Identity Fraud Study from Javelin Strategy and Research, 14.4 million people were the victims of identity fraud in 2018, and of those 14.4 million, 3.3 million people were responsible for some of the cost of the fraud. Out-of-pocket costs doubled from 2016 to 2018, with consumers on the hook for $1.7 billion dollars. While crime guides and hardware like skimmers are a huge part of the darknet’s marketing cache, what really puts butts in the seats is drugs. The infamous but now defunct Silk Road market site raked in $80 million in two years. But for some perspective, the state of Illinois legalized
recreational marijuana on Jan. 1, 2020 and did $40 million in sales in just the month of January. But for the sake of journalism we perused the online drug sites. Darknet drug sites are eBay’s less-sexy cousin. Sellers list their wares and employ a review system where buyers can leave comments. We found a listing on one site for the designer drug ecstacy with a helpful rating system of “Very Satisfy,” “It’s Okay” and “Total Garbage.” Reviewers then wrote about product quality, shipping problems and how high they got. One reviewer simply wrote, “nice and smooth.” But the paranoia of government takeover pervades the darknet, which is what the government wants—even though our own government is complicit. “The Postal Service suddenly became perhaps the largest drug-transportation network in the world, delivering fentanyl from China straight to American homes,” according to The New York Times. “The United States Postal Service’s international parcel volume increased to 20.6 billion units in 2015 from 1.2 billion in 2007.” The odds of detecting a few pills or some powder in that volume are insurmountable, but that’s not to say that feds won’t dress up as postal workers and arrest you when you pick up your packages. Thoroughly scared and disgusted? It’s not all bad. “Focusing all this fear and moral judgment on the dark web risks both needlessly scaring people about online safety and erroneously reassuring them about online safety,” writes Gehl. He uses Experian as an example. The credit monitoring company runs ads scaring people about the darknet and then offers a “dark web monitoring” service. But to get it, you have to give up the very information you’re looking to protect.
There is light on the darknet. “There are more than 865 encryption tools in use worldwide, all addressing different aspects of a common problem,” writes Phillip Winter in an article for The Conversation. “People want to protect information: hard drives from oppressive governments, physical location from stalkers, browsing history from overly curious corporations or phone conversations from nosy neighbors.” The deep web, and encrypted browsers like Tor, are just one way for people to achieve these goals. Even mainstream sites like Facebook and The New York Times have .onion addresses. Not to be shady, but to be available to citizens of places like China that don’t have fair and free access to them. The web is evolving and so is our understanding of privacy. Dr. Tim Summers has some wonderful information in this issue about how you can protect your information online. (See p. 28.) Our foray into the dark web was enlightening, but not as nefarious as the media makes it out to be. Consumers should take all precautions to safeguard their data, whether it be from hackers or intrusive corporations, but just make sure the costs don’t outweigh the benefits, and definitely don’t try to buy a tiger on the darknet. Just trust us. Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the Connect the Dots podcast. @vonettalogan
Don’t try to buy a tiger on the darknet. Trust us. april 2020 | luckbox
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DARKNET DIARIES Shrouded in tech-based secrecy, people with something to hide can do their worst on a portion of the internet called the darknet. The zone also provides cover for respectable users who have good reason to keep activities private.
SURFACE WEB A tiny portion of the web is indexed and readily accessible with a standard search engine.
DEEP WEB Most of the web is filled with private info that’s not indexed and isn’t accessible with standard search engines.
The Iceberg Most of the information on the internet resides below the surface, like the bulk of an iceberg hidden beneath murky waters.
THE DARKEST MARKETS p. 15
OPERATION BAYONET p. 18
TRACKING THE DARKNET p. 24
CRYPTO CRIME p. 26
THE ONION ROUTER
The part of the deep web known as the darknet provides a home to nefarious activities. Access requires anonymizing software or configurations.
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BENEATH THE DEEP WEB: THE DARKNET
Everything evil proliferates in the mostly inaccessible outer reaches of the internet. Call it the darknet and don’t confuse it with the deep web.
LEGAL DOCUMENTS FINANCIAL RECORDS
VARIOUS DATABASES SUBSCRIPTION INFORMATION
ONLINE DRUG MARKETS
By Ed McKinley
opular search engines— such as Google, Bing and Yahoo—tap into only a sliver of the information that resides on the internet–perhaps as little as 4%. That’s called the “surface web,” and it’s illustrated in diagrams as the tip of the internet iceberg. The general public is denied most of the internet’s information, about 90%, simply because it’s private. It includes financial dealings, medical records, scientific reports, government archives and anything with a paywall. Collectively, it’s known as the “deep web,” and entry often requires just a password. The dark side But the remaining 6% of what’s online, referred to as the “dark web” or “darknet,” isn’t so innocuous. It’s a sinister limited-access underground where thieves, pushers, bookies, counterfeiters, child pornographers, money launders, human traffickers and perhaps even hired assassins engage in “commerce” bereft of honesty or decency. It’s beyond redemption and often beyond the reach of the law. The darknet harbors secret places to score illegal drugs or ogle revenge porn. It purveys snuff films that purportedly document real torture, rape and
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DARKNET DIARIES murder. Money laundering’s commonplace. “Assassination markets” take bets on people’s dates of death. Animals are reportedly tortured, sexually assaulted and killed for the amusement of darknet sadists. Urban legend has it that darknet ghouls view live coverage of murders or hire real-life hitmen to commit murder. Some of the most heinous sites may be fakes, scams or myths. But it remains undeniable that the darknet is twisting the high-minded intentions that underlie the internet “information highway.” An untold number of programmers, scientists, engineers and inventors have contributed to the technology. Many stand out as particularly acute visionaries, beginning with Nicola Tesla. The Serbian-American genius of all things electrical was contemplating a “world wireless system” by the early 1900s. The chain of innovation continued with Leonard Kleinrock, an American computer scientist who wrote a scientific paper about a precursor to the internet in 1961. Eventually, the accumulation of knowledge helped British computer scientist Sir Tim Berners-Lee invent the World Wide Web in 1989. The onion router But some brilliant minds run afoul of the law, and even good intentions can turn bad. Some believe the launch of Freenet in 2000 represents the birth of the darknet. Freenet’s designer, Ian Clark, reportedly claimed his creation protected freedom of speech and combated censorship, but the anonymity it granted provided cover for unsavory activities. Motivation aside, dark web sites proliferated in 2002 with the release of The Onion Router, or Tor. It protects anonymity by smothering messages in layers of encryption reminiscent of the layers of an
onion. The U.S. Naval Research Laboratory developed Tor to protect intelligence communication online. Perhaps the first and certainly the most infamous darknet marketplace, the Silk Road, was launched in 2011 and took its name from the legendary trade route that prospered 2,000 years ago. The contemporary incarnation earned such notoriety for drugs deals and other illegal or illicit action that the owner, Ross Ulbricht, landed in prison with a life sentence. (See p. 15.) His acolytes restarted the site after his arrest, but the feds soon shut it down again. A successor to the Silk Road took the name AlphaBay, possibly because it sounded a bit like eBay. Yet the clever name didn’t save the darknet market from an international law enforcement sting that brought it down in 2017. (See p. 18.) Still, AlphaBay survived long enough to dwarf the size of the Silk Road.
URBAN LEGEND HAS IT THAT DARKNET GHOULS VIEW LIVE COVERAGE OF MURDERS OR HIRE REAL-LIFE HITMEN TO COMMIT MURDER.
The dark portal As mysterious as the darknet might seem at first—given that familiar search engines don’t survey it—getting there isn’t that difficult, according to the many YouTube videos that promise simple access. To take full advantage of the anonymity of the darknet, some recommend using a virtual private network, or VPN, to log onto an anonymity browser that ends with “.onion.” Because of that relative ease of entry— combined with the public’s growing awareness of the darknet’s existence— experts predict dark traffic jams. But just as most ideas become watered down as they gain wider acceptance, the darknet could become a continually sunnier part of the internet as exposure to the light of day increases. Could it become a safe, mainstream part of life? One can hope.
$1,000 worth of bitcoin can net a money launderer $10,000 in cash on the darknet 14
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DARKEST MARKETS The demise of the notorious Silk Road darknet market gave rise to even bigger and more nefarious online alternatives By Eileen Ormsby
The FBI and Europol teamed up to shut down the Silk Road online dark market in 2014, but the criminals who relied on the site scrambled to other parts of the darknet to continue their nefarious commerce. This excerpt from Eileen Ormsby’s book, The Darkest Web, documents the illicit migration.
fter the fall of Silk Road, the two smaller markets in its shadow— Black Market Reloaded and Sheep—received such a massive influx of Silk Road refugees that the former closed down gracefully, saying they didn’t need the scrutiny all the new members would bring, and the latter closed suddenly, taking everyone’s bitcoin with them. Silk Road 2.0 opened just a month after Ulbricht’s arrest, run by former Silk Road employees, three of whom were arrested a couple of months later and one of whom was in fact, undercover agent Cirrus. Silk Road 2.0 stayed open for a year before it, too, was shut down by the authorities. After that, several markets rose and fell—a few by law enforcement infiltration, but most just shut up shop, usually taking the bitcoin of their customers with them. The appetite for online drug markets was voracious; drug users worldwide had discovered a newer, simpler way to acquire better-quality drugs at reasonable prices, and the closures, busts and scams were little more than a nuisance, the cost of illicit activities. It was not long before new markets dwarfed the size of Silk Road. The classic exit scam, many say, is the perfect crime. Build up a network of trust among customers, then abscond with all their money. Those who have been ripped off have little recourse; there’s no ombudsman to complain to when your illegal goods don’t turn up or aren’t what was promised. No door to knock on and demand your money back.
Individual drug dealers have done it throughout the dark markets’ history to various degrees, with a former site vendor named “tony76” setting the bar. Though his real identity remains unknown, tony76 is believed to have scammed users out of up to a quarter million dollars last year in the cryptocurrency bitcoin, according to claims by at least one Silk Road forum moderator. But on a much larger scale, sometimes the owners of a market, entrusted with all the users’ bitcoin in their accounts and held in escrow, decide simply to close the market and move the bitcoin into their personal wallets. Such was the case with
End of the Road The Silk Road wasn’t the first darknet market, but it may have been the most infamous. The site, launched in 2011 by then-26-year-old Ross Ulbricht, was devised as a “freemarket economic experiment.” It used the Tor Browser and bitcoin to keep buyers and sellers anonymous. The thinking behind the site was that transactions should remain private and free of restrictions so long as they were voluntary and third parties weren’t harmed. The administrators banned stolen goods, child pornography, and other crime-related tools and resources. But before long, the Silk Road’s anonymity made it a haven for lawbreakers. The FBI shut it down and arrested Ulbricht, who was was convicted of multiple crimes and sentenced to double life imprisonment, plus 40 years, without the possibility of parole. In 2018, the U.S. Supreme Court declined to hear his appeal. A clemency petition has more than 268,000 signatures.
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DARKNET DIARIES ALPHABAY WAS THE EPITOME OF THE NEW DARKNET MARKETS— BIGGER THAN SILK ROAD EVER WAS, BUT DARKER, SELLING NOT ONLY DRUGS, BUT WEAPONS, STOLEN PERSONAL INFORMATION, COMPUTER HACKING TOOLS, MALWARE, RANSOMWARE, AND GOODS AND SERVICES THAT STEAL IDENTITIES AND RUIN LIVES. Atlantis in November 2013 (although in retrospect, it is likely Atlantis was simply spooked as they had apparently been fed information about the ongoing FBI investigation) and Sheep Marketplace also shut down in December the same year. And so it was in late March 2015, with the largest black market the darknet has ever known. The owners of Evolution Marketplace—known as Verto and Kimble—brazenly told staff that they were closing the site and taking the coin. The estimated value of everything within their control ranged from $12 million to $34 million worth of bitcoin at prevailing market rates. This should not have come as a surprise to its customers. As well as getting larger, these new markets had wildly different philosophies of doing business than the trailblazer. Gone were the days when the leading darknet market, Silk Road, refused to sell or list anything “the purpose of which is to harm or defraud another person.” The markets that emerged to fill the gap left by Silk Road listed stolen credit cards and personal information, hacking services and malware alongside drugs for personal use. Evolution was founded by a character well known to the darknet. Verto had been adminis-
trator of Tor Carding Forum, a massive community of those who trade stolen credit or debit card account information for profit. They sold personal information, credit card dumps, ATM skimmers, cloning machines and fake IDs. And the owners pulled Ponzi schemes on their own members. In retrospect, it should have been obvious that someone who had made a career of ripping people off would stage a heist where risk was minimal and reward was great. Evolution’s administrators had probably planned the long con, giving themselves a year or so to establish trust and amass bitcoin. Evolution had always had a cleaner interface and, importantly, lower commissions than any other major online black market. The profits, while still healthy, were unlikely to be adequate for those risking their lives and freedom. Two former moderators of the Evolution forums confirmed separately that a “staff meeting” was called the morning of the closure, though their recollections differ slightly. “We had a staff meeting at 10:30 a.m. this morning,” said NSWGreat, where the owners announced that the “market was being closed and they’re taking everything with them. Aid markets and forums
66% of dark market vendors sell stolen payment products, with compromised accounts sometimes selling for as low as 1% of the account balance. Source: CipherTrace
would be online for 30 minutes for us to save anything we wanted to keep.” Another moderator: “It was pretty bizarre,” confirmed EvilGrin. “Verto wasn’t there. Kimble said we’d wait a few minutes for him. Then in a few minutes he said, ‘Verto isn’t coming to the meeting, or to any meetings again. Because I’m taking Evo offline in 30 seconds.’” When Silk Road was launched in February 2011, one of the stated intentions of Dread Pirate Roberts was to create a place where peaceful people could buy and sell drugs free from violence. Exit scams brought out the violence in people. Many of the vendors on Evolution had large amounts of money tied up— money they owed to very real people in very real life who would be very unsympathetic. Vendors posted that they feared for their lives if they could not pay their own suppliers. Many of those who lost money in the Evolution exit scam (and many who did not, but were affronted by the heist) were baying for the blood of Verto and Kimble. They didn’t just want the money returned—they wanted those who had taken it to suffer. The pitchfork brigade got even uglier when they started offering money for the identities of other Evolution staff members, all of whom were presumably as in the dark as any of their customers. Some went one step further—not just the uninvolved staff, but their families as well. Despite the thousands of online sleuths combing for clues, following the bitcoin and sharing their theories, the absconding founders of Evolution were never located. They joined a small but growing number of darknet drug lords who apparently got away scot-free and enjoyed their spoils in anonymity. Whenever one market went down, other markets operating simultaneously would get an influx of new members, and those without the proper infrastructure would buckle under the demand. After Evolution closed its doors, there were no consistently reliable markets for some time; users became so frustrated that many said they would forgive the owners of Evolution their sins if only they would
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A seizure notice from law enforcement agencies greeted visitors to the darknet marketplace AlphaBay after the site was taken down.
reopen the stable and efficient market. Thanks to the transparency of bitcoin, pundits could make educated estimates of the amount of turnover and profit that market owners made. Thus, it did not take long before the gap in the market was filled with others attracted by the potential for massive returns. AlphaBay launched in mid-late 2014, and it was immediately apparent that it existed purely for profit and made no pretense at the lofty ideals and morals
DARKNETS SOLD PERSONAL INFORMATION, CREDIT CARD DUMPS, ATM SKIMMERS, CLONING MACHINES AND FAKE IDS. THEY PULLED PONZI SCHEMES ON MEMBERS.
of the old-school markets. AlphaBay was the epitome of the new darknet markets; bigger than Silk Road ever was, but darker, selling not only drugs, but weapons, stolen personal information, computer hacking tools, malware, ransomware, stolen goods and services to steal identities and ruin lives. With few exceptions, if it was illegal, it could be purchased on AlphaBay. This was the true Wild West of the darknet. There were few rules on AlphaBay, other than a ban on child pornography, a ban on any activities designed to circumvent commissions going to AlphaBayâ€™s owners, and a stipulation that any malware sold must have a built-in function to ensure it could not impact any computer in Russia, whether belonging to government, industry or private citizens. This final rule, alongside AlphaBayâ€™s large Russian-speaking membership and the Russian-language forums that rivaled the size of the English-language ones, meant the website was widely considered to be run by Russian organised crime. Before long AlphaBay was 10 times the size Silk Road ever was. Darknet markets had come a long way from the days of the creation of a young idealistic Texan in Silicon Valley.
Shedding light upon darkness Eileen Ormsby, a Melbourne, Australia-based lawyer, author and freelance journalist, has been decrying the evils of the darknet on her blog, All Things Vice, since 2012. Her books, The Silk Road (2014) and The Darkest Web (2018), chronicle the rise and fall of websites that provide online marketplaces for nearly everything illegal, immoral or illegitimate. Her writings have prompted the pushers, hackers and hitmen who inhabit the dark recesses of the internet to break into her computer and threaten her life. Just the same, she manages to live a quiet life and stay off-grid as much as possible.
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OPERATION BAYONET An international band of cyber police joined forces to bust the bosses of sinister darknet marketplaces By Jack Rhysider
This account of an international crackdown on the internet’s darknet markets was adapted from the Darknet Diaries podcast created by Jack Rhysider.
ome background on the darknet could foster a better understanding of the fate that befell a site called AlphaBay, one of the most popular darknet marketplaces ever. Think of the darknet as a cloak of anonymity that hides users’ identities somewhere in the far reaches of the internet. Better yet, imagine walking into a nightclub where everyone’s required to wear a mask, white shirt, red tie and blue suit. That way, no one can tell the club patrons apart. It’s much the same on the darknet. At least, that’s the theory. The darknets include Freenet and I2P, but Tor—which stands for The Onion Router—ranks as the most popular, the most feared and the most reviled. Users employ special software to connect their computers to the Tor network and become anonymous. Normally, websites know visitors’ IP addresses, which are associated with where they are geographically. But when users connect to Tor, they get an IP that might be hundreds or thousands of miles away from their actual locations. This masks where users are actually located. For extra safety, visitors can use a virtual private network, or VPN, to connect to Tor. If Tor or the VPN servers are compromised, neither system would know where the users came from or went. They’d be able to see only one or the other.
The Silk Road In repressed countries, legions of activists, intellectuals and cautious ordinary citizens use Tor to circumvent censors and make their voices heard. Whistleblowers use Tor to hide their identities. Anyone concerned about mass surveillance may use Tor to escape being tracked. It’s a tool for sharing messages without facing punishment for speaking up. But Tor offers something else, too: It grants access to restricted darknet sites. Because Tor theoretically operates an anonymous network, bad guys use it to commit crimes. Tor sites offer to trade software or music illegally. Tor users blog about subjects like how to counterfeit money or how to hack into computers illegally. Drug marketplaces proliferate on Tor. Tor rates drug marketplace sites, providing sellers with scores to help buyers decide whom to trust. Buyers can purchase a sample of any controlled substance to determine if it’s legit—in a debased sense of the word. Perhaps the most infamous of all the dark markets was the Silk Road. The feds tracked its founder, Ross Ulbricht, and captured him in 2014. He was convicted on multiple counts of fraud, conspiracy and narcotics trafficking, and sentenced to life in prison without the possibility of parole. But some Silk Road programmers and moderators weren’t immediately apprehended, and they went on to create Silk Road 2.0. Within a year, the feds caught up with them and shut down that site, too.
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The same month Silk Road 2.0 was shuttered, a new site called AlphaBay sprang up on Tor, and Silk Road “entrepreneurs” immediately began using it to buy and sell drugs. But another big dark market, known as Evolution, was also operating at the time, serving as a marketplace for all kinds of illegal merchandise but primarily as place to buy and sell drugs. Evolution used an escrow service for transactions. Buyers sent bitcoin to the Evolution server, which held the cryptocurrency until the transaction was complete and then released it. It was dominant and highly rated. But in March 2015 Evolution went offline. This time it wasn’t because of the feds. Whoever was running Evolution shut the doors and absconded with about $12 million they were holding on the site for buyers. It was as though the buyers had paid for their drugs, and the middleman simply split with the cash instead of turning it over to the sellers. Thus the buyers were out the money and had nothing to show for it. The rise of AlphaBay At that point, many of the buyers and sellers in the illicit drug trade turned to AlphaBay for online transactions. Within two years, the site was servicing more than 400,000 users and had grown to become the biggest dark market in the world. AlphaBay’s friendly moderators taught visitors how to use bitcoin and how to employ Pretty Good Privacy (PGP) to encrypt web chats. Users could buy marijuana, LSD, magic mushrooms, meth, cocaine, fentanyl or heroin. They could acquire altered driver’s licenses, fake passports, unregistered guns, stolen credit card numbers, concealable credit card skimmers and high-grade ink-jet printers to crank out counterfeit currency. Yet despite all those options, drug sales predominated. Buyers couldn’t use credit cards or PayPal. Only bitcoin, Monero and Ethereum were accepted. Those cryptocurrencies are theoretically anonymous because buyers don’t know who’s receiving the payment. For its trouble, AlphaBay charged 2%-4% commission on every transaction. With hundreds of thousands
of transactions, the site was making some serious bitcoin. AlphaBay hired a staff and continued to add features and fix bugs. But a site like that attracts a lot of enemies. Law enforcement agencies from around the world were working to shut down sites like AlphaBay. Investigations began in the U.S., the U.K., the Netherlands, Canada and Germany. The authorities began by seeking clues that could reveal who was running the sites, but at first found nothing. The Feds catch a break Undercover FBI agents visited AlphaBay and used bitcoins to buy marijuana. The weed arrived in the mail, but the shipments offered no clues as to who was selling it or who was operating the site. All the agents learned was the marijuana was shipped from California. The agents bought heroin, fentanyl, more marijuana and then 50 grams of meth. Then they bought four fake driver’s licenses and a credit card skimmer that fits onto an ATM. The FBI, which by now was sharing information on dark market cases with law enforcement agencies around the world, continued to gather inconclusive bits of information until it finally spotted something significant. An agent who created an account received a revealing email message welcoming him to the sinister market. The header of the email greeting bore the address email@example.com. The FBI took the address to Microsoft, owner of Hotmail, and found it was associated with the LinkedIn account of Alexandre Cazès, who was born in 1991. This matched the name and the “91” in the email address. His LinkedIn profile explained that he lived in Montreal and ran a computer tech support company called EBX Technologies. The FBI dug into the facts surrounding Cazès and discovered that besides his involvement with AlphaBay he was embroiled in Hansa, a popular European darknet marketplace noted for its sophisticated user interface, highly competent admins and exemplary customer support. Even though Hansa was smaller than
ABOUT 840,000 BITCOINS WERE TRANSFERRED THROUGH ALPHABAY, TOTALING AROUND $450 MILLION. THE FEDS ESTIMATED THE COMMISSIONS CAME TO BETWEEN $9 MILLION AND $18 MILLION. april 2020 | luckbox
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DARKNET DIARIES AlphaBay, it had attracted the attention of law enforcement. Nearly all the Hansa servers were on the anonymous Tor network, which made it impossible to trace their locations. But one Hansa development server resided on the regular internet. The Hansa admins had been using it to test new features. Researchers reported that intelligence to the Netherlands National High Tech Crimes Unit. Following the leads The Dutch agency used the tip to track down the IP in a data center in the Netherlands. They contacted the center and put something akin to a wire-tap on the server to monitor the information packets coming in and out. They found the server was talking a lot with the live Hansa server on Tor. The production server was in the same data center as the development server, so the Dutch made harddrive copies of a few of the Hansa servers, including those used for development and production. Working directly with the data center, the authorities accomplished that without causing an outage on the site. Next, the Dutch High Tech Crimes Unit combed the contents of those hard drives to identify the AlphaBay admins. Somewhere in the logs, the Crimes Unit discovered the names and possible locations of the two men running the Hansa dark market. One address was in Germany, but when the Dutch government contacted Germany to request the admin’s arrest and extradition, the German government explained that it was already tracking both suspects. It seems the same two who were running the Hansa dark market had previously
created an online site to buy and sell pirated e-books and audiobooks. The German police were trying to find their location to arrest them. So the Dutch and German authorities began collaborating on a new plan. They would capture the two miscreants under the German case, but the Dutch would control the Hansa investigation. With the help of the Lithuanian government, the Germans and Dutch located the Hansa server. The agencies had everything they needed to arrest the admins and take over Hansa. But then the FBI notified the authorities in Europe that it had also uncovered the details of the case and was about to raid the data center and arrest the owner. So agencies from the Netherlands, Germany and the U.S. teamed up. If the Dutch controlled Hansa, they could collect information on the users of the site and potentially arrest a lot of dealers. The honeypot The FBI agreed to the plan and named it “Operation Bayonet.” Bayonet was a play on words: Bay came from AlphaBay, net came from darknet, and together, they would signify piercing the dark marketplace. Authorities hoped that taking down both AlphaBay and Hansa would destroy trust in the dark marketplace for a long time, potentially crippling the whole online trade of illegal merchandise and drugs. Operation Bayonet was a go. The next step was the takeover of Hansa. The Dutch authorities worked with Lithuania and Germany to coordinate assaulting the data center while simultaneously nabbing the
On a website called Azerbaijani Eagles, visitors can commission a murder for $5,000. The site Slayers Hitmen provides more options, with a beating going for $2,000. Death by torture costs $50,000. Source: The New York Times
two suspects. On June 20, 2017, the international band of cops sprang into action. The Dutch police invaded the data center in Lithuania, and the German police executed surgical strikes on the homes of both of Hansa admins. It’s not clear how they accomplished all this, but here’s a likely scenario: The German police probably watched the admins and verified they were on their computers. Then the cops created a disturbance to draw the men away from their computers without shutting down the machines and leaving the Hansa site. The German police gave the signal to the Dutch authorities who then quickly migrated the entire Hansa server to the Netherlands and placed it under their control. To stay undercover, the German police may have simply filed arrest reports for two suspects caught pirating e-books and audiobooks. That meant visitors to the Hansa site remained oblivious to the takedown. So the trap was set. The Dutch police had set up a honeypot—or sting operation—by using a popular drug marketplace to attract criminals to conduct crimes under their watchful eye. Now that they were collecting extensive information, they were ready for the FBI to conduct the next step in Operation Bayonet. The FBI was ready for action. Agents knew the owner of AlphaBay, Alexandre Cazès, was living in Thailand, and they knew the AlphaBay server was situated in Montreal. The FBI coordinated with Canada and Thailand to conduct simultaneous raids on the data center and the Cazès residence. Again, the goal was to arrest Alexandre while he was logged onto his computer, thus proving he was the admin for the site. On July 5, 2017, the FBI and police in Canada and Thailand went on the offensive. The takedown The Canadian cops raided the data center and took the servers offline. Simultaneously, the Thai police staged a disturbance outside the opulent Cazès villa to lure their prey away from his laptop. A plainclothes Thai cop in an unmarked
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police car purposely smashed into the front gate of the house but made it look like an accident. Additional plainclothes cops played the roles of shocked neighbors to add to the chaos. But there was no sign of the suspect even though the authorities knew he was home. The ruckus continued for what seemed like an eternity until Cazès finally emerged with his cell phone in his hand, wearing shorts, sneakers and no shirt. He was angry about the gate but became truly confused when Thai authorities wrestled him into a pair of handcuffs. The cops grabbed his phone and kept it open so it wouldn’t become locked. The police then proceeded inside and found his computer open and logged into the AlphaBay server as admin. He had been trying to figure out why the servers in Montreal were down. When the Royal Thai Police and the FBI examined the Cazès computer they found a text file with all the passwords for the AlphaBay site. That would be enough evidence to convict him of owning the largest dark market in the world. The raid on the Montreal data center also succeeded, and the FBI seized his servers and took them offline. The authorities kept the capture of Alexandre Cazès quiet and did not announce they had shuttered AlphaBay. Angry AlphaBay users suspected an exit strategy similar to the one at Evolution, where the owners ran off with the buyers’ bitcoins. Cazès was thrown into a Thai jail to await extradition to the U.S. Meanwhile, the U.S. filed a civil forfeiture complaint against the suspect and his wife, which allowed the FBI to seize everything the couple owned. An ill-gotten fortune Among the seized assets, FBI agents found a meticulously maintained journal that made it easy to locate and collect the family’s valuables. It led the authorities to 10 vehicles, including a $900,000 Lamborghini, a Mini Cooper, a BMW motorcycle and a Porsche Panamera. Real estate holdings included the dark market operator’s primary luxury villa in Thailand and the house next door where
his wife’s parents lived. Cazès was building a villa in Bangkok and had vacation houses in Phuket, Antigua and Cyprus. His palatial home in Cyprus cost $2.3 million, the amount required to become an official resident of the island nation. He had also paid Antigua $400,000 to become a resident. He had three Thai bank accounts, one Swiss bank account and one bank account in St. Vincent in The Grenadines. Cazès was holding large amounts of cryptocurrencies, including bitcoin, Ethereum, Monero and Zcash. Between his bank accounts and cryptocurrencies, the FBI seized $8.8 million. In addition, the FBI seized all the cryptocurrency stored on the AlphaBay servers in Montreal. Those servers had 250,000 active listings, compared with the 13,000 on Silk Road when it was shut down. Cazès was charging a 2% to 4% commission on every transaction, and the logs showed that about 840,000 bitcoins were transferred through AlphaBay, totaling around $450 million. The feds estimated his commissions came to between $9 million and $18 million. According to his notes, he had a net worth of $23 million. But perhaps Cazès wasn’t just about money. His father described him to a reporter in Montreal as kind and caring. “He wouldn’t hurt a fly,” his father insisted. Cazès didn’t have a criminal record, never smoked cigarettes and never abused drugs. He was so smart that he skipped a year of school. Still, those brighter days had ended. Cazès sat in jail knowing the authorities were taking everything away from him and his wife. He was concerned about her parents losing their house. He also knew full well that Ross Ulbricht drew a life sentence for running Silk Road. Gripped by fear, he felt the walls closing in and he didn’t want to face his troubles.
ALPHABAY USERS COULD BUY MARIJUANA, LSD, MAGIC MUSHROOMS, METH, COCAINE, FENTANYL OR HEROIN. THEY COULD ACQUIRE ALTERED DRIVER’S LICENSES, FAKE PASSPORTS, UNREGISTERED GUNS, STOLEN CREDIT CARD NUMBERS, CONCEALABLE CREDIT CARD SKIMMERS AND HIGH-GRADE INK-JET PRINTERS TO CRANK OUT COUNTERFEIT CURRENCY.
His final act On July 12, after seven days in a Thai jail cell, Cazès twisted a towel into a tightly wound rope, tied it into a sturdy knot to form a noose, put his head through his creation and used the weight of his body to hang himself. The next morning the
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Jeff Sessions, then U.S. Attorney General, announced the takedown of the darknet marketplace AlphaBay at a Justice Department news conference on July 20, 2017.
in rapid succession, the busts rattled the dark market communities. That’s why the Hansa shutdown didn’t trigger a mass migration to another site. Instead, users scattered. They returned to the streets or simply gave up on their criminal activity altogether—at least for a while. The feds had not only infiltrated the darknet but also penetrated the minds of the denizens of the darknet. Some learned caution. Other gave in to panic. In fear and seized by confusion, they got sloppy, suddenly reusing passwords, accidentally revealing their home addresses and just generally becoming negligent about protecting their privacy. So the raids indisputably shook up the dark market trading scene. But why wouldn’t they? After all, this was the most elaborate sting ever conducted on the darknet.
A darknet-focused podcaster Jack Rhysider, a network security engineer, created the Darknet Diaries podcast in 2017 because no one else was chronicling the evils of the darknet. The podcast exposes the true stories of hackers, malware, botnets, breaches and privacy—all in an investigative style that bring to mind detectives in fedoras and trench coats. (Check it out!) He still finds time to devote to a tech blog called TunnelsUp and a podcasting blog known as Lime.Link.
PHOTOGRAPH: REUTERS/AARON P. BERNSTEIN
Thai guards discovered the body, and the news broke in Thailand. The Wall Street Journal informed the rest of the world, noting that the feds had seized AlphaBay and the owner of the site was dead. Frequenters of the dark markets panicked. Conspiracy theories ran wild. Was Cazès murdered by another dark market owner? Maybe someone close to AlphaBay killed him so he would take the fall for everybody? Was it the feds? Why would he commit suicide? According to plan, new users flocked to the Dutch government-controlled Hansa dark markets as soon as AlphaBay shut down. Every day, more than 5,000 new users were registering at the site—a significant increase from the normal 600. In fact, the volume of new users broke the registration system, and the Dutch police worked for days getting it back online. Under Dutch law they were required to track and report every sale on the site, and users were conducting about 1,000 transactions a day. The paperwork was becoming too much for the Dutch authorities to handle. After 27 days, the Dutch government pulled the plug on the server, shutting down the whole operation—but not before collecting information on about 27,000 transactions. The Dutch authorities placed a banner on the site saying it had been seized by the Dutch National Police. At the same time, AlphaBay’s site started displaying the message that the FBI had seized it. News that government agencies controlled both sites shattered the trust of many dark market buyers and sellers, sending the drug-trafficking community into chaos. The FBI gathered more evidence and then arrested the AlphaBay moderators. The Dutch police, collected information on more than 420,000 users, including 10,000 home addresses, turning the information over to Europol for further action. The Dutch seized about $12 million in bitcoin that was on the Hansa server and arrested more than a dozen dealers in the Netherlands. To this day, the FBI and Dutch police continue to sift through the data they collected to track down suspects and build criminal cases. When AlphaBay and Hansa went down
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TRACKING THE DARKNET Are the cops closing in on the criminals who run darknet marketplaces? Luckbox asks the contributors to this issue
Law enforcement agencies are becoming better at tracking down darknet marketeers and closing darknet markets. How are the darknet markets responding? Eileen Ormsby: The evolution has been
interesting. Back in 2012, a highly confidential police memo was leaked to several people on Silk Road that stated law enforcement did not have the technological knowhow to battle the emergence of darknet markets, and their best tools were old-fashioned police work and the dissemination of “FUD”—fear, uncertainty and doubt— among the users. Old-fashioned police work uncovered Ross Ulbricht as the owner of Silk Road and FUD has remained a powerful weapon, but it goes hand-in-hand with increasingly sophisticated cryptocurrency tracing methods. The weak spot for the market owners and large vendors has always been turning crypto into fiat. And law enforcement has been able to follow the money to make arrests as blockchain analysis tools have become more powerful and large crypto exchanges have become more strictly regulated and subject to KYC (Know Your Customer) requirements imposed by the Financial Crimes Enforcement Network.
Jack Rhysider: If you ask former U.S. Attorney General Jeff Sessions, he’ll tell you the authorities are absolutely getting better at tracking and catching darknet criminals. But personally, I believe that you can be anonymous and private online to the point that even the U.S. feds can’t find who you are. People almost always get caught because they slipped up and accidentally leaked information about themselves. Kim Grauer: We’ve seen that after
prominent marketplaces are shut down, vendors relatively easily find other darknet markets on which to sell their wares. As a result, some law enforcement agencies such as the Swedish Police Authority also focus on investigating vendors themselves, and they are having success.
Bitcoin remains one of the most-used cryptocurrencies in darknet markets. Is there any evidence to suggest this trend will change? Timothy Summers: Bitcoin was the first
app for blockchain. And, hey, it’s hard to forget your first app. Bitcoin will continue to be a major driver in the markets—whether darknet or not—
regarding cryptocurrencies. However, those in the know are privy to its lack of anonymity and have sought other options. Candidly, there is a direct correlation between the accepted cryptocurrencies and how private the participants believe the exchange needs to be. You may find some people willing to take the risk of using bitcoin, ether, dash, or litecoin; but find more sophisticated groups using monero, Zcash, or PIVX. There is no sign of bitcoin losing ground. Ormsby: There is no doubt that bitcoin is still king when it comes to darknet market transactions. It has longevity and is comparatively easy to use. However, its strength is also its greatest weakness— the public blockchain means that every transaction is visible to every person. Some markets are encouraging the use of Monero, an alternative currency that does not have a public blockchain. A couple of newer markets mandate it. Although touted as a privacy coin, Monero does not have the ease of use of bitcoin, and users can lose significant amounts of money as bitcoin is converted to Monero and back again, to cash out. Darknet “commerce” allegedly includes child pornography, controlled substances, illegal weapons, terrorism and even murder. Do America’s foreign rivals—such as Russia, China, Iran and North Korea—use the darknet to disrupt Western governments or elections? Summers: There is an abundance of
evidence that the darknet is actively used for the exchange of government intelligence, yes, by Russia, China, Iran, North Korea, but also many others. Today, you and I can go on the darknet and purchase a bot army to promote our political agenda to sway an election, and the seller has historical performance data with 5-star reviews. Grauer: Yes, there are several examples
of nation states engaging in illicit activity on both the darknet and clear web to evade sanctions and disrupt
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democratic elections. Lazarus Group is an infamous cybercriminal syndicate linked to the North Korean government. Considered an advanced persistent threat by cybersecurity experts, Lazarus is widely believed to be behind the 2014 hack of Sony Pictures and 2017 WannaCry ransomware attacks, as well as a number of cryptocurrency exchange attacks. The U.S. government has reported that North Korea uses funds from exchange hacks and other financial crimes to fund its weapons of mass destruction and ballistic missile programs. Activities usually associated with Russia and North Korea have also recently been attributed to Iran. And the security firm ClearSky released a report claiming government-backed Iranian hackers have been hacking VPN servers to access large corporate networks. Interestingly, the Stanford Internet Observatory recently identified the upcoming Taiwanese presidential election as a near-certain target for a Chinese influence campaign. A Chainalysis report documented an increase in darknet market activity. Yet, press coverage and law enforcement activity appear muted. Why does it seem so quiet out there? Summers: Law enforcement work
is continuing; however, with issues like the coronavirus and the potential of global economic pandamonium, attention is elsewhere. Also, it’s old news that data breaches happen and our data is being sold on the darknet. Truthfully, that doesn’t mean anything real to the everyday person. Ormsby: It is largely because little
newsworthy activity is happening. The fact that you can buy drugs online is old news and it is no more interesting than drug transactions that happen on the street. It’s perhaps less interesting because violence is eliminated from the equation for the buyer and the seller in an online deal, so there will be no tales of shootouts or bloody aftermath of drug deals gone wrong.
Back in 2011 and 2012, Silk Road was novel and outrageous, and it had an enigmatic, idealistic leader who was heavily engaged in the robust and loyal community that grew up around his creation. New markets are simply businesses that have little appeal to journalists. Rhysider: FBI campaigns like J-CODE
and Operation Disarray have recently been announced, which aim to stop the online selling of opium. These campaigns look to be pretty successful with numerous arrests and seizures. But what makes it really hard for the media to cover this is that it’s a constantly changing environment with a lot of secrets. It’s hard to get many answers as to what is going on in the darknet, and that deters the media from talking about it. It’s just too complicated and appears to be a bottomless pit.
More than seven in 10 survey respondents in nine countries said they worry about how tech firms collect and use personal data. So why is the public so slow to adopt the Tor browser and DuckDuckGo search engine—both of which could protect privacy? Summers: Tor, in its current state, is
too slow, complicated as a concept and generally requires too much work
DARKNET MARKETS WILL EXIST AS LONG AS PEOPLE WANT TO EXCHANGE THINGS IN CONFIDENCE. for mainstream public adoption. DuckDuckGo is gaining popularity, but it’s fighting against the illusions of openness that companies like Google and others use in their marketing. It’s becoming suspicious to desire privacy on the internet. Usage of Tor and private search engines like DuckDuckGo help us achieve a level of intimacy and privacy that people expect in the physical world and that we should be empowered to achieve in the digital world. Ormsby: Tor blocks a lot of benign stuff
we may want to see because it uses scripts that could compromise our identity in some way. Most of us insist on a fast, simple, intuitive and seamless internet experience, and that’s just not something you’re going to get using the privacy tools, but we accept it because we like the convenience, even while we freak out when our computers seem to be spying on us as ads follow us around the web. Avatar headshot for anonymity
Kimberly Grauer heads research for Chainalysis, a blockchain analysis company. She previously studied tech in developing countries as a research associate at the London School of Economics. She was also an economic researcher at the New York City Economic Development Corp. @kimberlygrauer
Eileen Ormsby, a lawyer, author and freelance journalist, is based in Melbourne, Australia. Her first book, Silk Road, provided the earliest indepth exposé of the black markets that operate on the darknet. Her investigations have led her deep into the secret corners of the darknet. @EileenOrmsby
Jack Rhysider covers true stories from the dark side of the internet on his Darknet Diaries podcast at darknetdiaries.com. He says he created the show because virtually no one else was covering the beat. He’s also spent much of his career working as a network security engineer. @jackrhysider
Timothy C. Summers, Ph.D.—an ethical hacker who also researches how other hackers think—consults with companies on emerging technology and serves as the executive director of cloud and advanced network engineering services at Arizona State University. @howhackersthink
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CRYPTO CRIME Illicit marketplaces hidden in the darknet are anything but dead—in fact, they’re thriving
Darknet market revenue
Share of all incoming transaction activity
Darknet market share of all cryptocurrency received
Statistics Source: Chainalysis’ The 2020 State of Crypto Crime report
Darknet market revenue versus darknet market share of all cryptocurrency received by services, 2013-2019
Value received by darknet markets in millions of USD
Crypto crimes and online drug markets have disappeared from the headlines but haven’t disappeared from the darknet. Darknet market activity was more pronounced last year than ever before, according to a report by blockchain analysis company Chainalysis
Darknet market transactions increased from 9 million transfers in 2018 to 12 million transfers in 2019
The Early Darknet Days October 2002
The Tor network is deployed
The Tor Browser is announced
Bitcoin is released to the public
The Farmer’s Market becomes the first known darknet market on Tor
Ross Ulbricht launches the Silk Road
The Drug Enforcement Administraton closes the Farmer’s Market
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Number of active darknet markets vs. average value received per darknet market, 2011-2019 Average volume sent to darknet markets
50 Number of active darknet markets
$800 million Darknet market sales in 2019. Up by 70% from year earlier
Average value received per darknet market in millions of USD
Number of active markets
Global darknet markets by share of total market size, 2015-2019 100%
Others (after top 20)
Abraxas Market Evolution Market
sa M a
Dr ea m
TradeRoute Market Silk Road 3.1 Brian Dumps FEshop
Middle Earth Marketplace
By Pin pa ss Sh Pays op Wa ll S tre et Ma rke t
Chainalys, a blockchain analysis company, provides compliance and investigation software to banks, businesses and governments in 40 countries. The company has been releasing annual crypto crime reports since January 2018. @chainalysis
Bitcoin passes $100 in value
The FBI shuts down the Silk Road and arrests Ross Ulbricht
Bitcoin passes $1,000 in value
Silk Road 2.0 is launched with the promise of improved security
The FBI and Europol shut down Silk Road 2.0
Ross Ulbricht is convicted and sentenced to double life imprisonment plus 40 years
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WHY YOU SHOULD USE THE ONION ROUTER The actionable aspects of the darknet begin with embracing its dominant browser By Timothy C. Summers
ardly anything’s all good or all bad, and the roundly criticized darknet’s no exception. On the negative side, the darknet’s anonymity provides shelter for criminality of every stripe. But on the positive side, that same anonymity can aid legitimate enterprises by guarding against data breaches and protecting sensitive information from prying eyes. That’s why internet users—which includes just about everybody—would do well to become familiar with the darknet. To begin that task, let’s review the workings of the internet in general. The clear web, or surface web, is what visitors see when they search the internet with a typical browser, like Mozilla Firefox or Google Chrome. It includes the indexed data from search engine titans like Google, Facebook, Amazon and Twitter. It’s all the information available via websites and publicly accessible servers. It also offers digital content from YouTube, TikTok, Instagram, Netflix and many other emerging digital media channels. But it doesn’t stop there. The clear web also includes data from shopping sites, banks, the Play Store, the App
Store, adult sites and any systems that visitors interact with regularly. Yet, all of that information is at risk on the clear web. When a massive data breach strikes—like the recent attacks on MGM Resorts and Facebook—hackers are using inventive ways to scrape data from websites and servers. It’s like dragging a net across the surface of the ocean. Last year, a whopping 5,183 data breaches exposed 7.9 billion records. That’s a lot of data to drag a net through! But hackers can’t tap into sites they can’t find, so the anonymity of the darknet could help deflect their attacks. Now, however, a lot of data remains on the surface web. For perspective, Google processes more than 20 petabytes of data daily, Facebook handles 500 petabytes daily, and Amazon processes somewhere around one exabyte. How much is that in real life? One petabyte is equivalent to 160 million books. An exabyte is 1.6 billion books. In fact, 1.6 billion books stacked upward toward the sky would be just 10,000 miles shy of reaching the moon. Again, that’s a lot of data, and most of it’s available via the clear web. So, why talk about the darknet if all that data’s on the clear web?
Because the clear web accounts for only 4% of what’s on the internet. Not-so WWW The deep web, named by computer scientist Michael K. Bergman in 2001, provides a home for non-indexed websites that aren’t registered with search engines. “So, no one can find them!” exclaims Bergman. Search engines, like Google, use “crawlers” to traverse the internet, adding every site they find to the Google index. But the crawlers cannot reach some places—like behind closed, locked doors on the deep web. Examples of sites on the deep web include Sci-Hub, which claims to liberate scientific knowledge by offering free research articles; ProPublica, an independent, non-profit Pulitzer Prize winning newsroom; WikiLeaks, a non-profit that publishes information leaks and classified media shared by anonymous sources; and Protonmail, an encrypted email service developed by the European Organization for Nuclear Research, known as CERN. Moreover, the deep web is simply sites that have not been indexed by a search engine.
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Dark versus deep A small part of the deep web called the darknet consists of thousands of sites that require special tools for access. Stories about the dark web are filled with allegations of sex trafficking, child pornography and drug dealing. Yes, bad guys lurk on the darknet, but it’s more than just criminal masterminds and drug kingpins. In fact, legitimate uses proliferate on the darknet. Think of the darknet as a place where groups can exchange things in private. The idea of a hidden web dates back to the beginning of the internet. The Advanced Research Projects Agency Network (ARPANET), created by research universities and the United States Department of Defense, was established in 1969 as the first wide-area packet-switching network with distributed control and the first network to implement the TCP/IP protocol suite. In short, ARPANET was the first version of the internet, and the technology that enabled it still provides the technical foundation of today’s internet. Myth and rumor still cloud the origins of ARPANET. Some say that it was built as a nuclear-resistant command and control system. Others maintain it was developed to correct the frustrating lack of communication among computers that researchers were using in farflung locations. Regardless of the original goals, ARPANET was soon ensconced at leading research universities, including Carnegie Mellon University, MIT and Stanford, to name a few. But because ARPANET was government-funded, it was illegal to use it for anything that wasn’t government-related. Just the same, Stanford students sold marijuana to MIT students in the
TOR CAN PROVE USEFUL FOR EVERYONE WHO’S CONCERNED ABOUT PRIVACY AND PRIVATE EXCHANGE.
first online transaction. By the 1980s, the general public could purchase computers and modems to gain access to the new sensation called the internet. But the data from ARPANET and its successors was not publicly accessible because it remained hidden. Over time, the technology evolved, networking expertise became commonplace and people began seeking ways to participate in private exchanges of their own. Today, anyone with the know-how can create their own private exchange networks on the darknet—and for legitimate reasons. The darknet goes legit Accessing the darknet requires special software like the Onion Router, or Tor. It isn’t the only way to reach the darknet, but it’s the most popular. Tor, released in 2002, is free and open source software for anonymous communication. More specifically, Tor directs traffic through a global volunteer overlay network that includes more than 7,000 relays to conceal the user’s location and activity from anyone conducting surveillance. Tor routes traffic through volunteer relays so that the starting point appears to be somewhere else. For example, Tor may route a message through five different relays in different cities and countries. Because of that level of privacy, it has attracted users ranging from terrorists to the criminal marketplace Silk Road. Like ARPANET, Tor and its underlying technology were funded and developed by the Defense Department for anonymous, private exchange. Ostensibly, Tor is meant to provide a way to browse privately and freely. It empowers users to block undesired tracking from third-party trackers and ads; defend against unwanted surveillance and monitoring of browsing habits and search history; resist companies fingerprinting them based on browsing habits and device information; and protect data by using multi-layered encryption. Tor can prove useful for everyone who’s concerned about privacy and private exchange. It has a huge following among journalists seeking to protect sources,
activists working to create a movement, cybersecurity experts conducting research and cryptocurrency enthusiasts making transactions. It provides all of those groups the ability to communicate in confidence and be forgotten after each use. A need for privacy Debating privacy is as old as mankind. It started with protecting one’s body and domicile and, over the millennia, progressed to maintaining control of personal information. In 1891, Samuel Warren and Louis Brandeis described privacy as the right to be left alone. By 1967, the definition expanded to include the claims of individuals, groups, or institutions to determine for themselves when, how and to what extent information about them is communicated to others. Many argue in favor of pervasive surveillance, but there’s a legitimate need to oppose government surveillance, notes Edward Snowden, a whistleblower who leaked classified information. “Arguing that you don’t care about the right to privacy because you have nothing to hide is no different than saying you don’t care about free speech because you have nothing to say,” Snowden maintains. Meanwhile, technology continues to erode privacy. Companies use technology to capture and exploit personal data, the world’s most valuable resource, It’s time for society to re-evaluate whether it’s OK for others to control that information and choose whether to share it with the world. Everyone should understand the darknet and learn to use Tor. To dive even deeper, consider taking the online courses that teach students to become well-informed Tor users. Do the research and be safe. For champions of privacy and for those who simply want to be left alone— look to the darknet for a ray of light in the darkness. Timothy Summers, Ph.D., serves as CEO of Summers & Co., a global strategic advisory firm that provides advice on emerging technology. He’s also the executive director of Cloud and Advanced Network Engineering Services for Arizona State University. @howhackersthink
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FINANCIAL TRANSACTION TAX
Taxing the Trade An advocate and an opponent each have their say about a proposed financial transaction tax
Candidates for the Democratic presidential nomination support a financial transaction tax (FTT). The levy on transactions of publicly traded securities would offer a progressive means of raising tax revenue and increasing market efficiency, proponents say. Advocacy groups representing individual and institutional investors, including high-frequency traders, have pushed back. They argue that high-frequency trading has lowered the cost of transactions and that an FTT would affect Americans across the income spectrum. The Institute on Taxation and Economic Policy has waded into the debate with a report on the possible ramifications of an FTT. Luckbox invited Steve Wamhoff, the group’s director of federal tax policy, to make the case for the FTT, and called upon Tom Sosnoff, co-CEO of financial media firm tastytrade to offer a rebuttal.
Are financial transaction taxes a new idea? Steve Wamhoff: The concept is
not new at all. In fact, the United States had a small tax on trades from 1914 to 1966, and that began at a rate of just 0.02%. It did not cover as many transactions as the FTTs proposed today. The U.K. has been taxing stock trades going back to around 1700, so the idea has definitely been around. It’s not a new idea. Tom Sosnoff: The idea that something is OK because it was done in the past is ridiculous. Thank God we didn’t copy the U.K. model of market structure and free market enterprise. What are the benefits of an FTT? SW: An FTT could reduce
inequality in a couple of different ways. Some of the tax is not passed on from the financial institutions to investors because some trades would no longer occur as a result of a tax. Some of those trades were not in the interest of investors to begin with. So there’s some evidence that some of the financial transactions made today merely churn assets. It just generates fees for financial institutions without really benefiting the investors. And there’s a lot of evidence to support that. In one possible scenario, financial institutions would directly pay the tax. But in another possible scenario, they would pass it on to investors. So, investors would pay higher transaction costs on these
trades, or they would just not do some of these trades that would otherwise benefit them. Because most investment is done by well-off households, this would make the FTT a progressive tax and that would reduce inequality. So, for example, the latest data I was looking at from 2016 showed that in that year, the wealthiest 10% of households in the United States owned 84% of the stocks, while the bottom 60% of households owned just 1.8% of stocks. If this tax is passed on to the investors, it will be paid by well-off households making it a progressive tax. And that will reduce inequality because it will increase taxes on the wealthy and have little effect on anybody else. TS: The argument that adding a
financial “sin” tax to individual investors to reduce income inequality is a bit of a stretch. I’m fine with taxing institutional investors all you want. However, self-directed investing is not about the wealthy. The average account size across the entire industry for active investors is $25,000. The average do-it-yourself investor is learning how to take risk and make decisions—all while becoming strategically articulate and financially savvy. Why should the small, self-directed investor bear any of this unfair toll?
Could an FTT make markets more efficient? SW: Some of the trading that might
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come to an end as a result of an FTT is not benefiting investors to begin with. It is just generating fees for financial institutions and not benefiting investors—the economy would be more efficient without it. The economy is actually better off without that. But even beyond that, there seems to be trading that even when it’s profitable to certain investors does not benefit the broader economy or society. For example, when we think about flash (high-frequency) trading, that appears to reward people who manipulate the marketplace rather than people who are simply identifying sound investment opportunities. Flash trading uses technology to view another party’s order seconds before that information is available to everybody else, and then they try to profit from this asymmetrical information. Flash trading rewards manipulating the marketplace rather than identifying sound investments. In fact, flash trading is what some economists have identified as making our system less efficient. This flash trading relies on an extremely large volume of trades, and that is the type of activity that an FTT would dramatically reduce. TS: High-frequency trading and
high-volume market-making have added liquidity, tightened markets, reduced trading costs and delivered investors more efficient price discovery. The entire globe
trades in the U.S. markets simply because we have the most efficient and deepest pool of liquidity in the world. The reason our exchanges have been able to maintain market leadership is mostly because we have the lowest fee structure and best technology. You never want to risk losing the role of being the global leader for capital markets. What rate would you envision for an FTT? SW: Proposals that are floating
around now from Sen. Brian Schatz (D-Hawaii) and Rep. Peter DeFazio (D-Ore.), called the Wall Street Act, imposes a tax of 0.1%— that’s 10 basis points—on financial transactions. There’s another proposal from Sen. Bernie Sanders (D-Vt.) and Rep. Barbara Lee (D-Calif.) that assesses a 0.5% tax on stocks, a 0.1% tax on bonds and a 0.005% tax on derivatives.
TS: If you don’t understand the
problem with an FTT then it’s impossible to make up a number. A fraction of one basis point is insane. The reason America is the leader of the free world and houses most of the richest companies on the globe is because we have the deepest pool of liquidity. Remember, liquidity rules. Politicians can mess with lots of stuff but they shouldn’t mess with the foundation of the liquidity pool.
How much revenue could an FTT raise?
SW: Over a decade we can raise hundreds of billions of dollars. The Congressional Budget Office examined a proposal that is very similar to, or maybe the same as, the Wall Street Tax Act—the proposal from Sen. Brian Schatz and Rep. Peter DeFazio. They estimate over 10 years the tax would raise more than $770 billion. So that’s an example of the magnitude we’re talking about. TS: A far more sensible way of
raising hundreds of billions of dollars without hurting individual investors is to order two fewer stealth bombers, stop building a border wall and collect a fair tax from the world’s wealthiest corporations, such as Amazon (AMZN), Google (GOOG), Apple (AAPL) and Faceook (FB).
Steve Wamhoff serves as director of federal tax policy for the left-leaning Washington-based Institute on Taxation and Economic Policy (itep.org). He previously worked as Sen. Bernie Sanders’ senior tax policy analyst and has held positions with the Social Security Administration’s Office of Policy and the Coalition on Human Needs. @stevewamhoff
The Democratic presidential candidates favor an FTT. Sen. Bernie Sanders has offered a specific FTT plan, and former Vice Pres. Joe Biden has indicated support for the tax. Your reaction? TS: As a Democrat, this makes me
sad. The way to reverse inequality in America is not through a misunderstood tax that has no long-term sustainable benefits. The key to reversing inequality is to continue to make America the primary center for productive market structure, business and entrepreneurship. You can do that without messing with the financial system. It’s the driver of growth. Just fix a broken tax code.
Tom Sosnoff, an online brokerage innovator and financial educator, founded thinkorswim in 1999, started the financial media firm tastytrade (which owns this publication) in 2011 and launched brokerage firm tastyworks in 2017. He serves as co-CEO of tastytrade and appears daily on the tastytrade financial network. @tastytrade
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trends life, luxury & the pursuit of happiness
Pairing Dark Rums By Jeff Joseph
PHOTOGRPAH: GARRETT ROODBERGEN
ark rums are taking their rightful place alongside whiskey in the brown spirits craze. Both rum and whiskey require fermentation, distillation and aging, but the ingredients differ. Rum is made from byproducts of molasses, honey and sugarcane, whereas whiskey is fermented from barley, rye and wheat. Just as whiskey drinkers have learned to appreciate the unique experience of each barrel finish, rum aficionados are finding they can identify the containers used in the aging process. Finer dark rums may be aged (mostly) in old bourbon barrels or sherry, port or other wine casks, for anywhere from two to 30 or more years. The aging gives them a distinct, full-bodied rich and spicy flavor, and it adds to the whiskey-like color. But, for the most part, the deep hues of dark rums are achieved through copious use of caramel coloring and unfermented molasses. The result invariably yields a rich and exotic drinking experience. The initiated detect notes of toffee, coffee, leather and smoke. Instead of diluting the finest rum in cocktails or watering it down with ice, fanciers sip
the liquor neat and pair it with premium cigars or single-origin dark chocolates with cacao levels of 65% to 73%. That’s why Luckbox asked Valerie Beck, a favorite chocolate expert and CEO of Chicago-based Chocolate Uplift, to provide an assortment of artisanal dark chocolates. Beck specializes in soy-free, additive-free, small-batch global varieties of single origin. Each of the chocolates that passed the magazine’s pairing test were of Caribbean origin. Beck says that the Caribbean islands became a major part of the cacao industry in the 1500s, relying predominantly on slave labor. Today, 2.1 million children still work cacao farms, sometimes in hazardous conditions not far removed from slavery. Chocolate Uplift sources sustainable chocolate from cruelty-free companies, she notes. For cigar pairings the magazine called upon Plasencia, the world’s largest tobacco grower. Plasencia produces more than 40 million cigars each year from plantations in Honduras and Nicaragua. The company’s extraordinary full-flavored cigars are the perfect dark rum companion.
The high cacao levels in dark chocolate complement the molasses in dark rum. They’re at their best when enjoyed together.
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Luckbox is always in good spirits, and this darknet issue is a time to share some amazing rums. These are our picks for the best dark rum values (under $50)—along with our recommended cigar and dark chocolate pairings. RUM LEFT TO RIGHT
Papa’s Pilar Marquesas In a special release finished in #4 Kentucky bourbon whiskey barrels, the nose hints coffee beans, honey and toasted almonds. The taste is rich—cocoa notes with oak and vanilla—finishing with a strong but smooth sweetness. $40 Plantation XO Reserve 20th Anniversary This rum is initially aged in Barbados using ex-bourbon casks for 12-20 years, then transported to France to finish another year in French oak casks. The palate is sweet—hints of banana, marzipan, caramel, toasted coconut and cigar tobacco. The oak and bittersweet finish pairs best with Plasencia’s Alma Fuerte. $50 Santa Teresa 1796 Solera Honey, fruits and brown sugar at the start of the taste are followed by tropical notes of coconut and banana. Vanilla oakiness and dark chocolate bitterness counterbalance the chocolate and cigar pairings. $45 Havana Club Anejo Classico This younger (1-3 year) Bacardi rum made this list for its value. It’s lighter-bodied, with vanilla, brown sugar, chai notes, barrel char and some fruitness. Perfect for mixing. $22
CHOCOLATES LEFT TO RIGHT
9th & Larkin Dominican Republic Oko-Caribe 72%— bright notes with a subtle lingering flavor that does not compete with the rum’s sweet molasses finish. Crow & Moss Zorzal Dominican 70%—fruity and fudgey. Very rich and complex. Sirene Lachua Guatemala 73%—fruit notes open to herbal spice and caramel. Very sophisticated. chocolateuplift.com
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CIGARS TOP TO BOTTOM
Plasencia Cosecha 146 Itâ€™s an exclusive blend from the Plasencia familyâ€™s 146th harvest of the inagural 1895 crop. The leaves are Honduran and Nicaraguan, producing a mediumbodied, full-flavored complex taste with sweet dark chocoalate notes.
Plasencia Alma Fuerte This blend of aged Nicaraguan tobaccos features bold, vibrant and intense flavors. Laced with hints of dark chocolate, plum, and cinnamon, the taste is rounded out with finishing notes of oak and molasses. Exceptional.
PHOTOGRPAH: GARRETT ROODBERGEN
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THE POLITICAL TRADE
How I Turned $400 into $400,000 Trading Political Futures* By Derek Phillips
ed by Verifi rs of ito d e the box Luck
’ve always been a bit of a gambler. I went to college during the poker boom of the early 2000s, when everyone wanted to become the next Chris Moneymaker. I thought my experience playing cards with my grandfather and drafting fantasy football teams meant I had an advantage. It didn’t. Later, during my hour-long drives home from the dog track, I rationalized leaving money behind in the poker room as an investment in the future. I dreamed of using the skills I was supposedly acquiring to achieve financial independence. In
Derek Phillips, known as Dmp on the PredictIt leaderboards, is a professional political futures trader.
retrospect, it’s bizarre to me that I might have been right. Eventually, I saw a PredictIt ad on Facebook in the summer of 2015, about eight months after the website was launched. I had just moved to a new city and was working remotely at a job that left me bored and a bit disconnected. I always had a passing interest in politics. But once I became familiar with how the PredictIt website operated, the delusions kicked in again. I allowed myself to dream of achieving financial independence through legal gambling. I put $400 on my credit card and invested an increasing portion of time on PredictIt. Before long, it became an addiction. More than just gambling While PredictIt’s core demographic is undoubtedly people like the character in my story—young men eager to fight with strangers and hungry for the thrill of a big wager paying off—the developers carefully distinguish what they do from gambling. Marketing for the website bills PredictIt as the “stock market for politics,” with the broader mission
of building a better model for predicting political outcomes. In this model, the free market determines the probability of political events by enabling users to bet money on their opinions. Prediction markets generally do not constitute a scientifically chosen sample of the general population, so the betting can lead to mispriced markets. But the data it produces has become increasingly relevant to academics, political analysts and media outlets. As PredictIt continues to grow and attract a larger and more diverse user base, it will become even more useful as a model for predicting outcomes. Bettors create markets by taking binary positions on a political event that’s matched with someone taking the opposite position. Through this process of offering and accepting bids, a price is negotiated and both participants stake a correlating percentage of a dollar. Each winning share is redeemed for the full dollar at the market’s resolution. For instance, if I purchased 100 shares of Bernie Sanders winning the New Hampshire primary at
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PHOTOGRAPHS: (MAINE, NEW HAMPSHIRE) WIKIPEDIA; (TUBERVILLE) REUTERS/ USA TODAY NETWORK; (SESSIONS) REUTERS/ELIJAH NOUVELAGE
75 cents, I would have risked $75 and profited $25. The person who wagered $25 that Sanders would lose (it doesn’t matter to whom) would have stood to win $75 and lost everything in the end. Buying and selling can take place any time, so if I am happy to make $5, I can offer to sell at 80 cents, just as the person with the 25-cent NO shares can see the way the returns are progressing and cut the losses for the highest price available. Imposing limits A U.S. Commodity Futures Trading Commission no-action letter limits how much users can wager but not how they can deposit. The maximum bet is $850, according to PredictIt’s legal owner, New Zealand’s Victoria University of Wellington. (PredictIt, of course, was developed for educational purposes, wink wink). Limits like this and a 5,000 trader per contract maximum enable PredictIt to operate as a non-profit and skirt national gambling laws. It also prevents organized trading operations from buying out markets and loading enormous amounts of money into positions to inflate their value before selling the bump. While “maxing” a position can be frustrating, high rollers always have opportunities beause PredictIt operates several hundred markets— some recurring weekly. Unless the world of politics becomes boring, there will always be plenty of action.
“Bettors create markets by taking binary positions on a political event that are matched with someone taking the opposite position.”
DEREK PHILLIPS’ BEST BETS Which party will win ME-02 in the 2020 presidential election? Buy Democratic YES or Republican NO under 30¢ With Nebraska, Maine is one of two states in the country that apportions their delegates by district. Obama won Maine’s second district by double digits both times, and Trump won by 10 in 2016. Democrat Jared Golden won the House seat in this district during the midterms, and both potential nominees should outperform Hillary Clinton with rural white voters in the northeast.
Which party will win New Hampshire in the 2020 presidential election? Buy YES on Democrats winning or NO on Republicans around 50¢. President Trump’s reelection prospects are at a high on PredictIt, but some of the money coming in for him is unwisely invested. A lot depends on who the Democratic nominee is, but unless the primary descends into chaos and the party nominates someone who cannot win, NH is unlikely to even be a battleground state.
Who will win the 2020 Alabama Republican Senate primary? Buy Sessions YES or Tuberville NO under 20¢ The price for Sessions is low right now because Trump just attacked him on Twitter. It’s possible that it will recover substantially before this goes to print. It’s also possible that Trump will continue to attack him. If you can buy under 20¢, there is a ton of upside to this bet. Sessions is a four-term Alabama Senator with deep ties to the state party, and even Republican voters here have shown an unwillingness to defer to Trump when it comes to electing their representatives.
Which party will win ME-02 in 2020? Republican
Which party will win NH in 2020? Democratic
Who’ll win the AL GOP Senate primary? Tommy Tuberville
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And with a diversity of buying opportunities comes a diversity of strategies. I began on PredictIt the way I would suggest any new player get started. Familiarize yourself with the platform by looking for zero-risk opportunities in marketplaces with lots of options. Markets like the Democratic nomination and presidency markets are great for this, and even the weekly tweet and polling markets offer potential. In those markets, bettors are always willing to pay a premium on their preferred option and don’t realize they would get a much better deal betting against the others. Market pricing tightens over time, and the most lucrative arbitrage is always when a market opens. But even now bettors can buy the open NO offers on every candidate in the Democratic presidential primaries and get a guaranteed 10% return on investment, paid up front because of PredictIt’s linked contract policy. You lose only the opportunity cost because these markets are cash cows for those of us who know what we are doing. But, of course, bettors can sell at any time, so if they feel like they’ve graduated to something more profitable, they can take their money out and move on. A community forms As part of the PredictIt scene for four years, I’ve gotten to know hundreds of players on the website’s message board, in real life and through back channels such as Twitter and Discord. That’s just a small percentage of the nearly
PREDICTION MARKETS 38
100,000 active users on PredictIt, including college students, employed professionals who play the markets in their spare time and a few dozen full-time professionals like me—many bringing in six-figure incomes. There are as many approaches to prediction market trading as there are traders. As with any betting outlet, some strategies are clearly bad, including get-rich-quick scams or martingale-style doubling down. But I’ve taken the best of what others have shared and applied it to my own game. The most successful bettors learn from one another and never stop trying something new. With a willingness to learn and a respect for the personalities that make PredictIt fun and exciting, you’ll find that we’re quite a social group. We’re willing to share secrets and celebrate each other because our success depends on a steady stream of suckers and political partisans willing to gamble with their hearts and lose big on predictable outcomes. But people of all backgrounds have found success, and each contributes something unique. In my network, I’m plugged in to lawyers who interpret contractual language on complicated issues such as Senate cloture, mathematicians
“Unless the world of politics becomes boring, prediction markets will have plenty of action.”
HEAR, HERE Luckbox has launched a podcast for political freaks and probability geeks looking to profit in the political prediction markets. Each episode of The Political Trade features veteran prediction market traders willing to provide actionable trading ideas and share the tactics that achieved their big returns. The Political Trade is available on Apple Podcasts, Google Podcasts, Spotify and most other podcast-listening platforms.
who can provide expert perspective on probability and statistics, and software developers who can build programs to search network websites for polling data. We have social media experts, data scientists, former quant traders and political strategists. Then, of course, there’s me, who is none of these things. My background is in teaching, and I have no discernible skills that would make me good at this. But on PredictIt, sometimes the improbable can happen. So I’ll continue to do what I do until the luck runs out. Derek Phillips, a self-described failed academic, began trading political futures as a hobby before going pro during the 2016 election. In four years, he has turned a $400 investment into a portfolio that has earned more than $400,000, a claim verified by Luckbox. He lives in Chapel Hill, N.C., and trades on PredictIt under the name Dmp. @dmpfrompi
The University of Iowa created the Iowa Electronic Markets to introduce the world to the modern electronic prediction market during the 1988 presidential election. Since then, prediction markets have served as a valuable tool for measuring public opinion and forecasting political outcomes. And for those who have made smart trades, they’ve proven lucrative. Political questions, such as “Who will win the 2020 presidential election?” are markets, and users can purchase “YES” or “NO” options on contracts within those markets, such as “Donald Trump” or “Bernie Sanders.” The prices are determined by the market’s forecasted probability that an event will—or won’t—occur, generally in cents. Upon expiration, correct contracts pay out a dollar, and incorrect contracts become valueless.
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THE NORMAL DEVIATE
Forget the Darknet
The markets can provide the excitement active investors want—without risk of prison time By Tom Preston
h, the so-called darknet. The Wild West of the internet. Where anonymity—or as close as anyone outside DARPA (Defense Advanced Research Projects Agency) is going to get—provides a warm blanket while users surf unhindered by the blue-nosed algorithms of Google, Facebook, Apple, Amazon or Microsoft. That’s the story, anyway. While the darknet may harbor content unavailable on the more-regulated internet, most people aren’t searching for “Tulsi Gabbard 2020” sites blocked by the DNC. The darknet is where one searches for things with a high likelihood, if not 100% probability, of being illegal. Drugs, weaponry, other people’s credit card info. Now, Luckbox readers aren’t going to do anything illegal, but they’re curious. When they step outside the highly vetted world of Amazon, or even eBay, what’s the likelihood they will actually receive what they paid for as opposed to their money simply disappearing into someone’s untraceable bank account? While some sites that match buyers with sellers might track data, it’s tough to find solid info. But some darknet sites have ratings, like eBay. If buyers stick with them, the odds of a successful transaction might be somewhere between Craigslist and Facebook Marketplace. Outside the rated-vendor sites, it’s a crapshoot. But unlike buying legal stuff on Craigslist or Facebook, where a buyer just might get scammed out of money, buying illegal stuff online has an asymmetric risk/reward. Yes,
buyers might receive what they paid for. But the risks can go far beyond losing some money because the “seller” didn’t ship the product. Law enforcement agencies can’t use an IP address to find someone making purchases on the darknet. But when something suspicious goes through the mail or another common carrier, a lot of eyeballs—both organic and electronic—can focus in on it. If the purchase seems sufficiently threatening, a couple of black Suburbans might pull up to the house and spill out a bunch of guys with M4-shaped bulges under their jackets. Not good. In trader lingo, that’s limited upside and unlimited downside, with the downside being prison. Now, that might sound like trading to the uninitiated. But it isn’t. The prices of products listed on exchanges can’t go below zero. Investors might buy a share of Google for $1,300. But if Google goes to $0, the most they can lose is the $1,300 they paid. But the price is unbounded on the upside. Because of that, stock prices have asymmetric risk to the upside that’s best modeled using a lognormal distribution. On the other hand, stock price returns can and do go below zero. And stock returns are much more symmetrical, with negative returns balanced by positive returns, best modeled using a normal distribution. That works out really well because the normal (stock price returns) and lognormal (stock prices) probability distributions are simply transformations of each other. By definition, variable has a lognormal distribution when the log of that variable has a normal distri-
bution. Because of the convenience of the lognormal and normal distributions, they underlie option pricing formulas. Yes, some traders want to use other statistical distributions they think are better at modeling stock price behavior. But they can require assumptions and unobservable parameters. They can also be computationally less efficient, and not conducive to calculating probabilities in real time, with streaming stock and option prices. That’s how to quantify the risks of a trade, unlike the unquantifiable risks of the darknet. Investors have been using the lognormal/normal distributions for decades and haven’t found a better replacement. Feel confident about the probability numbers they generate. So, with more exchanges offering nearly non-stop trading, there’s no reason to look for entertainment on the darknet. The markets can provide as much excitement as traders want— without the risk of prison time.
If a darknet purchase is sufficiently threatening, a couple of black Suburbans might pull up to the house and spill out a bunch of guys with M4-shaped bulges beneath their jackets. Not good.
april 2020 | luckbox
3/6/20 1:58 PM
Coronaviruses cause diseases in mammals and birds. In humans, coronaviruses cause respiratory tract infections that are typically mild, such as the common cold, though rarer forms such as SARS, MERS, and COVID-19 can be lethal. The latter, COVID-19, is spreading in the world now.
The markets’ performance during earlier epidemics may indicate investors have little to fear from the coronavirus By Yesenia Duran
ased on the markets’ performance during the onset of other infectious diseases—including SARS, Ebola and avian flu— Wall Street investors may have little to fear from the coronavirus. The pathogen need not sicken a U.S. stock market that finished last year with the best annual return in years and has traded at all-time highs. Historically, Wall Street’s reaction to such epidemics and fast-moving diseases has often been short-lived. According to Dow Jones market data, the S&P 500 posted a gain of 14.59% after the first occurrence of SARS back in 2002-03, based on the end-of-month performance for the index in April 2003. About 12 months later, the broad-market benchmark was up 20.76%. (See “Short-lived,” right.) SARS sickened about 8,100 people during the 2003 outbreak, with 774 people dying, according to the World Health Organization and the Centers for Disease Control and Prevention. Separately, the S&P 500 rose 11.66% in the roughly six-month period following reports of the 2006 avian flu virus—a fast-moving pathogen also known as H5N1. The market gained 18.36% in the following 12 months.
Short-lived The S&P 500 posted a gain of 14.59% after the first outbreak of SARS in 2002-2003. Epidemic
6-month % change of S&P
12-month % change of S&P
N/A Source: Dow Jones market data
Where: Asia, North and South America, Europe When: 2003 Severe acute respiratory syndrome (SARS) spread quickly through contact with bodily fluids of an infected individual, including microscopic droplets of mucus or saliva that become airborne through sneezing and coughing. SARS infected people in 12 countries before it was contained that year. There’s no cure.
Where: Africa When: 2014 The Ebola virus was transmitted to humans through contact with wild animals and then spread quickly among humans in Central and West Africa. Multiple outbreaks of Ebola have occurred, but the 2014 pandemic was by far the worst. Fatality rates for this particular strain of Ebola were about 50%, but past outbreaks have had fatality rates of up to 90%.
Where: United States When: 2016 The Zika virus does not pose a substantial health risk. The disease is endemic in tropical climates and spreads through the bite of an Aedes aegypti mosquito or through sexual intercourse with an infected partner.
The Centers for Disease Control and Prevention defines an epidemic as “The occurrence of more cases of disease than expected in a given area or among a specific group of people over a particular period of time.” A pandemic is the worldwide spread of a new disease. An influenza pandemic occurs when a new influenza virus emerges and spreads around the world, and most people do not have immunity. Viruses that have caused past pandemics typically originated from animal influenza viruses. The World Health Organization no longer uses the term “pandemic” to describe outbreaks and has instead warned government leaders to prepare for a “public health emergency of international concern.”
luckbox | april 2020
3/6/20 1:59 PM
Man Up to Yoga The ancient but trendy practice isn’t just for women By Lissette Caballero
oga, a system of movement, breathwork and mindfulness, offers countless benefits and has earned worldwide popularity. But yoga teachers find themselves repeatedly fielding the same question: “Why don’t more men take yoga classes?” A few men do practice yoga, but they’re a small minority in group classes. Instead, they often prefer private lessons. Guys interested in yoga often ask how many one-onone lessons it will take before they’re ready for a group class. New female students usually just ask when and where the class is held. That raises questions: What’s preventing guys from taking group classes, and what tips can help them along? The time had come to investigate with a short survey and an unscientifically small sample of men who ranged from young professionals to retirees. The men unanimously acknowledged the positive health benefits of yoga. A graphic designer said he knew yoga would put more glide in his golf swing. A firefighter referred to yoga as preventative medicine and predicted it could ease his hypertension. A weightlifter admitted
yoga would help him gain flexibility in his squats. Yet, despite all the positive talk, only one in this sample of 10 had a regular yoga practice. So there it was. Only 10% were active yoga practitioners, and 90% said they don’t practice regularly or even occasionally. Why is this so? Well, many agree that it’s the way yoga is marketed in the West. The culture created around yoga here is geared pretty much to women. In the media, the yoga fitness industry clings to the stereotype of a young, slender, fit woman. That’s led women to share their thoughts about poses and retreats. It’s part of the feminization of yoga. In the informal survey, men said they felt there were too many women in yoga classes. One felt that he could not perform yoga as well as the women, so he preferred not to go to classes. Another said the sweaty females in sportswear were too provocative and made him uncomfortable. Ninety percent of the men just refused to go to yoga classes because they felt out of place. So let’s address that. Try these tips to feel comfortable in class:
36 million Americans practice yoga regularly, an increase of 50% in the last four years.
72% of yoga practitioners are women.
1. Take a spot on the outer periphery of the class and toward the center of the room. Don’t take a positioin in the front of the class or the back. 2. When there’s a need to look at the other students to see the finer points of a pose, focus on their hands or feet. 3. Anyone prone to sweat heavily should bring two towels, a change of clothes and a bottle of water. 4. Bring a mat or call ahead and ask if the studio rents them out. 5. For “safe” yoga, try Iyenga classes that use blocks and straps to help properly align the body. Seek teachers trained to conduct classes at a slower pace to learn without the rush.
Here’s how to start practicing yoga.
With those precautions, any man can assume his rightful place in the world of yoga. After all, yoga has a rich tradtion of male guru figures in Asia. Think saffron robes, beads and long beards. The wisdom those teachers shared wasn’t just for women. It was for everyone. Lissette Caballero teaches pilates, yoga and breathwork in Miami. Follow or message her on Instagram @yogitraveladdict
1/3 of Americans have tried yoga at least once.
Yoga classes used to be just for men. Women were not invited until 1937.
Americans spend $16 billion on classes and equipment each year. Source: goodbody.com
april 2020 | luckbox
3/6/20 2:02 PM
Alternating rounds of starvation and gluttony won’t bring desired results By Jim Schultz
o what’s the best way to diet in 2020? How about long stretches of extreme hunger followed by face-stuffing food comas that last a few short hours? It’s known as intermittent fasting (IF). IF has been christened the holy grail of fat loss and hailed as the very essence of health, wellness, fitness and nutrition on the internet at large and social media specifically. Want to get skinny? IF is the answer. Want to get ripped? IF is the solution. Want to get abs? IF will produce them, by Friday—Saturday morning at the latest. That all sounds amazing, so what’s the problem? Uh, there are a lot of problems. Leaving nuance on the shelf for a moment, IF is defined as a strategy where a dieter fasts for 16-18 hours and feeds for the other 6-8 hours. Proponents say the fasting/ feeding protocol itself burns fat and limits fat storage. Caloric contents, energy equations, laws of thermodynamics? Pure garbage. Toss them in the trash as unnecessary nuisances in the IF universe. During the fasting window, food— and its absence—become the focus. It starts with an annoying twinge of hunger followed by saliva production ramped up to peak levels. It closes with full-fledged hunger. The feeding window brings some relief, but food—and its glorious availability—remain the focus. A race against the clock ensues as faces are filled and stomachs are stuffed with such an onslaught of macronutrients that the dieter doesn’t even have time to process all the deliciousness.
IF aside, the typical dieter is super strict on Monday, and the wheels rattle on through the week only to be capped with a 48-hour blowout on the weekend. IF perpetuates and even celebrates the starve-binge cycle that plagues many, many fat-loss enthusiasts. Also, some people think eating on IF gives them license to throw caution to the wind and eat as much as they want. If weight loss is your goal, you need to still be mindful of how many calories you are ingesting. Now, fat loss aside, IF has been shown to improve insulin sensitivity and activate autophagy, which its biggest fanboys claim could be its greatest health benefit. And that’s true. IF does improve insulin sensitivity during the fasting window. But factor in the caloric circus that rolls into town once the feeding window is open for business, and the sky-high blood sugar levels associated with its arrival. The net result is as it should be—no improvement or deterioration of insulin sensitivity absent a closer look at net calories. To be fair, a quick glance at Wikipedia confirms IF’s claim to activate autophagy. Still, a deeper look at the credible sources on Reddit forums reminds internet researchers that caloric deficits alone—irrespective of fasting/feeding protocols—also produce autophagy. So, using IF to cut body fat or improve health would be like saving up to fund a trading account by practicing stringent frugality 65% of the time. It’s like eating PB&J sandwiches and keeping the lights off during peak hours to keep day-to-
day costs to an absolute minimum, followed by repeatedly charging carry-out to the credit cards and buying all the Marvel movies on Amazon Prime to prepare for the next spending drought. Whether the account is ever funded has less to do with extreme thrift and more to do with the surplus that’s left over when the dust settles. No one earns a gold star for driving spending into starvation mode, only to follow it with a binge. The driving force behind any successful effort to save is the end result itself. So, it’s clear: IF isn’t magic for fat loss. Caloric deficits and sensible budgets are the sources of any mojo, but only if simple addition and subtraction qualify as wizardry and witchcraft. Jim Schultz, Ph.D., a derivatives trader, fitness expert, owner of livefcubed.com and the daily host of From Theory to Practice on the tastytrade network, was named North American Natural Bodybuilding Federation’s 2017 Novice Bodybuilding Champion. @jschultzf3
INTERMITENT FASTING 16:8 Fast for 16 hours, eat over an 8-hour window 18:6 Fast for 18 hours, eat over a 6-hour window 5:2 Eat your normal diet 5 days a week and limit calories to 500 on 2 days of the week (low calorie days should be between normal days) Warrior Diet or One Meal a Day (OMAD) Fast for 20 hours and eat one large (healthy) meal Eat-Stop-Eat Fast for 24 hours once or twice a week Be mindful of calories (don’t go below 1,200 per day on eating days)
luckbox | april 2020
3/6/20 2:04 PM
ARTS & MEDIA
HOW TO BE A CONSCIOUS EATER When it comes to what people should eat, confusion reigns. One day, coffee can cause cancer—the next, it’s the key to a long life. One day, something else will be bad for heart health—and the next it will be the perfect thing to start your day. And this is all without even considering the environmental costs associated with various foods: Should almonds and avocados, while nutritious, be passed over because of concerns about water usage? Small farmers in Latin American countries can’t grow enough food or raise enough animals because most of their water is used to grow avocados. What about farm-raised fish versus wild-caught? And what do food labels like “all-natural,” “fair trade” and “free-range” actually mean? In How to Be a Conscious Eater: Making Food Choices That Are Good for You, Others, and the
Planet, author Sophie Egan offers an extensive guide to decoding food labels. Egan says that conscious eating is not about diets, fads or hard-and-fast rules. It’s about being armed with the facts to navigate hype, marketing and misinformation in order to make food choices anyone can feel good about. And while nutritional guidance, environmental science and social movements evolve over time, the advice in this book is evergreen and straightforward, from an expert on eating in a way that is good for people and for the planet. She provides tips for buying produce, including why it’s good to eat seasonally and regionally. She lists produce grown with the heaviest amounts of pesticides (otherwise known as the “Dirty Dozen”) and the lowest (the “Clean Fifteen”). A simple rule to remember: When one plans to eat the skin, buy organic. If the skin
isn’t eaten, buying organic is less important. There’s a memorable philosophy for eating meat: “First, less. Then, better.” Eat less meat overall (especially red meat), and when one does eat meat, make sure it’s of higher quality and raised humanely. This book is very niche, with the author reaching out to readers who want to eat better (and also more consciously). That can seem daunting. Many don’t want to study everything before eating it—entering meals into a caloriecounting app is a big enough task. For example, she writes, “If you choose to eat fast food, choose the restaurant chains that serve meat raised without antibiotics, that pay their workers higher wages and that have committed to animalwelfare initiatives.” Most readers who eat out frequently won’t do that much research. But this book’s for those few who will. —Yesenia Duran
curious destinations in the world. Museums cited in the second edition are devoted to bordellos, the CIA, counterfeit goods, purgatory, male genitalia, neon signs, potatoes, voodoo, tooth fragments and medieval torture. Readers are invited to visit cemeteries for neon signs, pirates and spacecraft. They can marvel at the 18th century, rococo-style Palace Library in Mafra, Portugal, where each night for hundreds of years a colony of bats has been protecting the more than 36,000 valuable leatherbound volumes from page-eating bookworms, moths and insects.
And don’t forget the Witches’ Market in La Paz, the Devil’s Swimming Pool in Zambia or the Museum of Death in Hollywood. The second edition, a New York Times best seller, offers many more entries than its best-selling predecessor—from the bizarre to the beautiful. It’s the ultimate host or housewarming gift book that you hope someone will buy for you. Atlas Obscura would have our highest rating, if not for the hardto-read beige paper stock they choose for this otherwise perfect edition. —Jeff Joseph
Pandemics and travel bans are no match for Atlas Obscura: The Second Edition by Joshua Foer, Dylan Thuras and Ella Morton. But that’s no surprise. The first edition, published in 2016, became an instant phenomenon, and the second edition continues the trend. Both books offer versions of the ultimate traveler’s bucket list, laced with photos, maps and descriptions of hundreds of the most
HOW TO BE A CONSCIOUS EATER
3 out of 5 A valuable guide to making diets a thing of the past
4 out of 5 The armchair traveler’s essential illustrated guide to the world’s most hidden wonders
april 2020 | luckbox
3/6/20 2:05 PM
HARVINDER SINGH DHILLON Trader & Entrepreneur
How did you start trading? Having a finance background, I always saw trading as the pinnacle. I used to watch movies like Wall Street and get a real buzz from it. So, in the summer of 2014, I decided to get my feet wet and bought some stocks. My first three trades worked out beautifully. I bought
Office London Age 28 Years trading 5
3 1 2 4
5 6 7
stocks when they were oversold, and they went up. I’ll never forget my fourth trade—I bought an Indian mining company called Vedanta, and I saw the chart. The price used to be at 1,000 points, and it had dropped down to 500 points. Being the rookie that I was back then, I thought, “This
1. Watchlist of stocks 2. Volatility and volume analysis 3. Streaming tastytrade network 4. Options chain for placing positions, new position review screen 5. Mobile phone with social media groups with the tastytrade community to generate trade ideas 6. Surface pro with tastyworks platform for managing parents’ account, tastytrade watch list and the follow page 7. Microphone and headset to manage employees in multiple locations
luckbox | april 2020
3/6/20 2:07 PM
is great! I will buy this at 500 points and sell it for 600 points.” That’s when I realized it doesn’t always work out that way. I had no real strategy; it was just buy and pray. During that time, I was fortunate to sit next to someone at work who showed me the tastytrade way of trading, with volatility and probabilities. We spent two months paper trading. I was hooked and confident that this would be the beginning of a lifetime journey in trading. Favorite trading strategy for what you trade most? I vary my positions as much as possible, but my favorite strategy is selling premium with strangles, as the implied move in an underlying is often overstated compared to the realized move. I skew the strangle according to my assumption in the underlying by varying the deltas on the put and call. Strangles benefit from greater capital efficiency than selling naked puts or calls, as no additional buying power is required by selling the other side. Although strangles are undefined risk, they actually increase your probability of profits in two forms: 1. By not buying the wings you increase your breakeven points. 2. Profits are realized faster, which means you can take advantage by taking your profits quicker, which in itself increases your probability of profit. Also, when a trade goes wrong,
strangles are much easier to adjust than any other strategy. Average number of trades per day? 15 What percentage of your outcomes do you attribute to luck? I first began my trading journey by trading stocks, which was a pure 50/50 gamble. Having moved to selling out-of-the-money options, I have increased my probability of profit and have improved my diversification across both underlyings and strategies to absorb an adverse market impact. So, I have made my trading more about strategy and probabilities rather than luck. However, it would be foolish to say that I don’t need luck. My average probability of profit is 70%, but my actual winners were 80%, so I would assume 10% would be due to luck. Favorite trading moment or best trade? Diversification is often misunderstood in the industry. The masses seem to think that trading multiple underlyings is diversification. However, what most don’t understand is that the correlation tends to increase during times of market stress. True diversification can only be found by trading uncorrelated positions coupled with strategy diversification,
which ultimately will reflect in a low beta weighted delta. I have this ingrained within my trading strategy and often look at my beta weighted delta, but the first real test for my portfolio was on the day Britain voted Brexit on June 23, 2016. This wiped out the year-to-date gains for the S&P 500, however my portfolio only lost $125 out of $25k invested (0.5%). Experiencing how true diversification protected me from a large market downturn was incredible to see and gave me the utmost confidence of trading in both bull and bear markets. Worst trading moment or worst trade? Having a finance background, producing financial forecasts and targets for my ventures is the norm, and trading was no different. I used to set myself a target and calculate the daily theta needed to reach that goal. Unfortunately, this backfired, as I was so ingrained with this target that I forced theta at the targeted level, even when the opportunity was not present. This taught me the biggest lesson in both life and trading—that you can only take advantage of the opportunities available to you. They simply cannot be conjured up. I now vary my portfolio theta and the number of open positions depending on volatility levels and, in essence, the opportunity available.
FAVORITE TRADING BOOK
OPTION VOLATILITY & PRICING by Sheldon Natenberg Publisher: McGraw-Hill Education (2014) $61.99 (Amazon) Hardcover (592 pages)
HOW DHILLON BECAME A RISING STAR Rising Stars, a series on the tastytrade network, focuses on viewers’ coolest success stories. Dhillon, who’s in his late 20s and hails from London, began watching the tastytrade network about four years ago. He was inspired by Rising Stars interviews before becoming a Rising Stars interviewee himself. In 2015, Dhillon started to incorporate tastytrade mechanics into his trading style and since then has made a 172% return on his portfolio!
Meet Harvinder Singh Dhillon
april 2020 | luckbox
3/6/20 2:07 PM
THE POKER TRADE
Top 5 Mistakes Donkeys Make Expert poker players refer to amateurs as “donkeys.” Here, a WSOP pro reveals the most frequent donkey mistakes. By Jonathan Little
When amateurs sit down at the poker table, they tend to make five mistakes on a regular basis. Players who learn to avoid those errors see an immediate increase in their win rates. Overplaying marginal made hands Almost without fail, amateurs drastically overplay a hand like A-A after the flop. They see a flop of J-9-5, think they have the nuts and strive to get all-in. In reality, when 300 big blinds go into the pot in this spot, A-A is almost always crushed. 1
3-betting preflop with only premium hands Amateurs tend to play blatantly face-up before the flop. They three-bet (reraise) their best hands, or their best hands plus a few decently strong hands, such as A-J and K-Q. They call with their other playable hands. In reality, they should three-bet with a range tailored to take advantage of their opponents’ strategy. Against some players, they should three-bet with their best hands, and with hands not quite good enough to call with, such as A-4o, K-7s, and 8-6s, because they expect them to either four-bet or fold. Against others, they should three-bet with an incred-
ibly wide range to ensure they see the flop heads-up in position because they know they will check-fold most of the time after the flop when they miss. Playing incorrectly with a short stack Most amateurs play either much too tightly or much too loosely with a short stack. They can solve both of these problems by studying a push/fold app. But don’t follow charts too strictly because the chart makers assume opponents play well, which often isn’t the case. Other strategies, such as using an all-in/ min-raise/limp/fold strategy, may be ideal against specific opponents. 3
Failing to study away from the table How does a pro make complex decisions at the poker table in only the few moments? The answer is that they study most situations away from the table. No one can come up with the correct decision in every spot with just a few minutes of thought. Poker is a difficult game that requires diligent study. Whenever players encounter a difficult decisions, they should write them down and revisit them when finished playing for the day. That enables them to review their play with a clear mind. It’s not uncommon for pros to pinpoint leaks they have to work to plug. These notes also make it easy to discuss hands accurately with friends, which is incredibly beneficial. Discussing one’s play with other good poker players is mandatory for anyone who wants to improve at the game. 4
Worrying about short-term results Amateur players often can’t believe how unlucky they are. Usually these players have lost five tournaments in a row and can’t comprehend their “bad luck.” In reality, even world-class players occasionally play 20 or more tournaments in a row with no cashes. The sooner players comprehend the incredible variance inherent to poker, the sooner they can focus on the things that matter. 5
Jonathan Little, a professional poker player and WPT Player of the Year, has amassed more than $7 million in live tournament winnings, written 14 best-selling books and teaches at PokerCoaching.com. @jonathanlittle
QUIZ: ALL-IN OR FOLD? 2. Everyone folds to you in first position with 8bbs. You look down at A-9 off-suit. Should you go all-in or fold?
Pocket aces The probability of being dealt pocket aces in any one hand is 6/1326, or once every 221 hands. The probability of winning with pocket aces is 31.36%, assuming all players stay in until the end. However that is a big if. The probability of winning with aces in a real 10-player game is about 70%. So the probability of getting pocket aces and then losing is 0.3*(1/221) = 0.1357%.
3. Everyone folds to you in the cutoff with 12bbs. You look down at K-5 suited. Should you go all-in or fold? Answers
ANSWERS: 1. ALL IN 2. FOLD 3. FOLD
1. Everyone folds to you on the button with 8bbs. You look down at 8-6 suited. Should you go all-in or fold?
luckbox | april 2020
3/6/20 2:08 PM
A PR I L 3 tastytrade & CME Symposium Series* Austin, TX 4 NCAA Final Four Atlanta 4 Primaries and Caucuses AK, HI, LA & WY 6 NCAA Championship Game Atlanta
PHOTOGRAPHS: (BEER) SHUTTERSTOCK; (PRIMARY) REUTERS/JONATHAN ERNST; (COACHELLA) REUTERS/MARIO ANZUONI
National Beer Day: Observed on the anniversary of the Cullen-Harrison Act’s enactment—the bill that legalized the sale of low-alcohol content beer near the end of prohibition—National Beer Day celebrates everything and anything beer-related. Beer shipment data and U.S. Census statistics suggest that on average, U.S. alcohol consumers age 21 and up consumed about 27 gallons of beer and cider per person in 2018, compared to 40 gallons of soft drinks. What’s more, U.S. consumers spend nearly $120 billion each year on beer and maltbased beverages. Drink up!
7 National Beer Day
7 Primary WI 9–12 The 2020 Masters Tournament Augusta, GA 10–12 Coachella 17–19 Indio, CA
15 File Your Taxes
18 Opening, Closing and Adjusting Undefined-Risk Strategies* Boston
0–24 2020 TED 2 Vancouver, British Columbia 28 Primaries CT, DE, MD, NY, PA & RI Sen. Bernie Sanders and his wife, Jane O’Meara Sanders, voted in the Vermont Democratic primary on March 3. Eleven primaries are slated for April.
tastytrade & CME Symposium Series Presented by the CME Group, tastytrade’s Tom Sosnoff and Tom Preston (aka TP) will take the stage at The North Door in Austin, Texas, for a two-hour trading-focused symposium. Sosnoff will lead a discussion about active trading in a passive world, touching upon strategies for managing a financial future in the wake of changing investing dynamics. Preston will discuss the most important portfolio aspects of options, futures, stocks and alternative strategies.
Last year, Coachella drew about 99,000 music fans to Indio, Calif. for each day of the festival.
STAR TRADES One of the most powerful connections for wealth—Jupiter conjunct Pluto—occurs on Saturday, April 4, for the first of three times this year. The last time Jupiter and Pluto were aligned this way was in December 2007, just as the shadows of the 2008 financial crisis were beginning to gather. Gold Gold prices have astrological potential to hit highs on April 13 and April 23. Potential for an even stronger high occurs on April 29 as three planets are 120 degrees away from the gold market’s natal Sun, while heavy-hitters Jupiter and Pluto are aligned with natal Venus at the same time that the moon is opposite, putting big pressure on a planet often activated at market turns. The price conversion level of $1,545 per oz. has held well since the beginning of the year. Crude oil The market shows high potential on April 14 and April 22, with multi-planet connections with the first-trade horoscope chart for crude oil. Prices could hit a low on April 30 as the Sun aligns with first-trade Venus, and Mercury/Uranus are opposite the first-trade moon. Look for the planetary price conversion level of $50.80 per barrel to provide support. On the upside, strong resistance is at $57.20. Susan Abbott Gidel is the author of Trading In Sync With Commodities— Introducing Astrology To Your Financial Toolbox.
*For more information visit tastytrade.com (events)
april 2020 | luckbox
3/6/20 2:10 PM
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trades actionable trading ideas
R I PE & J U I CY T RADE IDEAS
How Gold Fits
Sign up for free cherry picks and market insights at info. tastytrade. com/cherrypicks
By Michael Rechenthin
nvestors often tout gold as a strategy during market declines. It sounds ideal because a precious metal like gold should withstand shocks to the economic cycle, right? Well, not always. Think about the decline of the S&P 500 at the end of February. The market dropped and so did gold. Yes, it did provide some diversification to a portfolio because it didn’t drop as much, but it still didn’t increase as much as many would have expected. (See “One follows the other,” right.) During the past 20 years, gold increased only 57% of the weeks when the S&P 500 saw a decline. And that average move in gold during the declines was a negligible 0.3%. Think of gold then as capital preservation instead of capital appreciation. In other words, you won’t “knock it out of the park” with gold. The second thing to remember is the volatility of gold. It’s less volatile than stocks but still more volatile than many might expect. On a typical day, gold moves between -1.1% and +1.1%. As a comparison, the S&P 500 moves -1.2% to 1.2% per day. Gold isn’t as “safe” then as many would like to think. Still, gold does have a place in many portfolios. But first, ditch the late-night commercials touting commemorative gold coins and bars.
One follows the other When the S&P 500 declined at the end of February, gold did too. So much for the safety of pretty metals.
The spread between the bid and offer is huge—and where would you store $10,000 worth of gold coins? Instead, check out the SPDR Gold Trust (GLD), an exchange-traded fund. Investors trade GLD shares worth more than $1.2 billion every day. Each share is backed by 1/10th of an ounce of gold in a vault in New York. Or check out the iShares Gold Trust (IAU). It trades less, but the markets can be extremely tight— each share is backed by 1/100th of an ounce of gold. That makes it attractive for those with smaller accounts. Keep gold positions small—don’t develop a “chicken little complex”
and begin believing the sky is falling—that would set up a portfolio for underperformance. Over time, gold tends to underperform the S&P 500 dramatically. Instead, use covered calls in gold. For example, consider buying 100 shares of GLD at 150 and selling the at-the-money 150 call in June for $450. That lowers the breakeven and increases the probability that the position will help provide protection while adding some cashflow to the account. Michael Rechenthin, Ph.D. (aka “Dr. Data”), heads research and data science at tastytrade. @mrechenthin
Keep gold positions small—don’t develop a “chicken little complex” and think the sky is falling.
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3/6/20 12:21 PM
A V E T E RA N T RA D ER TAC K LES T EC HNICALS
Trading the Trading Posts By Tim Knight
wenty years ago, the idea of publicly traded stock and commodities exchanges would have struck most investors as extremely peculiar. It might have seemed almost “meta” because exchanges were places where buyers and sellers convened to make markets. The notion of the markets themselves becoming tradeable took a certain leap of imagination. In spite of that, a variety of exchanges have indeed become public, and their success as financial instruments has been spectacular. These days, the public exchanges are quite richly valued. Three of them post priceto-earnings ratios (P/E) at levels formerly reserved for high-tech companies and breakout biotech ventures. The CME Group (CME) has a P/E of about 19, the Intercontinental Exchange (ICE) has a P/E of about 27, and Nasdaq (NDAQ) has a sky-high 36 P/E. Although these valuations vary widely, the core business of each firm is information and market-making. Graphs of the three exchanges’ stocks look remarkably similar, and the CME Group chart illustrates two consistent properties of all three stocks. First, a large, well-formed right triangle pattern acts as a bullish base. Second, a steady uptrend hasn’t broken a single time since the end of the financial crisis.
CME Group A large, well-formed right triangle pattern acts as a bullish base. Then, a steady uptrend hasn’t broken a single time since the end of the financial crisis.
Comparison Here are the three stocks in percentage terms, with the Intercontinental Exchange in black (the best performer, on top), the CME Group in blue (the middle performer), and Nasdaq in green (the laggard, bottom).
Comparing the trio Although the general shape and success of each of the three exchanges have much in common, the differences become more stark when the stocks are compared in percentage terms. Although each of the stocks has performed well since 2008, the standout, by far, is the Intercontinental Exchange. It has done three-fold better than the CME Group and almost five-fold better than Nasdaq. As the CME Group illustrates, all three stocks were hit hard during the financial crisis, which was understandable considering the business they are in. The CME Group fell particularly hard in 2008, probably because of the tremendous collapse in commodities
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during the financial crisis. The chart called “Comparison,” (bottom of p. 50), shows the three stocks in percentage terms, with the Intercontinental Exchange in black (the best performer, on top), the CME Group in blue (the middle performer), and Nasdaq in green (the laggard, bottom). In all three cases, the stocks hit lifetime lows at the end of the financial crisis and then began ascending with virtually no pauses. It stands out that even though the Intercontinental Exchange fell like the others, it had already appreciated handsomely. That meant over the long term that its intact gains were far more significant than those of its competitors. Nasdaq differs from the CME Group and the Intercontinental Exchange because it’s a stock exchange, and the other two are commodities exchanges. It’s thus unsurprising that the CME Group and the Intercontinental Exchange have more in common with their performances. They’re in virtually the same business of providing a market for both physical and financial futures products, as well as related businesses such as market data. The percentage performance of those two match closely but, again, the Intercontinental Exchange appreciated more in price and had a more subdued price collapse in 2005-2009. So over the long haul, it has been a stronger performer. (See “ICE & CME,” right.) Exchanges and products While using comparison graphs to examine exchanges, it might be interesting to see what correlation exists between an exchange and its underlying product. For example, because the Intercontinental Exchange is in the business of providing a marketplace for commodities, let’s examine the relationship the exchange has with a basket of commodities. That’s accomplished by comparing it with the Invesco DB Commodity Index Fund (DBC), which is the exchange-traded fund (ETF) for a variety of commodities. The only strong relationship takes place during the last half of 2008 because the worldwide collapse of commodities caused DBC to plunge, while the supposition that trading would shrivel likewise caused the Intercontinental Exchange to plunge. Once the crisis ended, however, the two went their separate ways. DBC ambled along aimlessly between 2009 and 2014 before slumping to a new, lower plateau. the Intercontinental Exchange, on the other hand, steadily moved over and octupled in price. (See “ICE & DBC,” right.)
ICE & CME The percentage performance of those two match closely, but the Intercontinental Exchange appreciated more in price and had a more subdued price collapse in 2005-2009.
ICE & DBC The only strong relationship takes place during the last half of 2008 because the worldwide collapse of commodities caused Invesco DB to plunge, while the supposition that trading would shrivel likewise caused the Intercontinental Exchange to plunge.
Although the general shape and success of each of the three exchanges have much in common, the differences become more stark when the stocks are compared april 2020 | luckbox
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A far tighter correlation exists between Nasdaq and a representative of equities in the form of Invesco QQQ Trust Series 1 (QQQ), the Nasdaq 100 ETF. From 2002 to 2009, those two diverged wildly. (See “NDAQ & QQQ,” right.) From early 2009, however, they moved virtually in lockstep, suggesting that the appreciation in equity prices was assumed to benefit interest in trading equities.
NDAQ & QQQ Invesco QQQ is shown in blue and Nasdaq in black.
Breaking down the dates Perhaps the most interesting examination comes from a date analysis. The data in the Intercontinental Exchange, used as a proxy for all three instruments, shows some interesting date-based features of the stock. (See “Date analysis,” below.)
Here are a few standouts: In spite of its reputation as a terrible month for stocks, October turns out to be the strongest for the Intercontinental Exchange, with July the weakest; The best year was 2006, with a nearly 200% gain. The worst was, not surprisingly, 2008, when the financial crisis struck and the stock dropped by more than 57%; Days of the week seem to differ meaningfully, with Thursday substantially stronger than Tuesday. One fact seems beyond dispute: Stocks based on exchanges—whether futures or equities—are at the mercy of asset markets as a whole. Although nearly a dozen years have
passed since the last meaningful bear market, investors can rest assured that if and when it happens again, stocks such as Nasdaq, the CME Group and the Intercontinental Exchange will bear the full brunt of the selling, just as they have enjoyed the strength of the lift in assets since early 2009. Tim Knight has been using technical analysis to trade the markets for 30 years. He hosts Trading the Close daily on the tastytrade network and offers free access to his charting platform at slopecharts.com.
Date analysis In spite of its reputation as a terrible month for stocks, October turns out to be the strongest for the Intercontinental Exchange, with July the weakest. Date Analysis Intercontinental Exchange Inc. (ICE) Month
January 0.14% February 4.97% March 2.96% April 3.63% May 1.05% June 1.06% July -1.62% August -0.63% September 2.36% October 5.61% November 2.43% December 2.50%
Best 5 years 2006 195.62% 2013 82.21% 2007 78.41% 2009 36.22% 2017 26.60%
% Up days
% Down days
Worst 5 years 2008 -57.17% 2014 -1.24% 2011 1.17% 2012 2.70% 2010 6.10%
Avg. returns from Feb. 6 One week -10.04% One month -4.85% One year 17.96%
Record low: 6.66 on 01/02/2006 Record high: 101.93 on 02/03/2020
luckbox | april 2020
3/6/20 12:32 PM
A SAV V Y F U T U R ES T RADER’S TAK E O N T HE M AR K ETS
ETFs Move Over: Smaller Futures are Here By Michael Gough
hat’s the greatest financial innovation of the last 20 years? Weekly options? Digital currencies? Zero commissions? It may come as a shock that many consider exchange-traded funds (ETFs) the biggest and most important change. After trading ETFs for so long, it’s easy to forget how capital markets used to look—illiquid and expensive. But it’s important to remember that at one point, mutual funds were a cutting-edge financial innovation. Mutual funds transformed investing by seamlessly diversifying portfolios for individual investors. By pooling assets, mutual funds provide exposure to several markets for a lower cost than building a diverse portfolio from scratch. Instead of constructing a $2,500 portfolio with just a few stocks, an investor can buy a mutual fund for the same price and gain exposure to 50 or 100 stocks, thus immediately diversifying. The drawback with mutual funds is latent pricing. Unlike a stock that changes price on a per-trade basis, a mutual fund updates its price only once per day, making active risk management nearly impossible. The ETF solved that problem with prices that update in real time, making it possible for individual investors to buy, sell and manage their positions throughout the trading day without sacrificing diversification. Because more than 7,000 ETFs are listed globally—covering everything from volatility to vegan-friendly companies—there’s a product for every investor. However, only a handful of these funds are liquid enough to support active trading, and the unrelenting stock market rally of the last decade has made buying many of them prohibitively expensive. So, there’s a new market issue to solve. Every day, companies are hitting record high prices and refusing to split their stock, which makes
On the rise The cost of buying 100 shares of SPY in a margin account has increased more than 100% in the last 20 years.
market access more expensive than ever before. For example, the top 10 companies in the S&P 500 are all priced over $100, and the average price of all constituents is above $130. Twenty years ago, the average price was only $40. Meanwhile, data from the New York Stock Exchange reveals that the number of odd-lots— trades of fewer than 100 shares—has reached the highest level ever recorded. Investors can simply no longer afford to buy stock. While fractional shares may make stocks more accessible, they don’t bypass the Regulation T margin requirements that mandate a 50% deposit of the asset’s value, so gaining exposure is still expensive. Commodity futures invented decades ago provide an abundance of benefits to investors. They carry more value per dollar than stocks, mutual funds or ETFs, and they offer fantastic diversification. That’s why futures contracts will provide the next iteration of product innovation. While mutual funds enable individual inves-
tors to stretch their $2,500 into a portfolio of multiple stocks, and ETFs provide access to all-day pricing, futures contracts afford pure exposure for a fraction of the cost. If an ETF provides $100 of exposure for $50, futures can make that exposure possible for $5. That reduction in capital outlay frees investors to build a holistic portfolio of stocks, bonds, oil, gold and foreign exchange for less than the cost of a mutual fund or ETF. Now, the Small Exchange (smallexchange. com), a new futures exchange, is offering smaller futures contracts appropriate for investors of all sizes for risk management, shortterm speculation and long-term investment. The Smalls conform to a common set of contract Learn more specifications and tick just about small like a stock or ETF, withfutures out the high cost.
april 2020 | luckbox
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QU I E T FOU N DAT I O N HELPS P ROACT IV E INV ESTO RS U NDERSTAND T HEI R PORTFOLI OS
Changes at Exchanges By James Blakeway
ike many industries, financial exchanges have consolidated in the past few decades. The world-famous New York Stock Exchange is now owned by the Intercontinental Exchange (ICE). The Nasdaq (NDAQ) acquired both the Boston and Philadelphia stock exchanges. The CME Group (CME) absorbed the New York Mercantile Exchange and later merged with the Chicago Board of Trade. All three of the aforementioned firms, as well as the Chicago Board Options Exchange (CBOE), are publicly traded. (See “Big 4’s fortunes,” below.) These four companies now represent a combined $163 billion in market cap value and are all components of the S&P 500 Index. For some context: CME Group, the largest of the four, now has approximately the same value as Caterpillar (CAT: $76.3 billion). Even the Cboe is a multibillion-dollar corporation, with a market cap greater than Kohl’s (KSS: $6.9 billion) and The Gap (GPS: $6.8 billion) combined. As long as these, now larger, exchanges provide liquid markets and facilitate efficient transactions, why should traders or inves-
tors care about consolidation? Quite simply, opportunity. Investors can purchase ownership in the companies that facilitate their investments, such as Nasdaq. Likewise, traders can buy or sell options contracts where the underlying stock is the Cboe, the same exchange that provides the marketplace for such transactions. Just as an avid online shopper might enjoy investing in Amazon, an avid trader intuitively appreciates the case for owning stock in an exchange. All four large exchange companies generated strong returns for investors during the past few years. Despite lagging behind the S&P 500 in 2019 (an average of 18.3% versus 23.8%), the performance of the exchanges over the past decade translated to meteoric returns, far outpacing the overall equity market. (See “Nearly ever upward,” p. 55.) Investors in all four exchanges receive quarterly dividends. While they yield less than the aggregate S&P 500 funds, the exchanges are still potentially more attractive as an income and growth asset than popular cash-burning tech stocks.
Digging deeper, the exchanges also outpaced the overall financial sector in recent years. Take, for example, XLF, a popular financial sector exchange-traded fund. It holds shares in all four exchanges, in addition to 62 other financial service stocks. XLF returned 255% from 2011-2019. This was far below the average of 414% for the exchange stocks. The high praise for the recent performance of the exchanges also highlights their current drawback for investors: They are likely overvalued. Analysts indicate that fair values for these four stocks are likely well below their market prices. This, coupled with exuberant recent rallies, makes it harder to justify purchasing at these lofty levels. Quiet Foundation’s free portfolio analysis tools provide some additional context around these stocks. An equal-weighted portfolio analysis indicates a fairly high diversification score among the exchange stocks because of their low correlation to one another and a low correlation to the S&P 500. Combined, the four stocks have underperformed the S&P 500 in the past three months but, as previously indicated, this is after multiple years of outperformance.
Big 4’s fortunes In the last decade, four companies that operate exchanges have outperformed the S&P 500 ETF. Company Name
Notable Exchanges/ Subsidiaries/Acquisitions
CME, CBOT, NYMEX, COMEX
NASDAQ, Boston Stock Exchange Philadelphia Stock Exchange
ICE, NYSE, Chicago Stock Exchange
Cboe Global Markets
Cboe, Cboe Futures Exchange, Bats Global Markets
S&P 500 ETF (Benchmark)
Market Cap (billions)
Past performance is no guarantee of future results. Information provided in an EPI Report does not consider the specific profile, objectives or circumstances of any particular investor or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her investment professional. Investment suitability must be independently determined for each individual investor. QF does not make suitability determinations or investment recommendations for investors. EPI utilizes the S&P 500 as its benchmark given that the S&P 500 is considered a barometer of stock performance in the United States. Aspects of the analysis and information found in an EPI Report are based upon simulated and/or hypothetical performance. Simulated and hypothetical performance have inherent limitations and do not represent the actual performance results of any particular investment products. The EPI Report does not guarantee any results or outcomes in the financial markets. Investors should be aware of the methodology used to produce an EPI Report and the inherent limitations when placing reliance on the results. For additional information about EPI Reports, visit the QF website: quietfoundation.com.
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Long-term investors may want to pass on these stocks and reevaluate if they fall to more logical price levels. However, for active traders, some opportunity may still exist. All four exchange stocks have listed options contracts available to traders. Of the four, the Intercontinental Exchange has the most liquid options, with high open interest and nickel-wide markets. Traders with a bearish sentiment on the ICE exchange may look to buy put spreads or potentially sell call spreads (in the event of heightened implied volatility). Regardless of seeking current opportunity or waiting for more turbulent markets, investors should continue to do their due diligence. James Blakeway serves as CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade that provides fee-free investment analysis services for self-directed investors.
Nearly ever upward Owning a piece of an exchange has generally paid off in the last 10 years.
Evaluate any portfolio with Quiet Foundation
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tactics essential trading strategies
SPECIAL SECTION Luckbox is devoting this month’s tactics section to techniques for pairs trading, courtesy of the Learn Center at tastytrade
Trading the Gold-Silver Ratio
Here’s the simplest way to reduce portfolio volatility by pairs trading the two heavy metals
By Anton Kulikov
n the world of pairs trading, the gold to silver ratio ranks as one of the most popular trades because of its stable correlation and tendency to diverge in price. What does all that mean to traders? The gold to silver ratio serves as a less-risky way to trade precious metals while engaging in fading short-term price extremes. Luckily, today’s technology and a wide array of financial products make it possible for anyone to trade the gold to silver ratio, regardless of the size of the account. Let’s explore the simplest method of trading this pair: the priceweighted ratio. But first, a quick disclaimer: This is just one method of trading this pair, but it also happens to be the simplest way possible. At this writing, the price of the SPDR Gold Trust (GLD), the exchange-traded fund (ETF) that tracks the value of gold, is approximately $149.00. The price of iShares Silver Trust (SLV), the ETF that tracks the value of silver, is $16.50. To trade this pair, divide the price of GLD by the price of SLV and procure approximately nine shares of SLV to one share of GLD. In “Gold to silver ratio,” right, the stats illuminate the history of this ratio for the past 10 years. The current ratio (price of GLD divided by price of SLV) is 9.0, meaning that it’s on the higher end of its historical range. Next, the trader has to decide which one to buy and which one to short. Because the price of gold is relatively inflated compared to the price of silver, it makes sense to short one share of GLD and buy nine shares of SLV. Keep in mind that the chance of making
money on this trade is the same as trading GLD or SLV outright. The benefit of this trade, however, is that it reduces portfolio volatility by roughly 50% compared to trading GLD or SLV outright. (See “One-day expected percentage change,” below.) The capital required for this trade would be around $300 for every nine shares of SLV and one share of GLD traded. That makes the trade scalable for accounts of all sizes. A margin account is required for this method of trading the ratio because the investor is shorting stock. Check out the Advanced Tactics article in this month’s Luckbox for more ways to trade this pair.
A wide array of financial products enable nearly everyone to trade the gold to silver ratio—regardless of portfolio size.
Anton Kulikov is a trader, data scientist and research analyst at tastytrade. @antonkulikov97
Gold to silver ratio stats (since 2010) The current ratio (price of GLD divided by price of SLV) is 9.0, meaning it’s on the high end of its historical range. Minimum
One-day expected percentage change in portfolio by trading … The capital required for this trade would be around $300 for every nine shares of SLV and one share of GLD traded. That makes the trade scalable for accounts of all sizes. 1 Share GLD only
9 Shares SLV only
Buying 1 GLD, Shorting 9 SLV
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BY 1893 INSPIRED
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Pairs Trading with Futures For a pairs trade, find two highly correlated assets that have recently diverged in performance By Michael Gough
airs trading involves buying and selling related markets to capitalize on performance disparities. Traders can use the strategy to reduce outright risk, diversify a portfolio and find new trading opportunities when markets seem recalcitrant. To structure a pairs trade, look for two highly correlated assets that have recently diverged in performance. Find two related products because outright losses in one position will be offset by gains in the other position. Two such products are gold and silver. Investors can use the same gold to silver ratio pairs trade described in the Basic Tactics article in this series with futures to realize immense cost savings. Experienced traders might consider using futures to trade the gold to silver ratio because of their capital efficiency. Exchange-traded funds (ETFs) often require 100% of their notional value—which means size or underlying value—in margin, but traders can achieve the same exposure with futures for only 10% of their notional value. In other words, $100 of ETF exposure requires $100, while $100 of futures exposure requires only $10. Investors can use those cost savings to hedge a portfolio, make shortterm speculations or contribute to long-term investments. Before jumping in, consider the subtle differences between ETFs and futures pairs trades. When calculating the notional value that determines the proper ratio of each leg to buy and sell, traders should consider each product’s contract specifications.
While no one can perfectly hedge a pairs trade, adjusting by the volatility helps equate the risk on both sides of the trade.
Unlike ETFs, where the notional value is equivalent to the price of the product, futures have more-nuanced notional values. Gold and silver represent a classic case because one gold contract controls 100 troy ounces of gold, while one silver contract controls 5,000 troy ounces of silver. Therefore, an extra step that considers these subtleties is required to compute the proper trading ratio. Besides considering the contract size, traders should adjust each product’s notional value by its volatility to derive a more accurate pairs ratio. While traders can never perfectly hedge a pairs trade, adjusting by the volatility helps equate the risk on both sides of the trade. Failing to incorporate volatility can result in accidental over or under exposure to one market, which effectively defeats the purpose of pairs trading. Thus, to calculate the volatil-
Volatility-adjusted notional pairs-trade ratios Some popular products and their volatilityadjusted notional values are listed in the table below. Pair
S&P 500 (/ES) and Nasdaq 100 (/NQ)
S&P 500 (/ES) and Dow 30 (/YM)
Gold (/GC) and Silver (/SI)
British Pound (/6B) and Euro (/6E)
Canadian Dollar (/6C) and Australian Dollar (/6A)
Soybean (/ZS) and Corn (/ZC)
Wheat (/ZW) and Corn (/ZC)
Source: Volatility-Adjusted Notional Pairs Trade Ratios
ity-adjusted notional value of gold and silver futures, apply the following formula: Volatility Adjusted Notional = Number of Troy Ounces x Price Per Ounce x Implied Volatility As of this writing, that equates to: Gold Volatility Adjusted Notional = 100 x 1,589 x 11% = 17,479 Silver Volatility Adjusted Notional = 5,000 x 17.86 x 18% = 16,074 These volatility-adjusted notional values reveal the proper pairs trading ratio for a gold and silver pairs trade is one for one. If after looking at the gold to silver ratio traders believe the ratio will increase, they can buy one gold future and sell one silver future. Vice versa, if they believe the gold to silver ratio will decrease. While the number of troy ounces per gold and silver future is unlikely to change, prices and implied volatilities are dynamic and should be recalculated before entering a new position. Besides reducing capital requirements, incorporating futures can add a level of opportunity that’s unattainable with ETFs. While there are liquid ETFs for gold, silver and the major index funds, several other exciting markets—such as foreign exchange, interest rates and agricultural products—are accessible only with futures. Some popular products and their volatility-adjusted notional values are listed in “Volatility-Adjusted Notional Pairs Trade Ratios,” left. Michael Gough enjoys retail trading and writing code. He works in business and product development at the Small Exchange, building index-based futures and professional partnerships.
Learn more about pairs trading with futures here
april 2020 | luckbox
3/6/20 12:45 PM
Trending Together Many stocks tend to move in tandem, so pairs trading enables investors to mitigate directional exposure By Michael Rechenthin
nvestors might consider using pairs trading when they feel bullish or bearish on a stock but want to reduce exposure to the daily movement within the market. In other words, it’s well known that stocks tend to move in tandem—they tend to go up or down in price at the same time. Pairs trading enables investors to be more non-directional and make money on the relative value of the investment—making money in up and down markets. For example, an investor might think Caterpillar (CAT) is undervalued compared to the overall market. While Caterpillar is up a few percentage points over the past year, the Dow Jones (DIA) is up 15% over the same period. In this case, the investor might go long Caterpillar and sell an equal dollar amount of DIA. That’s a strategy that professional traders have been using for years, and usually these trades take a few days to a few weeks to play out. Occasionally, investors keep these trades for a few months. With the price of DIA more than twice the price of CAT, traders would need half the shares of DIA to gain a hedge—for example, 134/294 = 0.46. But another more advanced way of trading stocks and exchangetraded funds (ETFs) incorporates the different magnitudes of move-
Tracking volatility Caterpillar has been traveling in the same direction as the Dow but with wilder swings. 15% Notice CAT is considerably more volatile than DIA. It has swung directly greater.
-5% DIA CAT
-15% MAR 2019
ments into the ratios. It’s called “volatility-based pairs trading.” Notice the one-year percentage change of CAT and DIA in “Tracking volatility,” above. CAT is considerably more volatile than DIA. That means the hedge needed to reduce risk will be greater than just looking at price. To use “volatility-based pairs trading,” investors need two numbers
for each symbol: price and implied volatility. Implied volatility can be captured from an advanced trading platform such as tastyworks. (See “Implied volatility,” below.) Caterpillar, as a percentage, has a much larger expectation of movement because it has a larger volatility than the Dow—nearly double. But the price of Dow Jones is more than double the price of Caterpillar.
Dow Jones (DIA)
Traditional Pairs Trading
100 shares of CAT ($13,400)
45 shares of DIA ($13,400)
Volatility Based Pairs Trading
100 shares CAT ($13,400)
75 shares of DIA ($22,333)
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CARTOON: JONNY HAWKINS
Follow the steps below to determine how many shares of the hedge are needed. First, multiply the symbol by the last price and then by the implied volatility. That provides a theoretical expected move of the price over one year—either up or down. Thus, Caterpillar is expected to move by 134 x 25% = 33.5, either up or down over one year. While the Dow is expected to move by 294 x 15% = 44.1, either up or down over one year. Second, divide the amount that Caterpillar is expected to move by the amount that the Dow is expected to move. Thus, 33.5 / 44.1 = 0.75. That means investors need three-quar-
ters as many shares of the Dow (compared to Caterpillar) as opposed to only half if investors didn’t take volatility into consideration. The pairs trading ratio differences are even more dramatic when the change between the volatilities are larger. (See “Pairs comparison,” p. 60.) So, adjusting for volatility means that an investor has a more appropriate hedge for risk. That helps lower daily change in price between the pairs. It’s something to consider when trading two symbols. Michael Rechenthin, Ph.D., (aka “Dr. Data”) heads research and data science at tastytrade. @mrechenthin
Pairs trades usually take a few days to a few weeks to play out. Occasionally, investors keep them for a few months.
“Whatever you do, don’t go near it, Billy. This is the portal to the Dark Web.”
3/6/20 12:50 PM
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Understanding Delta Delta can gauge a position’s directional bias and also do so much more By Mike Hart and Anton Kulikov
Investors use “delta”—one of the most common terms in options trading—to describe risk in many different ways.
0 position. Delta above 50 means the option is in the money, and below 50 means out-of-the -money. At or around 50 means at-the-money.
that this option is in-the-money, out-of-themoney and the probability of a touch on the 16 delta option.
Directional bias Delta can gauge a position’s directional bias. If, for example, the delta was +25, that would mean for every dollar up in XYZ an investor could expect to make 25 cents. A positive delta indicates a bullish bias and a negative delta indicates a bearish bias.
Delta-hedging Delta is the change in the option value when the underlying moves up by $1. This also provides an idea of the directional risk. This one fact makes delta one of the most widely used Greeks.
The Rules of the Road The next Luckbox will feature essential “Rules of the Road” for active investors. While the rules aren’t immutable laws, theycan serve as customary best practices that investors can follow to achieve a sustainable edge in their trading.
Share equivalency With a delta of -25, an investor would need to buy 25 shares to bring it back to a neutral
Standard deviation We can use delta to approximate probabilities. One standard deviation is equivalent to a 16 delta option and calculates the probability
Mike Hart, a former floor trader at the Chicago Stock Exchange and a proprietary futures trader, specializes in energy markets and interest rates. He’s a contributing member of the tastytrade research team. @mikehart79
Credit Put Spread Sell one out-of-the-money put, buy one further out-of-the-money put. Probability of profit is greater than 50%.
IVR > 30 and Bullish
Debit Put Spread Buy one in-the-money put, sell one out-of-themoney put. Probability of profit is around 50%.
IVR < 30 and Bearish
IVR > 30 and Bearish
Credit Call Spread Sell one out-of-the-money call, buy one further out-of-the-money call. Probability of profit is greater than 50%.
IVR < 30 and Bullish
Debit Call Spread Buy one in-the-money call, sell one out-of-themoney call. Probability of profit is around 50%.
april 2020 | luckbox
3/6/20 1:02 PM
luckbox of the month
WHEN BEER GOES VIRAL
Imported Beer Sales
ter, then other beer companies can only hope a disaster comes their way, too. Constellation Brands (STZ), which owns Corona, responded to the global headlines by saying in a press release that the company’s dollar sales were up 5% in the four-week period that ended Feb. 16, nearly double the brand’s 52-week trend. “All business units supporting our beer business are seeing positive sales trends for the brand thus far this calendar year,” the release went on to say. But don’t just take their word for it. Popular fact-checking website Snopes gave the claim that Corona beer sales dropped in the wake of the virus a “False” rating—not “Mostly False,” not “Mixture,” but just plain “False.” And it’s happened before. It was only 11 years ago that the National Pork Producers Council felt compelled to release a statement calling for accurate reporting of the “swine” flu, officially called the H1N1 flu. Despite the H1N1 flu not actually being linked to pigs, the council’s statement was motivated by a very real threat to the U.S. pork industry, which at the time was nearing “the brink of financial disaster.”
Corona $2.37 billion Modelo $1.97 billion Heineken $795 million Dos Equis XX $383 million Stella Artois $368 million Tecate $202 million
Source: Information Resources Inc., 2018 data
But that simply isn’t the case with Corona, and that’s why Luckbox decided to name the popular Mexican beer brand the honorary Luckbox of the Month for April. 5WPR doesn’t list Constellation Brands among its list of clients, but it might as well at this point. After all, what started as seemingly buzzworthy bad news for Corona turned into an opportunity for the brand to tout its record sales and explain its positive growth to an attentive global audience. If that’s not lucky, we don’t know what luck is. Cheers!
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PHOTOGRAPH: (BEER) VENGEROF / SHUTTERSTOCK.COM
ational Beer Day made this issue’s calendar, so why not celebrate by ordering an ice-cold Corona with a wedge of lime when April 7 rolls around? If that sounds like a refreshing idea, odds are you aren’t among the 38% of beer-drinking Americans who supposedly told pollsters they wouldn’t buy Corona under any circumstances in light of the novel coronavirus outbreak. Nor are you among the additional 16% who were confused about whether Corona beer is related to the virus. “There is no question that Corona beer is suffering because of the coronavirus,” said Ronn Torossian, founder and CEO of 5W Public Relations, the PR firm responsible for disseminating the survey results. He went so far as to call the virus “a disaster for the Corona brand.” Really? No, not really. But that didn’t stop respected news organizations from repeating Torossian’s erroneous claims. CNN, for instance, enjoyed more than 19,600 retweets and 73,200 likes to its tweet citing the 5WPR survey results. The fake news may or may not have helped deflate Corona’s YouGov Buzz score, which measures whether U.S. adults have heard negative or positive things about a brand. Either way, Corona’s score fell from 75 in January to 51 in late February on a scale of -100 to 100. But if Corona is truly in the midst of a disas-
luckbox | april 2020
3/6/20 2:28 PM
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