A great day for crypto
The 2020 bull run continues into 2021, with many coins which stagnated for two or three years now exceeding their previous highs and reaching new all-time highs (ATH’s). Crypto social media is rife with messages about older coins which are hitting ATH’s, or new ones which are expected to go “to the moon”. It does seem like 2017 all over again, but this time, it is institutions and not retail investors who are leading the charge.
Recently we have seen more billionaires and large institutions enter into the crypto space, or add to their positions picked up in late 2020. Bitcoin in particular, is being discussed as “Gold 2.0” or “digital gold” in more boardrooms and trading floors, as professional investors realise the value of a scarce commodity which can be emailed rather than shipped, or stored securely on a thumb drive. Try doing that with a million dollars’ worth of gold, oil or coffee beans!
A quick glance at BitcoinTreasuries.org shows that one of USA’s largest financial services companies, Square Inc, holds $170 million worth of BTC, and cloud-based technology company MicroStrategy owns a massive $2.5 billion worth of bitcoin. This is dwarfed by the holdings of Grayscale, who now hold a staggering $22 billion worth of bitcoin. The Grayscale investment fund is seeing other investment firms such as Moody’s, Churchill, Slatestone and Kingfisher buying stock in its bitcoin fund.
Although still huge and climbing in the USA, institutional investment into bitcoin and other cryptocurrencies is crossing borders, with many large holding firms based in Australia, Canada, China, Japan UK and the EU. It seems that Wall Street, Bond Street and Raffles Place are finally discovering what Main Street has known for several years: cryptocurrency is the money of the future.
Revenge of the Nerds, Part Two
Speaking of Wall Street, we would be remiss if we did not mention the absolute spanking which Wall Street billionaires received from a group of committed internet unknowns.
Despite being practiced for decades by billion-dollar hedge funds, the art of “shorting” has been largely unknown by those outside the industry. Proponents of short-selling will say that it is a form of insurance, whilst opponents would say it is a form of permitted evil. Legendary investor Warren Buffett has made billions of dollars for himself and trillions of dollars for others, without using shorts at all, as he despises them.
In simple terms, someone who “longs” a stock may buy for $5 and sell for $10, pocketing a $5 gain. Someone who “shorts” a stock may believe the stock will fall from $10, so they borrow the $10 stock, instantly sell it for $10, and then pay back the loan by buying the same stock back when it drops to $8, pocketing the $2 difference.
The problem arises when the stock behaves differently to how you thought it would.
In the “long” case, the stock could rise to $50, and you sold at $10, so you made $5, but could potentially have made $45. If the stock drops to zero, then all you have lost is your initial $5 investment. C’est la vie.
In the “short” case, if the stock goes down further, say to $1, then you can purchase it at $1, and only have to pay back the $1 stock for each $10 stock you sold, pocketing $9. But if the stock rises, to say $20, you must buy at the higher price to pay back your loan, which means you have lost $10, or double what the long investor could lose. If the stock rises higher, to say $50, you would lose $40 for every share, or more than four times what you put in.
Wall Street investors believed that stocks in GameStop would go down, as they assumed a retailer who sold computer games on CD/DVD would be soon outperformed by online gaming. One could imagine Wall St boffins taking a large loan and selling all the stocks at $20 and waiting for stock to fall to $5, thus tripling their money and celebrating loudly, as another business failed.
It seemed that a serious collective of online nerds were big fans of the GameStop business, and not fans of Wall Street profiting from misery. Gathered together on Reddit, an online message board, the group organised an “Occupy Wall Street” protest with a difference: they would use their combined might to buy stocks in GME and send the price upwards, thus making the Wall Street investors lose.
The “Wall Street Bets” scheme was amateur yet brilliant, and by the time the $20 stock rose to over $300, some billion-dollar hedge funds were facing billion-dollar losses. Whilst many of the nerds had effectively paid several hundred dollars for a cheap stock, they did not care, as it was a chance to stick it to the big guys.
One of the organisers of the WallStreetBets group, known as “Roaring Kitty” faced a paper loss of around $13 million when the stock plunged up to 60% from its peak. However, as Roaring Kitty had purchased mostly under $20, he was still comfortably in the black when stocks dropped from $300 down to $90.
Hedge fund traders such as Melvin Capital did not fare so well, losing around $4 billion in less than a month. They received a $2 billion bailout from fellow hedgers Citadel, which of course, they will have to pay back. In total, large hedge fund traders lost almost $20 billion in January on GME alone, with much of this wealth being redistributed to anonymous geeks behind their keyboards. As John Lennon said, “Power to the people, right on!”
The “Occupy Wall Street” protests held in Washington streets post-GFC accomplished little in the way of meaningfully addressing wealth inequality in the USA, where average CEO salaries have increased ten-fold whilst minimum wage has stayed functionally the same for decades. It seems that the WallStBets organisers managed to get more done for wealth inequality by staying home, protesting quietly en masse, and pocketing a nice little return as well. Apparently, revenge is a dish best served at a comfortable social distance.
Will the nerds change the world?
It is all well and good to stage a protest, such as the 1950’s Civil Rights march, or the 2011 “Occupy Wall Street” but how do we know it will succeed over time?
There have already been a few converts or adjutants who have fallen into a more democratic line, including Andrew Left, head of Citron Research, who built a reputation for publishing reports on stocks he thought would fall. After shorting GME at $40, Left had to cover his position by buying back at $90, for 100% loss. Mr Left announced last week that he would no longer issue short reports, and would focus on long or bullish stocks.
Interest rates for shorting or borrowing most stocks on the US market are around 1%, whereas interest rates for shorting GME now range from 30% to 50%, which makes the short gamble phenomenally more expensive for the bears.
Nathan Anderson, founder of Hindenburg Research, and the man who helped expose Nikola Corporation’s fraudulent foray into electric vehicles, says he is happy that “questions are finally being asked” and states he is “hopeful that it leads to a broader understanding of how the system is flawed… Because that’s the only way it will ever actually improve.”
Meanwhile, back in Cryptopia
After pummelling billionaires in the stock market, the Reddit nerds turned their attention to crypto markets, where they pushed the price of novelty-coin DOGE to ridiculous highs of around 1600%, and then pushed the beleaguered Ripple coin (XRP) straight up by around 300%.
Watching DOGE rise from less than a quarter of one cent up to four cents may have been fun for those who got in early, but nobody wants to be last to that party, as the coin has no utility, infinite market cap and could easily plunge to fractions of a penny, or zero.
We have never been fans of the “pump and dump” schemes, where a small group tries to trick the market into buying coins at an inflated price, and the tricksters profit from the naïveté of newcomers. Whilst the aims of the first WallStBets mission may have been to nobly take down some billionaire hedge funds whilst a few thousand nerds became rich, a crypto pump and dump mostly hurts their own kind.
Nevertheless, billionaires have been put on notice: the revolutionaries will not bring pitchforks and guillotines, and soulless profiteers can be “Robin-Hooded” by anonymous crowds, even from inside their mansions. It is, as they say, a whole new playing field.
We have a large supply of pup-corn and are watching from the sidelines to see how this plays out. Will regulators place more rules on short-sellers? Will the SEC try to restrict those no-name nerds who attempt to liberate billionaires from their money? Being generally younger than the hedge fund traders, will the nouveau riche internet geeks take their GameStop millions and invest more into cryptocurrency than stocks? We certainly live in interesting times.
How did we go this month?
Typically long and never short, the BostonCoin portfolio ticked along nicely. We prefer to select coins which are undervalued and aim for longer-term growth. Whilst the ‘crypto-winter’ of 2018-2019 affected us, we held fast, diversified without speculation and watched as the good projects bounced back after a drop.
Winners this month included some coins which have been around for several years, as well as a couple of new-comers. As the crypto market matures into an institutionally-recognised investment market, there is further demand for scarce coins (such as BTC) which are seen as hedges against inflation, and those which can operate as quasi-banks or lending institutions (decentralised finance or “De-Fi” projects).
There is also further demand for coins which promise blockchain interoperability, so that Bitcoin or its clones can communicate with Ethereum or other chains.
Whilst full-scale mainstream adoption of cryptocurrency and blockchain technology is still a few years away, we are seeing the entire crypto industry making great strides toward truly worldwide use.
Winners this month include:
ChainLINK 1 824%
Celsius 10 399%
BOS NAV 29/01/2021
BOS Price 105.526686
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See you next month