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Crypto Lengthy & Brief: GameStop, Dogecoin and a brand new market paradigm

It's hard to do justice to the symbolism and meaning of last week's Reddit Robinhood GameStop drama.

That's not to say that a few quarters haven't been overdone. I've heard it compared to the riots in the Capitol – no, that was riot, this is rebellion, very different. I have seen calls to regulators to intervene and shut down retail platforms even though it is not clear that a crime has been committed. And I've read that it's important to label the leaders of this indictment as "outsiders." This condescension itself is part of the problem.

The protagonists are not outsiders – they are private investors flexing their collective muscles, the very muscles that the "establishment" has encouraged them to develop.

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Private investors were encouraged to invest their savings in the stock market. They were offered mobile apps that made it easy. They have been bombarded with advice and ideas from mainstream media. They got money to spend. And low returns drove them up the risk curve.

Make way

While attention has been focused on a handful of stocks that have seen astronomical gains due to the excitement of retailing, their origins and outcome (whatever that may be) have a lot to do with the crypto markets.

We're not trying to steal anyone's thunder. The WallStreetBets channel, which got the troops on their toes and led the indictment, did not welcome crypto traders or chatter. Their drivers are not decentralization or fair access – rather, they seem to be motivated by joy at their newfound power and anger.

The anger goes deep. The 139% short position on GameStop signaled strong hedge fund involvement – but this was a trigger, not a cause. This rebellion is an expression of pent-up frustration with the distorted rules of the capital markets that cement the power of the “elite”, combined with remaining resentment against the bailouts of 2008, a lack of market transparency and a long list of grievances among the generations.

A similar “old” and “new” mindset is driving the crypto markets.

Many of us were drawn to Bitcoin because we were concerned about the impact of defensive decisions of entrenched interests on individual wealth. Others were drawn to the concept of decentralized funding as an antidote to the potential harm of consolidated power. And there is a strong vote for financial sovereignty and freedom of trade.

We have all watched traditional finance initially reject the notion that a programmable token could ever have value or that code could bring returns. The success of the crypto markets has forced much of the "old guard" to begin to realize that things are changing. The events of this week will no doubt bring this message home.

Additionally, the same platforms that sold themselves as part of the democratization of finance limited users' access to certain stores this week as the market was in full swing. Can you envision a more public spotlight on the weaknesses in current market infrastructure? Google Trends shows that searches for "defi" (short for decentralized finance) are increasing.

There is a risk that the new government will use the private investor uprising as a pretext for overregulation. The mood of the population seems to be with the rebels, however, as lawmakers no doubt know (I can't remember ever seeing Ted Cruz, to whom Alexandria Ocasio-Cortez previously agreed to).

In addition, the appointment of Gary Gensler, who knows and supports crypto markets in general, as chairman of the US Securities and Exchange Commission could signal the start of structural reform in favor of more "democratic" access.

This could also increase investors' understanding of some of the underlying characteristics of blockchain-based assets and their markets. Access to these markets does have some hurdles, e.g. B. responsibility and familiarity with the technology. However, investor choice and user experience have never been this good and will continue to improve given the huge market infrastructure slated to go public this year.

Back to basics

It's not just market structure that is likely to be re-examined based on this week's events. The understanding of the market must also be reconsidered. This also has a lot to do with crypto assets.

I lost the number of mainstream commentators this week who stumbled upon "Basics" and how price shouldn't move as much if GameStop's situation hasn't changed. You're wrong – whether the stock is currently overvalued or not (I don't have an opinion on that), the company's situation and fundamentals have changed.

First, there is massive advertising. Second, in addition to the potential future revenue from game sales, there is likely a merchandising opportunity through branded cups and pitchforks. Third, there is a foundation for stock price support – only this is traditionally not considered worth considering when valuing assets. It should be.

Investopedia defines business fundamentals as "information such as profitability, sales, assets, liabilities and growth potential". I would add "public support" to this list. Critics of this idea will say that sentiment is short-lived, impractical to estimate and therefore impossible to evaluate, while traditional fundamentals are tangible and can be discounted.

Today, even the most tangible estimates are just estimates that, as we have seen, vary widely and can be rendered useless by unforeseen events. We have also seen sentiment move the markets, and not just in the short term. No analyst can reasonably ignore his power, and insisting that portfolio decisions "stick to the basics" are expected to return to what they were 50 years ago when investors put their money in safe stocks and forgot them until retirement.

The force unleashed this week might remind some of us oldies of 1999, when market fever rose before the crash. But back then we didn't have the power of social media, a generation stuck inside and helicopter money from the government. Nor have we dealt with unprecedented levels of social confusion, loss of trust in institutions, and belief in the strength of the community. Today's markets can turn south at any time, and when it does, it's likely ugly. Unlike at the turn of the century, however, retail involvement is unlikely to wane – this cultural shift is about more than making money.

The newfound strength of private investors has shown that sentiment not only surpasses earnings forecasts, but can also influence them. The same investors who pile into the stock are the same demographic that GameStop's future business will target. Collective power has shown that market sentiment is now more than ever a fundamental characteristic of markets. Some of the price hikes this week may have been driven by hedge funds who understood this and placed buy orders accordingly.

While volatility is likely to settle down at some point and business analysis should always play an important role in investment decisions, we can no longer say that sentiment is not a fundamental part of an asset's price outlook.

This is particularly relevant with crypto assets. Critics have often accused Bitcoin of having no "fundamental value," by which they mean no cash flow, no balance sheet, or potential earnings growth. True, these things don't exist, but it has a widespread belief in its usefulness, monetary policy, and eventual adoption by an even wider community. This belief should be viewed as a fundamental trait as it is now evident that it is driving the rise in prices.

Bitcoin isn't the only clear example of this. This week, the price of Dogecoin (DOGE) has increased tenfold in one phase (plus 500% at the time of writing), briefly adding the cryptocurrency to the list of top 10 crypto assets by market capitalization. DOGE doesn't do anything special. It has a cute dog as a logo. Its founder rejected the project a long time ago. Some people hyped it as a joke that then became part of their narrative – in other words, its unpretentious lack of basics has become part of its value. We like to mock people who put their savings into a purely sentimental asset – but that vibe has kept DOGE alive for over six years and has drawn a few high profile followers.

New language

As an analyst trained in "old school" valuations and portfolio allocation techniques, I understand the reluctance to let go of comfortable heuristics – I personally miss discounted cash flows that are so nice and clean. But when market components and participants change, the market analysis must also change. Does anyone remember when the last "value stocks" were for it?

Crypto markets have been pushing the boundaries of what "value" means for some time. The new generation of investors shows us that old rules need to be reviewed.

They are also constantly blurring the lines between institutional "smart money" and "stupid money" for retail. In addition, they show that reforms can be initiated by those who previously had little influence on generating profits.

This is the origin and ethos of the crypto market in a nutshell: new rules for a new type of investor. The Crypto Asset Market was born in retail and cultivated from the ground up. It attracts investors looking for an alternative to the traditional system. It has spawned new metrics and valuation paradigms.

All of us who work in this industry have watched the power shift this week with the feeling that what we expected is finally starting: a new type of investor insists on new rules and a new language, and mainstream markets are starting to take note of. This new breed of investor – be it angry with elites and unequal rules, intrigued by the emergence of a new type of asset, or both – will force a revision of some long-established investment rules, driving the philosophy behind the term "value" towards one more flexible definition for our changing times.

CHAIN ​​LINKS

Ray DalioThe founder of Bridgewater Associates, the world's largest hedge fund, published a document setting out his thoughts on Bitcoin. This is remarkable in that, not so long ago, he publicly expressed skepticism that this would succeed.

  • "I think Bitcoin is a damn good invention."
  • "At this time, there aren't many alternative gold-like assets that are in increasing demand."
  • "It seems to me that Bitcoin has succeeded in crossing the line from a highly speculative idea that could not exist in a short period of time, to a possible and probably also possible in the future."
  • "The new paradigm in which we live, in which many government bonds no longer have the same yield or diversification characteristics and currencies that are exposed to a higher risk of depreciation, could drive the development of alternative wealth stores faster than would otherwise have been the case."
  • "So far, Bitcoin's ability to offer some diversification advantage appears to be more theoretical than realized."

Elon Musk Now has "Bitcoin" and its logo in its Twitter bio and marked it with the tweet: "In retrospect, it was inevitable."

Scott Minerd, Chief Investment Officer of Guggenheim Partners, told Bloomberg Television this week he doesn't believe Bitcoin's institutional investor base is "big enough" or "deep enough" to warrant its current valuation.

In an interview with Yahoo Finance, CEO of ARK Investment Management Cathie Wood Recent talks with large corporations lead them to believe that others will follow Square's lead and allocate a portion of their treasury to Bitcoin. She also said at this week's ETF Big Ideas event that she doubts that a Bitcoin ETF will be approved until the asset's market cap hits $ 2 trillion.

Bank of Singapore, a private banking arm of OCBC Bank (the second-largest bank in Southeast Asia by total assets), said in a research note that cryptocurrencies have the potential to partially replace gold as a store of value if they can overcome the hurdles that come with it high volatility and reputation show risk and a lack of official acceptance.

Some of the greatest, according to sources University endowment fund The U.S., including Harvard, Yale, Brown, and the University of Michigan, has been tacitly buying cryptocurrency since 2019. BRING AWAY: This is remarkable given the traditionally conservative investor profile of the foundations. Allocations are most likely relatively small, but college foundations' AUM is hundreds of billions of dollars – small can go a long way. It's also worth keeping an eye on Foundation activism – some universities, Harvard in particular, have been criticized for investing in fossil fuel companies. Bitcoin's (misinterpreted) reputation for being bad for the climate could grab their attention.

According to Genesis Capital In its most recent quarterly report, total active loans outstanding increased over 80% to $ 3.8 billion in the fourth quarter. Borrowing grew 46% to $ 7.6 billion, the average loan size doubled from $ 2 million to $ 4 million, and the average loan size for first-time lenders rose from $ 0.6 million to $ 3.2 million . BRING AWAY: These growth numbers underscore the growing awareness of institutional investors about the potential returns on crypto loans. As long as returns in traditional markets remain low, growth should continue to be strong. This supports healthy liquidity in the crypto markets, which in turn could help strengthen the market infrastructure and gradually reduce the volatility of assets. (Note: Genesis Capital is owned by DCG, also the parent company of CoinDesk.)

On business intelligence companies MicroStrategy The latest call for earnings (MSTR) CEO Michael Saylor promised to continue investing the business intelligence company's excess money in Bitcoin, telling investors that his team will also be exploring "different approaches" for additional purchases. BRING AWAY: They are really working on becoming a bitcoin ETF.

Cryptocurrency mining company Marathon Patent Group (MARA) bought $ 150 million worth of Bitcoin during the recent price history of the crypto asset. BRING AWAY: Here we have a bitcoin mining company that is buying BTC on the open market to make it even more of a "game only" for the asset. And yet a Bitcoin ETF is considered too risky.

The City of Miami uploaded a copy of the Bitcoin White Paper to its website on Wednesday and joined a growing chorus of governments and corporations who are now hosting Bitcoin's original blueprint. BRING AWAY: The Bitcoin whitepaper can be found on a website of the US city government. Let that sink in.

In the last few months Grayscale investment (owned by DCG, also the parent company of CoinDesk) has submitted the registration of over 10 new trusts based on smaller cap crypto assets such as aave, chainlink, polkadot and others. BRING AWAY: Grayscale currently manages a number of market-leading trusts including GBTC (Bitcoin) and ETHE (Ethereum), as well as some smaller ones based on Horizen, Litecoin, Stern, and others. While grayscale doesn't necessarily signal an intention to respond to this new record, it does indicate a growing choice for institutional investors in the coming months.

Canadian investment firm Bitcoin fund from Ninepoint Partners (BITC.U and BITC.UN) started trading this week after completing a $ 230 million ($ 180 million) initial public offering on the Toronto Stock Exchange. BRING AWAY: The sizeable amount not only makes Canada's largest new crypto fund its second in two months (the CI Galaxy Bitcoin Fund traded on the TSX after a public donation of $ 72 million in December), it also indicates significant and growing demand from the market Canada's investors.

India's parliament is considering a government-backed bill banning "private" cryptocurrencies and providing a framework for creating an official Reserve Bank of India digital currency. BRING AWAY: The possible effects of the proposed bill are still unclear – what does it mean under “private” cryptocurrency, for example? Bitcoin and others are public cryptocurrencies. However, this would be a worrying precedent. It would also be an interesting case study of how effective government bans on crypto assets are.

If you are looking for a bird's eye view monthly market performance, my colleague Shuai Hao compiled this return table. If you blink you can see that the summer months are traditionally weaker and the end of the year is usually stronger. In addition, we can see that the volatility has decreased somewhat (fewer dark colors in both colors).

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