“I’ll gladly pay you Tuesday for a hamburger today” — Wimpy (Popeye cartoons)
I just loved how Wimpy, from the old time Popeye’s cartoons, always managed to get some hamburgers in exchange for a promise to make good in the future.
Jules Verne’s “From Earth To Moon” was prescient about mankind going to the moon. The story even based the launch site in Florida — which is where the Apollo missions were launched from. What is even more notable and relevant from my point of view is that the astronauts were also investment promoters. They had to hustle to raise the money to bankroll their moon cannon.
Promises about future performance are at the heart of every venture and speculation in life and markets. Many folks will make a lot of promises in the form of New Year’s resolutions and many gymnasiums and health clubs are going to make their financial year on January 1, 2018 (and I know I’ll be a part of that).
Financial promises are sometimes like New Year’s Resolutions — they glitter with such promise but you don’t know which ones keep losing their luster due to fake veneers and which are the real deal in need of some fresh polish.
“For carrying on an undertaking of great advantage; but nobody to know what it is” — from one company raising capital during the South Sea Bubble (1720)
There have been some interesting promises being made lately in finance and especially in the today’s molten-hot core of animal spirits, crypto assets. I don’t want to put on a tin-foil hat and say they’re all happening at the same time for the same reason but I have to admit at times it all feels like party tricks happening at the same house party.
Some these choices for our hard earned or too easily borrowed fiat include:
(1) The promise of owning “tokens” which hopefully could be exchanged in return for the utility of some theoretical service or solution on some theoretical decentralized network. It all depends on the team.
(2) Ultra-cool rides with the kind of torque that we used to enjoy only with toy cars. (Let’s not forget the push-button acceleration with machine controlled navigation).
(3) And in another corner of Mr. Market’s House of Burgers, some investors get to PAY for the privilege of loaning their money via negative yields.
Let’s focus on choice #1 for this post and move on to the other two choices in a follow-up post.
You can now get ICO whitepapers on freelance site Fiverr. I don’t take issue with freelance work, on-demand content creation or writing a paper in support of a crypto-asset but when it’s all available for hire then we have a problem. This is something to be wary of when this content will be used to raise capital (perhaps outside even the relatively friendly crowdfunding rules of the 2012 JOBS Act) in exchange for the promise of the delivery of crypto-assets sometime in the future.
The amounts being raised eclipse what’s been raised in conventional venture capital in terms of scale and speed. As a result there are lots of things falling through the cracks, which normally would have been squashed.
Just the other day, about 350,000 USD was raised for an ICO and the promoters vanished. Sad to say this is small potatoes at the moment. There’s a stampede past traditional venture capital happening.
— CoinDesk (@coindesk) November 28, 2017
The crypto asset fund raising so far has made even cutting edge Silicon Valley feel left behind, given its speed, and the presence of exchanges which support the trading of these assets after the fundraising closes. (Lockups? What are those?) Liquidity and exits look so different in this new space.
There has been, as of Q3 2017 reports, a constant stream of crypto-asset fund raising, the exchange of electronic fiat for digital tokens, on little more than the strength of a white paper and timely messaging. Ever notice, if you watch this space, all the issues with wallets and exchange security?
This is an industry in its infancy suffering growing pains and where primeval “Id” meets with “I.T.”: Bifinex news kept cropping up in my “feed”, along with Bittrex, with online updates about fighting off DDOS attacks. Kraken has issued news releases that they were working on updates too. Even Coinbase, where the total accounts opened just surpassed Charles Schwab, has been building up “CS”- not computer science but customer service. At the time of this writing, bitcoin has broken a five figure “handle” ($10K!) and various exchanges have had seizures as order flows stress-test their servers’ seams. (Lastly, it looks like Coinbase will have to comply with some of the IRS’ demands to see if the bigger pockets have paid their taxes on realized gains.)
The Promise: Coinbase users > Schwab accounts
The Problems: Growing Pains for Exchanges
One of the granddaddy crypto exchanges with issues was Mt. Gox. That has been a wild story with an amoral (and immoral) coda. After the payouts to creditors in Yen, it looks like Karepeles will get what is left over. A considerably slimmed down Karpeles (he’s been going to gym I guess) will assume the remnants of a bankruptcy estate slimmed down to remaining bitcoins — about $900+M USD. Wimpy got both the hamburger AND the money too.
Whether a “coin”, or a token, may be a commodity, an equity security, we don’t know yet but what is certain is that it’s a taxable asset, so firms like Coinbase have to crank out 1099s for its user base. While a crypto asset’s speculative genus may not yet be classified completely, what is known is that various crypto-assets have been targeted by class action law firms on the hunt for new prospects. (Hello Tezos, they see you.)
What exactly are crypto buyers getting along with their tax returns? In crypto-space, many buyers basically join waiting lists for what could be a Swiss non-profit funded recruitment of promises that “devs” will hopefully write a nice FAT protocol after getting some fat payouts in ETH or bespoke coin. (If a buyer is lucky maybe it’s a SAFT deal which makes it through future smell tests with the SEC.) We know in electric car-land, that you at least get a coupon for future delivery of a talking autonomous battery with wheels at some point but it’s not like you’ll be clipping dividend coupons.
Let’s see how much money has already been raised this year for what Mark Cuban has recently described as the purchase of collectibles. How have they been doing? See all that red on the chart below? Just how well has Wimpy done on getting a hamburger today, never mind paying something back next Tuesday? Fundraising is the first hurdle which many have failed.
That field of red and uncertainty about owners’ rights have not deterred the FOMO going on not among the retail buyers who jumped onto the Thanksgiving holiday bandwagon and signed up at Coinbase. Even stock jockeys have not been left out. There have been a handful of hot stocks with the word blockchain or associated with some bitcoin related fintech payments processing news. Overstock came first enabling customers to have bitcoin as a payment option, which is pretty vanilla and basic when compared to the ebullient transformation of a biotech company into a blockchain play. Have you seen a chart of $RIOT, a former biotech turned blockchain play? Woof.
As I mentioned, Mark Cuban described that most of the purchase of crypto-assets was similar to hobbyists buying collectibles, as if everyone was at Crypto-Con, and fans were buying limited edition goodies. Gary Vaynerchuck, marketing expert, made his bones in his youth, buying and flipping garage sale finds, before moving on to scaling up his family’s wine business and then pivoting to a client business and venture capital. You can watch the action on the dozens of crypto-exchanges for some hardcore 24/7 crypto flipping.
A lot of this “collectibles” capital, however, is being directed towards the funding of real startups designed to solve real and relevant problems. The most accessible use case for my layperson sensibilities has been security and privacy. What comes to mind is Civic, whose value proposition keeps increasing in the wake of constant customer database security breaches (e.g. Equifax and Uber). Decentralized network protocols to support online hosting (Filecoin), security, payment platforms meant to reduce cost and time, custody,or even content creation and monetization (Steem) are pretty nifty.
I have no doubts that we will get all manner of solutions and services we won’t be able to live or do business without a decade or two from now. At the same time we will learn about many unbelievable frauds and epic failures as well. I’m afraid Mr. Market is going to have to do his thing and take the time to sort out who deserves a Nobel prize and who is overdue for a perp walk.
Let’s revisit crypto assets in a future post and move on to a few notes about promises made with unicorns, electric cars and some quirky bonds in the next post.
Originally published at big-stack.com on November 27, 2017.