Weekly Roundup, 24th May 2021

Weekly Roundup, 24th May 2021

We begin today’s Weekly Roundup with a look at crypto.

Crypto

It was a dramatic week in crypto:

  • Elon Musk said that Tesla won’t accept payment in bitcoin after all, ostensibly because he has just discovered that BTC has a large carbon footprint
  • Tether revealed that only 3% of the $58 bn of issued coins was back by cash, reviving claims that it is a Ponzi scheme.
  • And China reiterated that crypto is not money and that Chinese financial firms should steer clear.

All of which meant that the price of BTC and ETH fell, to below $40K and to around $2,500 respectively at the time of writing.

John Authers

John Authers wrote of his struggles when discussing bitcoin with its “ardent supporters”.

  • They don’t mind that BTC doesn’t function as a currency.
  • They don’t mind that transactions are difficult.
  • Or that the price is volatile (as it has been in recent days).

They champion BTC as freedom from the “abuse of central banks and governments” and even from war.

  • John notes that the governments that crypto fans want to escape are largely democratic and that the guiding emotion is anger.

The GameStop saga is very similar. Both are motivated by anger, and a genuine, righteous desire to right the wrongs of society — whether by toppling unscrupulous speculators, or a corrupt government imposition. Also, there is a painful generational angle.

The crypto believers are, in general, no fans of old people (“boomers”).

It’s disturbing that ageism [is] acceptable when just about every other form of identity-based abuse is now unacceptable.

Bitcoin vs Fangs

John concludes that if BTC isn’t a currency, it is a growth asset, comparable to the FANGs.

He notes three problems with this idea of BTC as a company with a promising but unproven technology:

  1. The technology doesn’t work well enough yet. (This week’s volatility puts that beyond argument.)
  2. The way to invest in the technology isn’t by buying the currency, but by buying stock in the companies that produce that technology.
  3. Stock in Apple or Amazon.com Inc. has the advantage that it is backed by the
    companies’ assets and cash flows; bitcoin has no comparable backing.

David Stevenson

Sticking with crypto, David Stevenson looked at NFTs (non-fungible tokens). As David explains:

An NFT is a certificate of authenticity held on the blockchain, a digital ledger of transactions that cannot be hacked. These tokens may refer both to an actual item, such as an artwork, as well as its authentication.

They are just a piece of code with a unique identifier. An NFT is thus a kind of digital securitisation, an asset of a kind that cannot be exchanged for or replaced by another identical one (hence nonfungible).

That sounds a bit rosy to me – the most common use for NFTs to date is to “prove” ownership of easily-copied digital assets (pictures, videos and music) via a blockchain that may or may not exist in the future.

  • I can’t see most people trusting a system like this, though plenty of rich people already have.

This is the perennial problem for blockchain – decentralised sounds good, but only when a single unhackable decentralised system dominates the space.

  • Bitcoin comes closest to this at the moment, with the enormous amounts of computational effort, electricity and carbon required to generate more.

But getting a new decentralised solution off the ground is like floating a better version of Amazon.

David sees NFTs as an accessible and easy to trade form of securitisation, but to me they feel as secure as buying “antiques” and “rarities” on eBay.

  • Much better to buy through Christie’s or Sotheby’s and be reasonably sure what you are getting.

David has bought into Aquis-listed fund NFT Investments (AQSE:NFT), as well as DeFi firm Dispersion Holdings (AQSE:DEFI).

  • He previously bought into KR1, a kind of blockchain venture capitalist.

He also mentions the VanEck Digital Assets ETF (DAGB).

Swensen

David Swensen

David Swensen, the Yale investment manager who revolutionised the university endowment model of asset allocation, has died aged 67.

  • He worked at Salomon’s and Lehman’s before joining Yale in 1985.

At the time, university endowments held a lot of bonds and few international investments.

  • Swenson diversified into riskier foreign stocks and real estate, as well as private equity, venture capital, hedge funds and forestry.

Bonds and US stocks now make up less than 10% of the fund.

  • Hedge funds accounted for 24%, as did VC, and Yale allocations

    Charles Ellis, the former chair of the Yale endowment, said:

    The really great painters are the ones that change how other people paint, like Picasso. David Swensen changed how everyone who is serious about investing thinks about investing.

    Ted Seides, the hedge fund manager famous for losing a bet with Warren Buffett (and who now has a decent podcast), worked for Swensen:

    He was just an incredibly wise man. He was the greatest in the industry and he has been for many years.

    John Authers said:

    He stressed asset allocation rather than stock picking, or attempts to time the market — beyond the mechanical market timing that came with rebalancing (buying more of assets that had done badly and selling some of those that had done well).

    Swensen deserved more credit for this huge shift in the investment landscape than any other single individual. With the sole exception of Warren Buffett, Swensen’s actions at Yale were more closely watched than any other investor’s.

    John also notes that Swensen’s legacy is uncertain:

    Allocations to deeply illiquid investments made life tough for the big endowments during the global financial crisis, and many of them (including Yale) were forced to borrow.

    There have also been protests about fossil fuels holdings and the poor performance of hedge funds since interest rates fell have attracted criticism.


    There are also issues for private investors in reproducing the Yale approach.

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