I’ve been deeply confused by fundamental investing for several years, which is – perhaps, why I tend to stick to short term trading. But given recent moves in markets, there is some reflection to be done.
I started my journey trading in 2006, when it made a lot of sense financially. By 2011 it was clear that trading was to become a vastly less appealing career. But it was too late - I’d already invested, and had personal reasons to be in the space. Not to mention a love of markets. Nonetheless - I was economically rational. I saw the tech bubble forming and reluctantly jumped in – making sure to keep my focus on capital markets so I’d had optionality to get back into trading. I joined Palantir Technologies.
I hadn’t thought about Palantir stock since about 2017 when I sold my shares. Until 2020, of course. When suddenly taxi drivers were telling me that it was still very early. I’d ask them what they thought of various issues, to which they’d give me a confused look and say they liked Alex Karp, or they thought the military needed to modernize. That Big Data was the next big thing and it was still very early. This was obviously humorous to me, as it almost certainly was not early. Even when I joined in 2011, people smarter than me frequently told me I was quite late to the “Big Data Bubble”.
Palantir becoming a meme stock was a strange moment of cognitive dissonance for me, as I’d spent the past several years focusing on quantifying retail market participation. Palantir was one of the last companies I’d expect to become a meme - as it has no widely adopted consumer product, or recognizable brand. I have no opinion on the stock, nor any position. But I do have an opinion that we’re now seeing a generation of “early” investors realizing very rapidly that they’re not early at all, and that they’ve put their trust in a group of charlatans feeding them cope.
I felt the same way about crypto. I got involved in the space relatively early (first hype cycle), and made what I thought were some good gains on the long side. It made sense to put some money in because I couldn’t trade stocks due to my other capital markets focused work. In hindsight - my gains were laughably small. Was my process wrong though? Scaling and adoption never really made sense. There weren’t any applications, and the digital gold narrative didn’t hold water. Gold doesn’t require the network to pay the miners in order to exist. If Gold miners disappeared, gold would go up. If Bitcoin miners disappeared, Bitcoin would go to zero. The vision of transaction scale was the only way to compensate miners over the long term assuming the 21m supply cap - and there were no obvious signs that would happen. Lightning / and L2 scaling have been memes for a long time but suffered from centralization and security flaws as I believe we’re about to find out the hard way with Block (FKA Square).
Having become sufficiently jaded, and informed - I made a decent PNL shorting Ethereum post Arthur Haye’s highly humorous “ETH is a Double Digit Shitcoin Speech” given in 2018 at a big crypto conference in SF - where it was also rumored that EOS’ treasury planned selling multiple billions of ETH at market when Bitmex launched its futures. This was on top of the fact that anyone who needed to get their money out of gold / Switzerland who was afraid of censorship via the Automatic Exchange of Information had done so by Feb 2018. So the whale bid was gone. Crypto Kitties was the primary NFT-like use case (and let us not forget to pour one out for Pepe Cash, rare digital art which also stalled out). And Dapps were too slow and inferior to their centralized counterparts to get users (sound familiar?). The 2018 crash had – in my view, very little to do with the hike cycle / balance sheet unwind (sound familiar??) – and much more to do with the lack of incremental whale buyers and failure of the technology to scale. Clogged mempools in both ETH and BTC during the first phase of the crash made people realize how fragile everything was, and it all got compounded by ICO sales all the way to the $90ish ETH lows when… lo and behold ETH perp yields went deeply negative on Bitmex (sound familiar??).
People who participated in the first 2 crypto bull runs would recognize that nothing has really changed. Dapps still suck vs centralized counterparts. BTC still doesn’t scale. Lightning / and ETH2 shipping in the next 2 quarters are literally the same narratives peddled 4 years ago! What’s strange about this is the narrative of “being still very early”. While much is uncertain, and I’d say there are a number of big changes to crypto flows (namely the introduction of massive VC investment, and the onslaught of CBDC headlines combined w police state actions in previously democratic countries) - what crypto and Palantir have in common is a vast number of people telling themselves “they too can get rich”.
It is cope.
The reality is, if you’re getting into tech, artificial intelligence, crypto or big data - you are not early. I know that for sure, because I’ve been knee deep in it for 10 years. I’ve worked in the space, traded it at hedge funds, and co-founded a successful tech company. So the question is - why do people think they’re still early? Enter ARK Investments.
There’s a charismatic “Idea Person” who has no grasp of numbers telling what people what they want to hear. This person accumulates capital, which blows up people who do have a grasp of numbers. Typically, society tends to dislike “nerds” or people making detailed models of Tesla’s Free Cash Flow. This impulse is the origin of the “Virgin vs Chad” meme you see everywhere on Twitter, or the Midwit meme you also see everywhere. People who can’t code or understand technology want to get all the wealth that the tech bros got. And Cathie Wood tells them they can!
The problem is that she has taken what likely was a successful investment philosophy and track record, and hyper extrapolated it with the help of literal megalomaniacs who blew up catastrophically already (Bill Hwang). And now, unsurprisingly, is far over her skis. Just this week she blew up in what would be a literal laugh out loud portfolio at any hedge fund. Roblox, Roku, TenX Genomics, Palantir and Draftkings! Imagine having the hubris to simultaneously cover the military industrial complex, online gambling, TV and human genetic enhancement under the same “thematic bet” on human progress. Moore’s Law Charts as an investment thesis?? It’s laughable and insane. If I ran that book into earnings down 30% ytd, and then every one of those companies missed- I’d have been shown the door immediately at any credible long/short pod. I’d be locked out of the office by Monday. But that doesn’t matter. What does matter is ARK owned all of these companies in massive size, and still has a $16B+ asset base. And Cathie Wood’s investors aren’t smart enough to fire her - indeed they’ve barely reduced positions during this down move.
People want to spare Cathie Wood – but the reality is that the money weighted average of her fund is near $100. At the current price of $65, it’s highly likely she’s actually negative in dollar PNL INCEPTION TO DATE.
Cathie Wood honestly seems like a great and upstanding person who isn’t trying to mislead people. But has manifested hubris. Chamath … however, is a different case entirely. He dissolved Social Capital after writing a fairly crazy investor letter calling Venture Capital a Ponzi scheme. And subsequently, he’s gone in rapid fire mode dumping on retail investors as fast as he can. He’s getting liquid. The thing is… I know for a fact Chamath is not dumb. He has hubris, but he is a survivor and is clinical/ rational in his actions. He’s dumping and accumulating cash because he thinks the entire thing is going to cave. Whereas Cathie Wood is a true believer, Chamath is a true cynic. He was early at AOL and Facebook, and knows, probably better than any living human - that we are not early.
Putting these two things together paints a fairly clear picture of what is likely to happen next.
Private venture capital firms such as Sequoia have yet to meaningfully mark down their investments to be in line with public comparables. And so far, it seems quite unlikely that this will happen. For example - I know a metaverse start up that could be a meaningful comparable for MatterPort raising a large up round. Their first round was in November. In November Matterport was trading at $32. Now it is at $7. If the start up had a similar share price, it’d be about $50. This isn’t just true in the “metaverse” - it’s true in many other areas as well - the most egregious being Chinese education. The difference between $50 and $7, is approximately the size of the gap between public and private valuations.
I’m not the only one who knows this. Say what you will about them, but billionaire tech investors aren’t dumb, and they understand 409as.
Because of their extreme historical returns, venture firms raised on ridiculously good terms with big lock ups. So there is not an immediate cash squeeze coming. In fact, if anything - they appear to be shoveling money out the door at a rapid pace with the consensus being “Scared money doesn’t make money” and reputable (?) people saying that the vast majority of venture returns are made at the end of the cycle and you aren’t getting paid to time it. But zooming out - there were 4 sources of exit liquidity for venture investment. ARK Investments. Spacs. Robinhood and IPOs. Crypto token sales. Of the 4, 3 are no longer viable. Stripe cancelled its much anticipated IPO. Spacs have been gutted. ARK has rugged. Only crypto markets seem able to absorb the sheer amount of selling that needs to be done to generate a meaningful cash on cash return.
You might be wondering why seemingly business casual dressed dudes with normal girlfriends who eat vegan are suddenly tweeting like 3d printed weaponry anarchocapitalists. It’s because crypto markets are their only hope for exit liquidity. You’re wondering why technologists are going all in on technology that hasn’t worked for years? You’re wondering why solidity devs are $900k bid despite the fact solidity is a shit language that doesn’t have a single app with more than 1m DAUs? Look no further fam. It’s desperation. Even Cathie Wood just announced she’s investing in on-chain analysts when she probably should have been tweeting a 5-whys about bleeding out on every one of her largest longs.
The good news for the VCs, is that crypto fundamentals look fairly good. The ETH 2 merge seems likely to happen. Bitcoin hash power has survived China leaving the market. Ted Cruz buying Bitcoin seems like the hammer won’t be coming down in the near term, and Brainard’s speech about CBDCs seems to be referencing Tether solvency in a “risk we’ve paid attention to and won’t be an issue” kind of way. And given Biden’s popularity issues, Melania’s NFT collection, in my view, looks criminally underpriced. Realpolitik is ascendant. Russia is mining Bitcoin. DBS of Singapore, smashed earnings and announced a substantial expansion of their crypto business - setting the country to be the Switzerland of crypto. Nobody will be able to agree on anything. Chaos will prevail - a market ideal for bearer assets and portable private keys. Canada’s actions to arrest and censor its own citizens will hyper charge the crypto narrative. And the fact that Biden seems set to make a CBDC announcement will start driving fears that the central banks intend on banning physical cash. The fact they keep saying they don’t intend on banning physical cash probably should make people realize that’s exactly what’s going to happen if they’ve been paying attention at all for the last 2 years.
The rally in crypto, if it is to come - fundamentally, will not be about the tech. It will be about trillions of dollars of unaccounted for cash needing to find a home given a suddenly adversarial government with a sudden fetish for authoritarianism combined with better tracking technologies through CBDCs. But it doesn’t matter where the source of the rally will come from. VCs will only care about liquidity. And thanks to the heavy handed actions of nation states - the liquidity, seems to be en route.
At peak assets, private investors will need crypto to make up for all of the liquidity lost due to ARK, SPACs, the IPO market, and Chinternet. It will need to make up for the liquidity lost due to rate hikes and the Fed balance sheet. And just like any other liquidity seeking venture – it won’t be about fundamentals. It’s all about incentives. Raising the next fund. Dumping on retail.
The problem of course, is the entire thing will be completely psychotic. Nobody really will be playing Play to Earn games. People don’t actually want to use blockchain based products because they’re slow and they suck. Governance tokens assume that there’s value in active engagement w protocol decisions which is pretty dubious. And the even bigger problem is that if the fundamental move in crypto is about forced buyers – Bitcoin will consistently outperform, because it is the most liquid. Venture funds will increasingly be trading liquid tokens, and those tokens will underperform Bitcoin. Family offices will simply pile into Bitcoin instead, making a mirror image of what happened to the mutual fund industry in the US due to the rise of passive investment.
Those are problems for tomorrow. But the confluence of the rise of authoritarianism, and a desperate need for venture exit liquidity due to a generation of “early” investors finding out they’re in fact quite late– make this a trading market for today. You’re not still early. Early is precisely the wrong term to describe a market created by what comes after the End of History. You’ll be at the mercy of insiders who are not used to liquid markets. There are no rules. There will be network attacks, and trading bearer assets through decentralized exchanges will not fit well into existing fund mandates. But that’s what is called for. For those who are prepared to buckle up, desperate counterparties at peak capital who have never traded in liquid markets make for appealing competitors.
The bull case is that so much capital will flow in that a post nationstate web3 + metaverse world will come to pass. But making predictions like that is above my pay grade. I’m just a Chaos marine trying to fight eternally and I suddenly sense the bravest and most honorable private investors of the Imperium here with me in the Warp.
I’d like to end this with an observation that Peter Thiel isn’t a dumb guy. I’ve long termed Bitcoin + Palantir as “Thiel Parity”. A world where crypto is ascendant is not one where AI based citizen tracking is ascendant. And I think that’s a good framing for this week’s price action. Thiel essentially penned this idea himself in the intro to The Sovereign Individual. The Panopticon’s mirrors are cracking and I see strange beings grinning back at me – reflecting from the broken glass.
** None of this is investment advice, solicitation for securities, and is solely market commentary. I hold no liability for any decisions you make based on this piece