April 15, 2021
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- In this week's newsletter: Coinbase, dogecoin, Tiger, Madoff, housing, renting, and much more. All in 1,555 words, a 6-minute read.
1 big thing: The crypto bet gets real
Yesterday saw more crypto speculation than any other day in history.
- By the numbers: Coinbase, the stock, had $30 billion of trading activity on Wednesday alone. That's more than all the cryptocurrency that Coinbase, the company, trades in a week.
- Other crypto assets surged. Bitcoin and ethereum both hit new highs yesterday, dogecoin spiked, and digital artist Pak sold $17 million of his work at Sotheby's.
Why it matters: The price rises have created astonishing wealth — Coinbase CEO Brian Armstrong, for instance, earned $60 million last year and is now worth about $16 billion. But that's not because the grand visions for crypto's potential are anywhere close to becoming a reality.
Flashback: "Venture capitalists are right to be crazy about Bitcoin," wrote Axios' Dan Primack in 2014.
- Dan saw crypto disrupting the payments industry and other incumbents: "What if you no longer needed a phone company to create phone numbers? Or what if your web searches no longer needed to go through Google’s servers?"
- I was skeptical: "My bet is on Goliath," I wrote, "not David."
So far, Goliath has not been disrupted. Crypto has essentially zero market share in payments, or phone numbers, or web search, or any other real-world application bar wealth hoarding.
- Yet Dan was right in the only way that counts, at least as far as VCs are concerned. They made astonishing amounts of money, mainly just riding the value of bitcoin upwards. (Coinbase was a great investment in 2012, but still not as great as simply buying bitcoin.)
Where it stands: In the harsh glare of the public markets, Coinbase can look a bit underwhelming.
- It's very proud of its $1.8 billion in revenue and $800 million of profit last quarter — but compare that to Goldman Sachs, on a similar valuation, with $17.7 billion in revenue and $6.8 billion in earnings over the same period.
- Reality check: It's not even clear that Coinbase's profits will grow. Substantially all of Coinbase's revenue comes from taking an enormous commission on crypto trades. As we've seen in the stock market, large commissions in hot markets have a habit of trending towards zero very quickly.
The first day of trading in Coinbase stock saw new investors lose about $3.4 billion in total. (That's the difference between the final trade of $328.28 and the volume-weighted average price of $369.94, multiplied by total volume of 81 million shares.)
- That's more than six times the $525 million that Coinbase has raised in total outside investment.
The bottom line: Up until yesterday, crypto was a bit like play money: Easy come, easy go. Now that Coinbase is a public company and all-round crypto bellwether, things feel much more real.
2. The silliest bubble
Unlike bitcoin or GameStop stock, dogecoin — a literal joke of a cryptocurrency — is not supply-constrained. If you want more of it, you can mine it — and then, presumably, sell it, given the profit margin of about 57%.
- The irrational price rises in cryptocurrencies like dogecoin perhaps help explain why 62% of crypto investors, including 58% of investors with less than $10,000 in crypto investments, expect that they will get rich from their investments in cryptocurrency.
- Only 18% of crypto investors think it "unlikely" that their activity will make them rich.
The big picture: While most investment advice says that wealthier people can afford to take on more risk, that might not be happening in crypto.
- Driving the news: 30% of Black investors own cryptocurrency, partly thanks to Clubhouse groups like Black Bitcoin Billionaires.
- Tani Chambers, of Black Women Who Invest, told Bloomberg that "We have to take some high risks and make the investments that maybe are a little bit more risky than conservative because we are playing catch-up."
3. What we're reading: The VC momentum trade
A firm you've probably never heard of is disrupting the surprisingly hidebound venture capital industry and making money as fast as it can.
- Why it matters: Tiger Global Management has realized that there's something unique about the current moment in investing, and is seizing the day. Think of it like momentum investing, but with private companies.
The big picture: Tiger is a secretive hedge fund that competes head-to-head with top-tier VCs to invest in the hottest startups while the market tide is lifting nearly all boats.
- Everett Randle is a partner at Founders Fund, who has competed directly with Tiger, and he has now written an excellent post detailing their M.O.
How it works: Tiger has a well-deserved reputation in the industry for writing bigger checks, more quickly, at higher valuations, with fewer strings attached, than any big VC. This works because:
- As a hedge fund running about $65 billion in total, they find it easier to raise massive funds — their 13th is over $6.6 billion. That in turn means they need to write bigger checks in order to move the needle.
- By moving fast, they avoid sitting on their own investors' cash for as long as three years. Even if their per-investment returns are lower, their overall returns can still be higher.
- Missing out on a hot deal is a much bigger mistake in VC than overpaying for the same deal. (Tiger itself learned that lesson with Alibaba.) Successful VC investments are never successful because there was haggling over the valuation. So Tiger deliberately overpays — and often shuts out rival VCs in the process.
- Tiger doesn't believe that VCs really add much value beyond the cash they invest. So it doesn't take board seats or otherwise interfere with its portfolio companies. That can be refreshing to veteran entrepreneurs.
- Tiger can free-ride on the top-tier VCs by effectively outsourcing due diligence to them. If the likes of Sequoia and Kleiner Perkins and Andreessen Horowitz all have term sheets out to a company, Tiger is happy to trust their judgment.
The bottom line: Some VCs, like Union Square Ventures, are fundamentally value investors: They don't like overpaying and fear their investments will fall in value. Tiger is the opposite. So long as the music is playing, they'll be the first on the dance floor.
- It's a strategy that has worked extremely well so far.
4. The biggest disrupter of them all
Bernie Madoff died yesterday — a man who arguably did more to disrupt Wall Street than anybody else in the past 30 years.
Why it matters: Madoff invented payment for order flow, the controversial technique that allows brokerages like Robinhood to charge $0 commission.
- Madoff was also a driving force behind (and sometime chairman of) the Nasdaq, the exchange that grew to rival the mighty NYSE itself.
Most importantly, the collapse of Madoff's multibillion-dollar Ponzi scheme in 2008 was instrumental in creating broad mistrust of Wall Street as a whole.
- While investments go up and down, banks need to be trusted as honest brokers. But it soon became obvious that Madoff's scheme only lasted as long as it did because it was enabled by the likes of JPMorgan.
The bottom line: Madoff has a lot to answer for. The rise of the Tea Party, the rise of trustless cryptocurrencies, even the rise of Donald Trump — all of these things can be dated back to the shock that America felt when Wall Street was revealed in 2008 to be deeply corrupt.
5. The dispiriting news on housing
It's a discouraging scene: Bidding wars, soaring prices, and fears that homeownership is becoming out of reach for millions of Americans. We're in a housing frenzy, driven by a massive shortage of inventory — and no one seems to be happy about it.
Why it matters: Not all bubbles burst. Real estate, in particular, tends to rise in value much more easily than it falls. Besides, says National Association of Realtors chief economist Lawrence Yun, this "is not a bubble. It is simply lack of supply."
The big picture: Prices are being driven upwards by a combination of factors, including continued low mortgage rates, a pandemic-era construction slowdown, a desire for more space as people work increasingly from home, and a stock market driven increase in money available for downpayment.
The bottom line: Housing prices are likely to remain high and rising for a while yet. Go deeper.
6. The better news on rentals
The K-shaped recovery is most clearly visible in the chart of house prices versus rental prices.
- While richer homeowners with cheap mortgages seeking more space have driven prices upwards, poorer renters have often been struggling just to make rent at all, and landlords have had little if any pricing power.
The big picture: There's a shortage of rental properties, too. There are just under 43 million of them in total, per U.S. Census Bureau data — a number that represents a decline of 278,000 units in the past year.
- Rental properties still carry something of a stigma in the U.S., with many of the most desirable neighborhoods and school districts having little or no rental availability. Analysts see little prospect that will change any time soon.
7. The spending boom
8. Coming up: Apple kicks off tech event season
Apple is expected to announce new hardware products during an event on April 20, writes Axios' Hope King.
What's happening: Axios' Ina Fried writes that Apple has yet to introduce several long-anticipated products, including updates to the iPad line and AirTags, small devices used for tracking physical objects.
- Situational awareness: Apple is under regulatory pressure for its dominance of the App Store and will testify in the Senate next week.
9. Building of the week: Selimiye Mosque
Selimiye Mosque was built in 1575 by the great Ottoman architect Mimar Sinan in what is now Edirne, Turkey.
- Its great central dome and clean lines set the standard for Islamic architecture for centuries; its slender minarets dominate the skyline to this day.
- The whole complex covers more than 265,000 square feet, and includes two symmetrical square madrasas as well as a row of shops.
Finally: Remember when Uber burned through $1 billion in Southeast Asia, only to ignominiously admit defeat and retreat with nothing but a minority stake in its biggest competitor? Well, that stake, in Grab, is now worth $5 billion. Sometimes losing pays.