ICOs, Airlines and Bitcoin ETFs


Here is a fun Reuters investigation of events at Tezos, one of the more successful initial coin offerings in terms of fundraising (it raised $232 million worth of bitcoin and ether, now worth some $400 million), but one that has been less successful in doing anything with the money. “Progress since July has fallen short of our expectations, and the community has understandably expressed concerns over the lack of communication around this sudden change of pace,” said Tezos co-founders Arthur and Kathleen Breitman ominously in a Medium post this week, and derivatives on Tezos tokens — “Tezzies” — “fell as much as 31 percent.” Also back when Tezos was doing the ICO, its public-relations company claimed that its technology had been adopted by Ernst & Young, Deloitte, and LexiFi, none of which was true. Oops!

Tezos’s big headline problem right now is a governance battle between the Breitmans, who founded and control the company that is building the project, and Johann Gevers, “the president of a Swiss foundation the couple helped establish to handle the coin offering and promote and develop the Tezos computer network.” But maybe a bigger problem is … let us say, some varying conceptions about what an initial coin offering even is. Here is the founders’ perspective:

Kathleen Breitman told Reuters that participating in the Tezos fundraiser was like contributing to a public television station and receiving “a tote bag” in return. “That’s kind of the same thing here,” she said.

The fundraiser’s terms called the contributions “a non-refundable donation” and not a “speculative investment.”

Yes, right, clear enough, if you participated in the Tezos ICO, you were giving a charity a non-refundable donation. Reuters went to a Silicon Valley venture-capital investor who invested in the Breitmans’ company and was a big donor in the ICO, and ran that interpretation by him in a glorious deadpan. He was not amused:

Draper told Reuters that cryptocurrencies are commodities like pork bellies, and characterized acquiring Tezzies as a purchase rather than a donation. Asked this month how much he donated during the Tezos fundraiser, he replied via email, “You mean how much I bought? A lot.”

Hi yes look I am sure that the dispute with the foundation guy is taking up a lot of time and attention, but this is your real governance problem, no? If you think that your investors gave you money as a “donation,” and they think that they gave you the money as an “investment,” then you have some conflicting expectations! Also, though, if you can convince prominent venture capitalists to give you money that you think is a “donation” and that they think is an “investment,” and if you are right, then that is in some ways the ideal approach to fundraising. You can raise a lot of money, because sophisticated investors think they will make a profit, but you can also keep all of it, because they weren’t quite sophisticated enough to realize it was a donation.

Should index funds be illegal?

I dunno, on the one hand, this story about United Continental Holdings Inc. suggests that the rise in common ownership in the airline industry — in which the same investors own shares in all the big airlines, and so in theory don’t want them to compete against each other by slashing margins — hasn’t had that much effect. United has been engaged in “aggressive growth and a price war with discounters,” lowering its fares.

On the other hand, investors strenuously object. “Analysts faulted it for endangering its profit goals by implementing a no-frills ‘basic economy’ offering too widely.” On the earnings call, “analysts pressed Chief Executive Officer Oscar Munoz and President Scott Kirby on how they planned to deal with rising costs and falling pricing power. Would they rein in growth in the face of fare weakness?” And now investors are talking about getting rid of the CEO:

Before the call, “we had heard rumblings from the investment community about another potential management change at United Continental,” Helane Becker, an analyst at Cowen & Co., said in a note to clients. After the call, “they aren’t rumblings, but full-fledged screams.”

If United’s shareholders — who also tend to be American Airlines shareholders, and Delta shareholders — actually fire United’s management for cutting fares and growing too aggressively, then I suppose that will be taken an anecdote in favor of the common-ownership-is-an-antitrust-problem thesis. 

Elsewhere in criticism of passive investing, Bernstein Research — which famously called passive investing “Worse Than Marxism” — is launching two exchange-traded funds. The funds will invest based on Bernstein’s research calls, though (“It’s technically a passive ETF, because it follows a given set of rules, but those rules are based on very active ingredients in the form of Bernstein Research”), so there’s really no inconsistency. Bernstein worries that Marxism involves allocating capital based on a single central decision-maker, while passive investing lacks even that. Allocating capital based on Bernstein research is fine.

Bitcoin ETF.

What is the point of a bitcoin exchange-traded fund?

An ETF would give retail investors as well as institutions an easy way to get exposure to bitcoin, compared with buying or selling it on digital exchanges and holding it on a wallet secured to the blockchain, the software ledger that powers bitcoin and its cousins.

That is from this story about how people are confident that there will eventually be a bitcoin ETF, and they’re excited for it. (“People are looking for something fresh and new in the ETF space,” says a product developer.) At some level I get the point that there are regulatory uses for a bitcoin ETF. If you are an investor with a mandate limited to holding securities — like some mutual funds or retirement accounts — then you can’t buy bitcoins, but you can buy shares of a bitcoin ETF. Now whether you should be able to do that is an open question — presumably you are restricted to buying securities for a reason — but I assume that some mandate-limited investors want to buy bitcoins, and regulatory arbitrage is one of the great main streams of financial innovation, and who am I to question it.

But I suspect that the main explanation is the one I quoted above: An ETF is “an easy way to get exposure to bitcoin, compared with” the insurmountable garbage that one goes through to acquire bitcoins directly and hold them securely. (Remember all the bitcoin enthusiasts who hold their private keys on paper in bank vaults.) The main reason many people don’t acquire bitcoins directly is not that they are mandate-limited to holding securities — most people don’t have a problem holding dollars, which are not securities — but that it is not especially easy to acquire and hold bitcoins. As a currency, bitcoin is frustratingly difficult — so much so that it may be easier to go to a broker and buy shares of an ETF to get exposure to bitcoin, rather than to hold it directly. 

Of course if you are buying shares in a bitcoin ETF it is to bet that the price of bitcoin will go up. If you are betting that the price of bitcoin will go up, it might be because you think that bitcoin will see further adoption as a currency. But the fact that you are buying shares of the ETF, rather than buying bitcoin directly, undermines that thesis. The need for a bitcoin ETF is an argument against buying it.

Hedge funds.

One aspect of the hedge fund business is investing clients’ money so that they make more money. Another aspect is raising money from clients to invest. There is an obvious linkage between those aspects — the more money you make for clients, the more likely they are to keep giving you money — but they are not the same thing. And there is a sense in which the latter is more important: If you are good at investing but have no client money, you have no hedge fund; if you are bad at investing but raise lots of client money, you have a very lucrative hedge fund. Anyway here’s a story about Maverick Capital Ltd., which is fundraising on the basis of losses:

Maverick’s flagship stock-picking hedge fund is down 2% this year through September after losing roughly 10% last year, missing out on the rally this year that has propelled U.S. stocks to record highs. Maverick’s new “recovery share” class would let existing clients invest more money in its hedge funds at 1% management fees and no performance fees, compared with the 1.75% and 17.5% fees, respectively, its clients most often pay.

I mean, one-and-zero isn’t actually lucrative — it really is client accommodation — but still I admire the approach. If you lose 10 percent a year and nonetheless have net inflows of client money — as Maverick did last year — then I think it is fair to say that you are good at running a hedge fund. Any criticism of your investing returns rather misses the point.

Elsewhere, Bloomberg News “analyzed five years of calls—2013 through 2017—from three of the largest hedge fund events: Robin Hood, the Sohn Investment Conference in New York and the SkyBridge Alternatives Conference, or SALT,” and found that their influence is declining.

Blockchain diplomas.

How can I tell if you have a degree from the Massachusetts Institute of Technology? One way would be for me to ask MIT. If they say yes, then you have a degree from MIT. If they say no, then you don’t. That is what having a degree from MIT, customarily, means: that MIT acknowledges you as a graduate. MIT is an important credentialing institution because a lot of people trust its degree-granting process. It is, to use the term of art, a trusted intermediary. It is thus well suited to keep the ledger of who has degrees. MIT’s list of people who have MIT degrees defines the set of people who have MIT degrees.

But you know whatever this is fine sure:

This summer, as part of a pilot program, a cohort of 111 graduates became the first to have the option to receive their diplomas on their smartphones via an app, in addition to the traditional format. The pilot resulted from a partnership between the MIT Registrar’s Office and Learning Machine, a Cambridge, Massachusetts-based software development company.

The app is called Blockcerts Wallet, and it enables students to quickly and easily get a verifiable, tamper-proof version of their diploma that they can share with employers, schools, family, and friends. To ensure the security of the diploma, the pilot utilizes the same blockchain technology that powers the digital currency Bitcoin.

“MIT has issued official records in a format that can exist even if the institution goes away,” says the Learning Machine guy. I guess that is an advantage! What happens if a job candidate shows a potential employer her MIT degree on a smartphone app, and the employer calls up MIT to check and MIT says “we have never heard of her, she is not an MIT graduate”? Does the employer trust MIT, or the app?

No no no no no, look, this is cute, and there is a real thing here. It is possible to imagine a future in which “identity” lives on “the blockchain” (a blockchain? several blockchains?). Instead of giving a landlord your Social Security number so he can run a credit check, and giving an employer your MIT transcript so it can confirm you have a degree, you could accumulate your credentials and endorsements and creditworthiness and whatever in a blockchain wallet. Your identity could be your blockchain public key, and when someone wants to endorse you for something — when MIT wants to give you a degree, when your landlord wants to acknowledge receipt of your rent payment — they could all do it there. It might all be more secure and efficient and open and useful than our current disorganized system of identification and credentialing. In that world, of course MIT would give out degrees on the blockchain, and calling up MIT to check on a degree would be a weird archaism.

But it is hard to be a first mover. What if I started my own app — powered by the blockchain or whatever — that gave out MIT degrees? You could whip out your phone and show an employer your MIT degree, that I gave you. In the imagined future of blockchain-based identity, employers would be accustomed to using in-blockchain methods of confirming that an MIT degree was actually conferred by MIT; my app would lack the requisite cryptographic proof, and would be ignored. In 2017, though, employers will just call up MIT to check, same as they would if you gave them a photocopied paper transcript. All the blockchain stuff, for now, is just for show.


That — complete with the capitalization and exclamation point — is the headline of this press release from National Beverage Corp. (ticker: FIZZ), the maker of LaCroix seltzer, whose stock has been down 19 percent this month. Why is that, if results are so strong? Well, bots:

Analyst pens headline that FIZZ is weak . . . what the writer advocated was to induce short sellers to stampede aboard the passive BOT trading wagon. Why? With passive investment accounting for over one-third of the market, which does not question logic if prices are equitable, BUT merely accepts the stampede-induced results! There is no governor or regulatory convenience that accesses the reasonableness of the market behavior. Where is the SEC watchdog?

I don’t really know what it means either, but I always enjoy market structure folklore, and you might too.

People are worried that people aren’t worried enough.

Here is an Artemis Capital Management research note warning about “the Global Short Volatility trade.” You can think of it largely as a Minskyan analysis of the current market situation — a lack of fear leading to strategies that rely on that continuing lack of fear, which are very fragile if conditions change — but with a snake:

More financial concepts should be illustrated with ouroboroi, since deep down that’s what most of them are. If you’re a vol trader and you get the Great Snake of Risk tattooed on your back, please send me a picture. Anyway the note touches on many of our other favorite worries, like stock buybacks (“The later stages of the 2009-2017 bull market are a valuation illusion built on share buyback alchemy”) and passive investing (“Active managers serve as a volatility buffer, willing to step in and buy undervalued stocks when the market is falling”).

People are worried about unicorns.

Here is a story about the $20 billion valuation of WeWork Cos., which seems to rely on convincing investors that it is a “tech” company and so worth whatever your imagination will support (“Fueled by Silicon Valley Pixie Dust,” says the headline) rather than a “real estate company” and so worth an amount based on rental income. It is sometimes hard to tell, with a private buzzy tech unicorn, how much of its valuation premium is based on being private and not fully subject to market forces, and how much of it is based on structural features in its securities that make it worth less than its headline valuation, and how much of it is based on genuinely convincing investors that it is a different and more valuable business model from whatever came before. Usually you find out at the initial public offering.

Elsewhere, Lyft Inc. raised $1 billion in funding at an $11 billion valuation in a round led by Alphabet Inc.’s venture arm, because an ironclad rule of ride-hailing investing is that if you invest in one of them (as Alphabet invests in Uber Technologies Inc.) you have to invest in all of them. 

Things happen.

Wall Street’s Robots Still Have a Lot to Learn About Being a Human Trader. Canceling Puerto Rico Debt ‘Impractical,’ Says Hedge Fund Billionaire Klarman. ‘I Think We Got Away With It’: Listen to HSBC Trader Phone Calls. Trading Firms Fear Mutiny on MiFID Rule Demanding Passport Data. Wealthy Families Are Winning Deals Away From Private Equity. John Cochrane on equity-financed banking. LinkedIn founder Reid Hoffman: ‘Board games inspired my business strategy.’ “Everything that’s happened in my life has made me ready for this moment—to help affluent guys in early recovery who are going through the same thing that I went through.” Pacemaker software updates to prevent hacking may also be risky. “The mean of the maximum of a set of random variables is higher than the max of the individual means.” Dogs have pet facial expressions to use on humans, study finds. “We’re sad to announce that a few weeks into training, Lulu began to show signs that she wasn’t interested in detecting explosive odors.” Cockatoo barks at dogs. 

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To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net