$21 Trillion Crypto Catalyst and Self-Fulfilling “Memephesy”
$21 Trillion Crypto Catalyst and Self-Fulfilling “Memephesy”
In this week's issue, we dive into the AMTD-driven meme stock rally, a $21 trillion institutional vote of confidence for crypto, and more...
Good morning MIMs,
Before we dive into this week’s issue, remember that stocks have shielded investors from inflation 100% of the time in any 15-year time window—including the 1970s, the worst inflation breakout in the U.S.
They even beat gold, the supposed king of inflation hedges, which retained its purchasing power in only half of 15-year periods.
Source: Goldman Sachs
🚀 Digital Assets
$21 Trillion Crypto Catalyst with a Catch
Last week, America’s largest crypto exchange, Coinbase, announced a partnership with BlackRock—the biggest asset manager in the world—to bring bitcoin to institutional investors at scale.
The news marks a huge leap forward in bitcoin’s institutional adoption, which brought out a flurry of bold calls.
Dan Tapiero, the founder of 10T, a near $1 billion crypto fund, predicted that Blackrock will open the floodgates of capital into crypto and push its price into seven figures: “5% shift in [Blackrock] assets is $500 billion greater than [today’s bitcoin] value today. A catalyst for a path to $250,000+ [bitcoin] is becoming clear,” he tweeted.
Yet, bitcoin and other major cryptos have merely tracked the stock market on the news. Why is crypto so indifferent to such a big institutional vote of confidence?
🔍 Zooming out—bitcoin's long, winding path to institutional adoption
Let's look at what this partnership actually means.
In short, Coinbase will provide Blackrock’s “Aladdin” clients with direct access to bitcoin. For the first time, most institutional investors will be able to hold, trade, and broker the actual cryptocurrency instead of derivative instruments.
Aladdin is Blackrock's flagship asset management platform that serves as a “dashboard” for some of the biggest fund managers in the world. As of 2020, it administered a crazy $21.6 trillion, which comes to around 7% of all assets in the world.
But while coming on Aladdin theoretically opens a door to trillions of institutional dollars, bitcoin’s sluggish reaction hints that big investors won’t rush to back up the truck on crypto—especially in light of recent events.
“This year has been awful for crypto, with a couple trillion dollars of value wiped out and the liquidation of several large hedge funds and exchanges, not to mention the resultant collateral damage in the non-fungible token, or NFT, space.” Bloomberg columnist Jared Dillian wrote.
“More people are now questioning the viability and usefulness of the blockchain technology that underpins crypto,” he added.
Remember that the Blackrock-Coinbase partnership wasn’t the only institutional win for bitcoin this year.
This past April, Fidelity announced that it would become the first asset manager to offer bitcoin in 401(k) plans. Considering savers hold over $12 trillion in 401(k)s, even a tiny allocation could blow any cryptocurrency through the roof.
But just like bitcoin’s addition to Aladdin, 401ks will likely be more of a gradual long-term tailwind than a short-term boost.
It has to do with the fact that most of that $12 trillion in 401(k)s is parked in “target-date funds” and none of those funds are allocating even a sliver of their portfolios to bitcoin yet because bitcoin is still too volatile and unregulated.
“It’s something to watch but a ways out,” David Ireland, a fund manager at SSGA overseeing $150 billion in target-date assets, told CNBC. “It’s certainly not a hard no, but there’s a lot more, I think, to understand here.”
🔮 Looking ahead—we are getting there
Bitcoin’s string of positive news shows that it stands a real chance to become a legit alternative asset class, which deserves a meaningful allocation in institutional portfolios.
That said, it would be naive to expect trillions of institutional dollars to pour into crypto overnight.
While institutions can theoretically deploy that money, in reality, they can’t due to legal and reputational risks. So, until there's a strong regulatory framework that governs crypto, most fund managers won’t splurge on bitcoin.
As Dillian wrote: “The best thing for the crypto world would be the last thing it would ever want to see: regulation. I say this as someone who generally has a dim view of regulation. Getting rid of all the scams and the pump-and-dump schemes would make crypto a safer place to invest.”
We are getting there.
Since June, the Senate has been hammering out a landmark crypto legislation called the Responsible Financial Innovations Act. For their part, EU watchdogs are pushing their own set of crypto rules that will reportedly come into effect in 2023.
📖 Recommended reads:
But again, that won't happen overnight.
📈 Stocks
The Self-Fulfilling “Memephesy”
Are Reddit traders back at it again?
After listing in New York, a small, obscure Hong Kong company called AMTD Digital (HKD) exploded a crazy 14,000% before crashing this week—which then inspired a bout of sporadic rallies in US companies.
In the past week, movie theater chain AMC jumped 64%. Video game retailer GameStop—which was caught in last year’s meme mania— went up 26%. And struggling home furnishing retailer Bed Bath & Beyond (BBBY) nearly doubled.
📖 Recommended read: Dan’s Forbes column on how meme trading works
The sudden, baseless interest in these companies prompted speculations about the comeback of Reddit traders or even market manipulation. But the real culprit here could be a mere typo.
🖼️ The big picture—AMTD is not a meme stock
Let’s take a closer look at AMTD’s boom and bust.
AMTD is a three-year-old fintech company based in Hong Kong, which debuted on the New York Stock Exchange on July 15. On the listing day, the stock was trading at $7.8. At its intraday peak last Wednesday, the stock was selling for $2,555.
Consider how insane the latter price is:
At $2,555, AMTD’s price translated to a $470 billion market cap, which put a mere 50-person company among the top-10 most valuable companies in the world, beating giants like Visa, Tencent, and Meta.
Meanwhile, the company generated just $22 million in earnings in the past year. This means that at its peak, the stock was trading at a p/e of 15,000. That’s 15x more expensive than Tesla’s “richly valued” stock.
But while AMTD ticks most of the marks of a meme stock—it’s small, obscure, and insanely overvalued—there’s one oddity that gives away that it may not be one. It has to do with trading frequency.
As Bloomberg’s eagle-eye columnist Matthew Brooker pointed out:
“The height of the GameStop fever, early last year, was accompanied by a surge in volume. On Jan. 22, 2021, for example, when the price rose 51%, the number of shares changing hands totaled 788.6 million. That’s more than three times the stock available for trading, known as the float. By comparison, AMTD Digital’s volume peaked at 2.4 million shares on July 28 — less than 12% of the outstanding listed total. ”
🔮 A self-fulfilling prophecy
In all likelihood, AMTD is just one big misunderstanding, and there’s one sound theory that may explain it: mistaken tickers.
As Brooker speculates, “Could mistaken identity even have played a part? AMTD Digital has an interesting stock ticker — HKD, better known as the abbreviation for the Hong Kong dollar. Meanwhile, the ticker of AMTD Idea is AMTD — curiously close to AMD, for Advanced Micro Devices Inc., a $158 billion company with a far bigger public float that has rallied 33% since the start of July.”
It wouldn’t be the first time. Think Zoom Technologies’s 70,000% rally in 2019 when investors confused it with Zoom Video Communications, a company that runs the world’s #1 video conferencing platform.
All this means that the post-AMTD “mementum” in a handful of stocks may be nothing more than a self-fulling prophecy that will dwindle as soon as the market trips again.
🏛️ Macro
Here’s a run-through of the most important macro developments this week:
After the months-long Russia’s Black Sea blockage, four cargo ships departed Ukraine’s newly opened grain ports, which gives a sign of hope that food inflation will ease and, more important, the developing world will dodge widespread famines.
In July, the US unexpectedly added 528,000 new jobs, bringing unemployment to a record low of 3.5%. This marks the tightest job market in half a century, achieved only once just before the pandemic. Although it’s great news for the economy, it’s not so for stocks because it gives the Fed more wiggle room to raise rates. And as we know, higher rates are bad for stocks (📖 Recommended read: Dan’s explainer on why rates are bad for stocks.)
For all Biden’s diplomatic efforts, OPEC mustered just a 100,000 barrel increase in its September oil output, which is the most minuscule hike in history. The OPEC’s inflexibility is keeping a floor under oil prices as the economy enters a “technical” recession, which raises the risk of stagflation.
China has wrapped up its impromptu military drills targeted at Taiwan that began during Pelosi’s provocative visit. That reaffirms that China’s response was more political muscle flexing than an actual preparation for conventional war. One less Black Swan event to keep investors up at night.
The headline CPI for July came out at a less-than-expected 8.5%, which is half a percent lower than June. That’s excellent news for two reasons: 1) inflation may indeed have peaked and 2) the slowdown in price increases gives hope that the Fed will go softer on tightening.
💬 Quote MIMs are pondering
“I believe most investors have their eye on the wrong ball. One quarter’s or one year’s performance is meaningless at best and a harmful distraction at worst. But most investment committees still spend the first hour of every meeting discussing returns in the most recent quarter and the year to date. If everyone else is focusing on something that doesn’t matter and ignoring the thing that does, investors can profitably diverge from the pack by blocking out short-term concerns and maintaining a laser focus on long-term capital deployment.”
— Howard Marks, Co-Chairman of Oakwood Capital
📖 Recommended read: Howard Marks's July memo