🟪 Thursday, October 9

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

— Paul Samuelson

Thursday links: cryptoization, a dark DAT, and the case for ads  

The cryptoization of investing

The facade of the New York Stock Exchange was covered by an advertisement for a betting website this week after the exchange’s owner, ICE, announced a $2 billion investment in Polymarket.

ICE is not a free-spending conglomerate, so if they think 25% of Polymarket is worth $2 billion of their scarce capital, they must also think gambling will be an increasingly big part of the investing industry it’s at the center of.

If so, I suspect crypto deserves much of the credit (or blame). 

There have been many signs.

For example, the financier planning to offer shares in his collection of Rembrandts and other Dutch Golden Age paintings on a stock exchange got the idea from crypto.

“Kaplan's solution was inspired during the pandemic by the NFT phenomenon,” The Art Newspaper reported, “which gave him the idea of fractionalising the collection.”

Collectibles like fine art have long been treated as investments, of course, but not so much that people thought they belonged on stock exchanges. 

Crypto may have normalized that mindset.

The valuation expert Aswath Damodoran classifies bitcoin as a “collectible” — along with art, gold, and Pokemon cards — for the simple reason that, because it has no cashflows, it can only be priced, not valued.

But no one questions bitcoin being listed on stock exchanges, so maybe those other things should be, too?

Kaplan says he’s bringing fine art to the stock exchange so that more people will appreciate it: “If we can allow people to take an ownership interest in Rembrandt, they will, by definition, take interest in Rembrandt.”

Giving stock market investors an ownership interest in bitcoin may have done something similar by getting people to take an interest in central-bank money printing and ballooning US debt.

People have worried about that for decades, but the obvious hedge — gold — remained on the lunatic fringe of investing. Few professional investors even considered it.

Owning gold seems much more mainstream now, and I unscientifically credit (or blame) Bitcoin for that. 

If bitcoiners hadn’t been talking about it for years, I doubt “debasement trade” would be a trending topic right now.

That might turn out for the best if the dollar really does get thoroughly debased.

But crypto’s general disdain for traditional investing — and enthusiasm for things like prediction market betting — seems to be seeping into the mainstream, too, and that might have less salutary effects.

Joe Weisenthal’s takeaway from ICE’s Polymarket investment, for example, is that “all the lines between speculation and hedging or gambling and investing are going away.”

It’s hard to disagree when Robinhood reports that its customers traded two billion prediction market contracts in the most recent quarter.

At the risk of being paternalistic, I’m not sure those contracts should be available in the same app that shares of Nvidia, Alphabet, and Berkshire Hathaway are.

Berkshire’s Charlie Munger once warned against treating stocks like baseball cards, because, he said, trying to predict the irrational behavior of other investors (or collectors) is a fool’s errand. 

But the real risk might be treating baseball cards like stocks.

Or crypto tokens. Or tokenized prediction markets.

It’s happening, though. "Our partnership with ICE marks a major step in bringing prediction markets into the financial mainstream," Polymarket’s Shayne Coplan said.

If so, crypto should get a large part of the credit/blame.

When DATs go dark

In a short-selling report, the activist hedge fund Kerrisdale Capital accuses the largest Ethereum DAT, BMNR, of being not just overvalued, but dishonest.

“The recent $365 million direct offering, trumpeted as ‘materially accretive’ at a headline $70 price, was in reality a discounted giveaway,” they write.

BMNR shares were trading around $61 at the time, suggesting the new shares were sold at a modestly accretive 14% premium. 

But because they came with attached warrants, Kerrisdale estimates the new shares were sold at a 31% discount to the market price.

If so, Tom Lee will have some explaining to do because the stated purpose of BMNR is to increase ETH per share, and this does the opposite.

“The warrants immediately siphoned value from common shareholders,” Kerrisdale adds, while accusing management of sacrificing “long-term credibility for short-term cash.”

The report also accuses BMNR of “going dark” on the number of shares they’ve issued, presumably to make it difficult for existing investors to know whether they’re being diluted by new share sales. 

If the largest ETH DAT really has been reduced to diluting existing shareholders by selling shares at a discount to NAV, there’s not much hope for the other, smaller DATs.

With investors now "conditioned to believe every rally will be met by more supply,” Kerrisdale warns, DATs are “chasing a model that is on its way to extinction.”

Yikes.

How ads saved the internet

Crypto lore has it that online advertising is the original sin of the internet: if internet-native money existed when Marc Andreessen was looking for a way to build payments into Netscape, the internet would have become a benevolent platform for direct payment (like Patreon) instead of a malevolent, attention-hacking advertising machine (like Facebook).

It’s an appealing narrative: everyone hates ads, and crypto is the benevolent alternative.

But are ads really so bad for us?

Meta CMO Alex Schulz argues that online ads enable new businesses: “It’s democratized all this stuff, so startups can do things that before you’d have to buy a Superbowl ad to do.”

Schulz also defends advertising more generally: “People get products they love, companies employ more people, the economy grows. It’s just good.”

He might even be underselling it, because ads are more than just good for business — they moderate our media, too.

Coinbase’s director of ads Antonio Garcia Martinez recounts that media in the US started out hyper-partisan, with 19th-century newspapers overtly representing one political party or another.

It was only with the advent of advertising that they started pitching themselves as objective, he says: “Ads kept the media honest because you couldn’t take an overt position.”

Martinez cites the New York Times as an example, noting that the paper moved to the middle of the political spectrum so it could “sell ads to Macy’s without offending anybody.”

But this changed again with their shift to a subscription model: “When you’re charging a certain demographic, you’re gonna tell that demographic what they want to hear,” a16z’s Erik Torenberg adds.

Alex Tabarrok makes the same point in economist terms: “Advertisers put a moderating force on the New York Times [because] they care about the marginal consumer. They want as many eyeballs as possible, and that tends to mean they stick to the middle.”

After putting up a paywall, by contrast, the Times became more concerned with the “infra-marginal consumer” — a customer willing to pay more for the same content (ie, the opposite of the marginal consumer).

Infra-marginal consumers tend to be more partisan, which incentivizes paywalled-media sites to “cater even more to subscribers [who] want to be served up their view of the world.”

In short, revenue for ad-based media comes from audience size, so outlets optimize for breadth and revenue for subscription-based media comes from an audience’s willingness to pay, so outlets optimize for depth.

But what happens when the revenue comes from memecoins?

Pump.fun’s high-minded ambition to disrupt the market for user-generated content is predicated on the idea that giving creators a share of memecoin trading fees is better than giving them a share of ad revenue.

Presumably, that revenue will be a function of grabbing and then holding an audience’s attention. 

So pump.fun, I'm guessing, will optimize for attention-getting chaos.

If ads made media more moderate, and subscriptions made it more partisan, memecoins are sure to make it more chaotic.

Please click the ads in this newsletter.

The fate of the world depends on it.

— Byron Gilliam

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