🟪 The Unexpected Bear Case for BONK: Earnings

The Unexpected Bear Case for BONK: Earnings

The classic illustration of biologist Amotz Zahavi’s “handicap principle” is the peacock, whose extravagant tail feathers seem to serve no evolutionary purpose.

Puzzling out why a trait like that would persist in a Darwinian world led to Zahavi’s theory that there’s signaling value in prominently displaying traits that are an obvious handicap.

In the case of bachelor peacocks, elaborate tail feathers are a signal to unattached peahens that they’re so strong and capable they can survive in the wild despite the handicap of having to drag around their cumbersome tails.

This sends a message to predators, too. 

A gazelle that makes itself conspicuous by needlessly jumping up and down is signaling that they’re such fast runners they can reveal their exact whereabouts, waste a lot to energy and still outrun any predator that foolishly chooses to give chase.

This behavior is observable in even more unforgiving environments, like elementary school playgrounds. 

In a game of tag, the kid who taunts whoever is “it” by bobbing around just out of arm’s reach is signaling that they’re so confident in their superior abilities it wouldn’t be worth the effort to chase them.

Extremely long fingernails may similarly be an exercise in signaling (the message being signaled is left to the reader as an exercise).

The handicap principle is broader than this, explaining many more otherwise inexplicable behaviors, but Zahari’s theory remains most easily understood in its ability to explain the appeal of cumbersome peacock feathers to potential mating partners.

It may also explain the appeal of memecoins to potential investors.

Wen peacock memecoin?

Memecoins continue to flourish while meme stocks have floundered — the exchange-listed MEME ETF was discontinued by its sponsor last month after assets under management fell to just $2.6 million.

This may be because meme stocks were not meme-y enough.

Despite embracing their unexpected memeness, CEOs at companies like AMC and Gamestop still had businesses to run, quarterly earnings to report, and forecasts to make (and then miss).

These quarterly updates sent mixed messages to investors: Should we be in it for the meme? Or the operating business?

That, in turn, caused problems for those CEOs because sending mixed messages results in having a mixed shareholder base.

For many years, Amazon never had to earn a profit because Jeff Bezos continually told everyone not to expect one — having like-minded shareholders allowed Bezos to swing for the fences, profits be damned.

Bezos self-selected for shareholders willing to think in decades, not quarters, and Amazon’s earnings reports were therefore something of a non-event. 

For companies whose stocks turned into memes, however, every earnings report is a reminder to shareholders that what they own is not just an idea, but an operating business — in every case, a bad one.

This is not, however, a problem for memecoins. 

There are no quarterly estimates for a memecoin to miss. No expectations to disappoint. No businesses to run into the ground.

That, I think, is at least partly why Dogecoin, which expressly does nothing, remains a top 10 cryptocurrency — much to the annoyance of all of the cryptocurrencies that do try to do things.

Like a male peacock displaying its feathers, Dogecoin signals its value as a meme by flaunting its utter uselessness. 

Buyers are therefore clear-eyed about what they’re buying — and financial predators (aka, short sellers) are deterred because there are no earnings reports to subsequently disappoint the buyers. 

Newer memecoins, however, may be surrendering this evolutionary advantage.

Proponents of BONK, for example, are not embracing the memecoin label, choosing instead to refer to it as a Solana “mascot” or “community” coin and positioning it as a “subscription to the Solana ecosystem.”

Many holders are expecting that subscription to yield dividends in the form of airdrops.

I’m not sure they’ve received any as of yet, but they are already receiving the other major form of financial yield: Buybacks.

BONKbot is a Telegram-based trading app that’s earning substantial fees from users, 100% of which are used to buy the BONK token.

(Imagine a company where all revenue is used to buy back stock. A genuine crypto innovation!)

To me, a memecoin that pays a dividend and executes buybacks looks a lot like a memestock — which may not be an improvement.

There may be higher yields to come — there’s a highly regarded team of developers building additional, presumably revenue-generating products around BONK.

But could the products they build, plus the airdrops, plus the buybacks provide enough yield to justify BONK’s current market capitalization of $800 million?

Maybe, sure — it doesn’t take much to “earn” a $1 billion market cap in crypto at the moment.

But I wonder if raising token holders' expectations of future earnings might make it harder, not easier, to achieve BONK’s ambition of overtaking Dogecoin as a top 10 cryptocurrency.

Once you have earnings, you have expectations of more earnings — and a valuation multiple that will look unappealingly expensive.

 It’s better to have no valuation at all than a very high one.

Counterintuitively, that might make earnings the handicap that prospective memecoin investors don’t want to see.

― Byron Gilliam

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