Multiverse of Madness- From Do kwon to Now Ko'd

Multiverse of Madness

This week of one of the most volatile period in the equity markets, as volatility spiked and market participants started their frantic selling. This week's market movements has shadows of the Mar2020 period whereby rapidly shifting market conditions resulted in billions of dollars being snapped away.

 At this period of sharp volatility, the fundamentals focused investor can take comfort in the words of Benjamin Graham in (The Intelligent investor) and metaphors of Mr Market, as a (maniac depressive) person whom is merely there to deal with you. There are underlying companies and cash flows behind the stock and difference between price and value is what the investor benefit from. The inability of the investor to fight head-on against a massive all-powerful incorporeal being. And how your mindset towards dealing with it determines whom is the master and whom is the slave. If Benjamin Graham was born a millennial, he will have thought of the Marvel cinematic universe as a apt description of how to deal with Mr market

1) To take precautions to ensure you will not be wiped out no matter what. 

2) To face Mr Market at the period of greatest fear and peril. And be prepared to embrace huge temporary losses 

3) To understand that the power of time is at your side. 

4) To bargain for unreasonable deals when the market is going irrational. 

5) To be comfortable in the possibility that this period of great uncertainty can continue endlessly as the market / investor can be trapped in the period on repeat

6) Embrace emotional pain as an old friend. 

7) Have the perseverance to continue throughout this ordeal. The investor can continue to lose, and lose and lose again. 

8) It is the mindset of the investor towards the market. That determines whom is the master and whom is the prisoner. 

Thoughts on the crypto markets 

If the equity markets is the scene of Doctor strange bargaining with (Mr Market), the crypto markets is a separate multiverse whereby Doctor strange is fighting against the seas of red by the unreasonable scarlet witch, taking place in the (wandavision hex) whereby everything is made up.  Although I have no direct holdings in the crypto space, I have exposure via coinbase to benefit off the volatility of this asset class, and I do have friends whom trade actively among the different cryptos. My understanding is that the rules in cryptoland are dramatically different from mainstream finance. Economic reality in equity markets do not scale to cryptoland and I do not know whether this is proof of rampant speculation or just quirks in this separate multiverse.

1) From DoKwon to Now-Ko'D

The lack of due diligence on the projects and founders and how the stable-coins are structured.

In conventional equity analysis, the perceived integrity, capability, and capital allocation ability  of the management is one of the integral part of qualitative analysis on each underlying business. Especially in the realm of finance, the complexity of high volume transactions and the huge temptations of siphoning off from the huge deal flows, have led to the banking industry necessitating intensive due diligence and background checks on its employees before giving them access to systems to manage money, and even that is not foolproof. In Warren Buffett's words, the ideal candidate is someone whom integrity is of utmost importance, followed by being hardworking and intelligent. And you will never want to place your assets with someone whom is intelligent and working hard, to screw you over. 

In crypto land however, billions of dollars are allocated to projects which functions are not rigorously tested and vetted by independent coders and auditors before they are deemed worthy by investors to allocate money to. Rug pulls are commonly conducted by (anonymous faceless founders) whom use smart contract back-doors, malicious code to lock up crypto / siphon money, which is the norm and not the exception in the shitcoin space. Tether is notorious for failing its checks conducted by independent auditors, and instead of fixing the problem decided to pretend the failed audit didn't exist, and decided to change its original prospectus on its asset composition (USD Cash)  so many times that its current asset base is now an amalgamation of dubious unidentifiable assets and the mantra of (Trust Me Bro). 

Luna and Terra is the product of Do Kwon (Now Ko'D) which is essentially a related party transaction of 2 crypto bros vouching for its others credibility. Luna on its own has no economic function apart from selling a dream of building a future ecosystem, and using its perceived valuation to dilute its investors, such that every time terra deviates from its peg, as long as Luna does not drop to USD 0, it can artificially adjust the exchange rate of luna-terra to support terra being an x amount of Luna (equivalent of USD 1). Despite skeptics providing warnings about Do Kwon flaky stable-coin mechanics, and his history of failed dubious stable-coin projects like (Rick and Morty), DoKwon instead adopted an arrogant attitude of ignoring the problems but flexing his riches to challenge / silence critics. In the bull market, no one paid attention to it when the market is going up. It is only when the tide subsided when everyone discovered whom is swimming naked.

The difference between Terra and Tether is that Tether use dubious assets to claim that he is rich and people should transact through him. And Terra has a dubious friend called Luna that tells everyone that Terra is rich, people should transact through Terra, and if Terra runs into issue dubious friend Luna will support him. 

2) The impossible trinity.

Blockchain on its own has real life applications in specialized niche software. Its potential replacement of the SWIFT network and traditional payment systems already had successful test cases and should not be overlooked. Its potential to create a public and irrefutable public ledger is very helpful in cross referencing / auditing public records. And smart contracts are useful (API tools) to extract data from trusted authorities (sources of factual truth) in order to be be used for inputs into other forms of automated decision making. 

Cryptocurrency however is a concept I am uncomfortable with. In the hype of creating artificial scarcity and fool's gold, a decentralized ledger can be used to create a token that can be tagged and listed in an auction driven market. There are no court of law that can justify that if you own the token you own all of the economic output that is generated while others uses the decentralized ledger. As an investor in Chinese markets, it is disconcerting that real underlying companies that provide products and services with real economic value servicing global markets, can be traded at depressed valuations due to perceived political risk despite a thriving court of law, while a separate multiverse of decentralized ledgers with no use cases and no legal backing, spitting out tokens that have no intrinsic value, can be priced larger than Berkshire Hathaway. 

In the economic concept known as The Impossible Trinity, a currency exposed to the global markets has this trade-off between capital mobility, independent monetary policy (ability to set interest rates), and exchange rate stability. Certain small nations like Hong Kong and Singapore chose to optimize for managed float exchange rate and capital mobility, giving up control of its use of interest rate policy. The US flexes its economic dominance over trade flows, chose to optimize for control of interest rate policy and free capital flows, and giving up control over its exchange rate. China chose a CNY-CNH and stock connect mechanism, whereby Local CNY has very limited convertibility to external currency, limiting its capital mobility, while optimizing for control over its interest rate policy and exchange rate with major trading partners. 

Cryptocurrencies operate in a separate multiverse whereby they ignored economic reality and tried to do everything, without dedicated reserves to protect its function and peg when the project runs into challenges. Cryptocurrency also has tradeoffs on their operational capability with regards to decentralisation, Transaction speed and cost, scalability. These are problems that cannot be solved with present day mechanics and technology, and as such cryptocurrency investments are still too early stage for me at this moment.

 

 

3) The box (project) can have an artificial price floor once it is listed no matter how flimsy its actual economics are. And as long as people believe in it it can generate investor interest and becomes a self fulfilling prophecy 

Per one of the interviews between Matt Levine and SBF (CEO of crypto exchange FTX), the nature of most crypto projects are on the basis of ponzi economics. As long as the scarlet witch (market participants) deems this project is real it will continue to exist in this hex. Any box that simply spawns in this space will be allocated a price floor of USD20 million and don't have to make sense or have a use case compared to mainstream finance.

Personally, I feel that the cryptoland multiverse is a poorly written parody of the alternate hex reality in Wandavision. Despite the horde of discord channels and social influenzas disputing otherwise and advising others to buy the dip (With the disclaimer Not Financial Advise), I don't think the idea of discounted memes flow and price to memes analysis is a good substitute for the underlying cash flows that an actual use case a product / project can generate. 

 
Conclusion
This volatile period is NOT over and I am simply penning down my thoughts after been through this wild week in the equity markets, as well as barter with my friends on the sea of red in cryptoland.  I will try to pen a consolidated post at the end of the month for my portfolio decisions and decide how best to make the best decisions moving forward.