The Delta Trade

Something has piqued my interest in the last few days. The Delta variant is sweeping through the nation, which has resulted in reimposed indoor mask mandates, increased hospitalization rates, and increased timelines on self-imposed work from home mandates by private companies. Robinhood debuted as a public company only to drop 8% on the first day of trading. That seemed absurd because its very customers are infamous for propping up stocks well beyond any reasonable measure of valuation. Well, just a few short days later and it’s up a whopping 90%. That means $MEME stocks are alive and well. And if this Delta variant keeps us glue to our screens in our bedrooms, $MEME stocks are likely to have a resurgence.

The Delta variant is actually worrying and frustrating. It’s important to reiterate, 99% of deaths and 97% of hospitalizations are attributed to UNvaccinated people. But breakthroughs are are becoming more common and I certainly don’t believe it’s at only 10%.

I don’t have any evidence for this, but vaccinated people who have been reintegrated to society and get an illness are not getting tested. The vaccine is obviously effective at reducing symptoms and shouldn’t hamper mobility as long as the UNvaccinated don’t clog up our hospitals. Even Mitch McConnell who recently got Covid and miraculously praised the vaccine for reducing his symptoms, said it ‘felt like a sinus infection’. It’s hard to have sympathy for the UNvaccinated, but try and keep some for anyone who chose not to get the vaccine due to a compromised immune system. Reddit is doing a plenty good job with the posthumous shaming. But there is a renewed interest in the Covid news cycle and I’m going to go ahead and directly tie that to an increase in retail trading propping up covid-related companies well above their plausible value of discounted cash flows.

The WSJ quoted infectious-diseases expert Carlos del Rio saying, “If you’re vaccinated, you should not worry about the Delta variant.” Having just recovered from the Delta variant, I think he’s both right and wrong. If you have any comorbidities, it’s worth taking some precautions. I was out for 5 days. No fever, but I certainly wasn’t comfortable. If you are going to see any at-risk people, also take a pause. The Delta variant is wildly contagious and vaccinated people seem to pass it along at an alarming rate even if they are not symptomatic. All that said, if you’re vaccinated and not worried about getting the flu or strep, you probably shouldn’t worry about the Delta variant. But I’ll never stop anyone from taking whatever steps they want to be personally responsible for their health. The government’s job is to provide accurate information so we can make our own informed decisions, and it seems like they are. Also, people are looking for information.

But We’re Here for the $MEMEs

Ok great. I’m sure most of you have been devouring headlines about the Delta variant the last few weeks. Did you catch the news about the Lambda variant in South America? So why are we here really? Here’s why:

That looks a lot like the stocks that exploded last right after we digested the fact that we would be working remotely, would have limited mobility, and that there would likely be a successful vaccine.

Moderna: I’ve been holding this since March last year and WOW. It’s now a part of the S&P 500 and they just received FDA fast track designation for Respiratory Syncytial Virus (RSV) Vaccine (mRNA-1345). I obviously copy and pasted that. mRNA vaccines are all the rage these days. I’m not selling, but not buying any more because that stock has been on an absolute tear.

Novavax: The stock popped today because they sealed a deal with the EU for 200 million Covid-19 vaccines. They had a big pop in January, but haven’t seen their 52 week high of $331 since then. They were also trading at $4 in 2019. With a current market cap of $16.6bn, I think there’s a lot of room to grow here. I’m going to pick some up tomorrow.

Pfizer: I just bought this one. It looks like the FDA will give the vaccine full approval, as opposed to emergency approval, by September. Historically there’s nothing to suggest this stock will pop, but it’s a big pharma stock that can’t hurt to own in your 401k. They have the resources of a big pharma company and proved they are nimble enough to be first the the market with a vaccine that looks like it will get full approval. Bravo.

Catalent: Catalent provides advanced delivery technologies and manufacturing solutions for drugs, gene therapy biologics and products for the consumer health space. Catalent has partnering with JNJ, AstraZeneca and Moderna to provide fill-finish expertise to their supply chains and their biologics revenue, which represents 44% of their total revenue, is up 31% from the prior year. I’m honestly not sure why this company hasn’t manage to profit more from helping pharma companies manufacture vaccines. Whatever, I’m re-buying.

I also own JNJ. I’m going to look at buying all the other classic quarantine stocks like Zoom and AstraZeneca. Big tech is an obvious one, but I can’t buy any more of that. Clorox looks good, especially because it just took a 10% hit after posting a disappointing Q4 due to dwindling demand.

Pinterest is an interesting play. It just got crushed after earnings because its revenue guidance said it would be difficult to sustain its growth that it got after quarantine. Well, now that people think it’s going to contract this is a perfect time to surprise. I’m not going to buy now, but if mobility decreases and the stock doesn’t go up before the next earnings call, this looks like a solid buy.

Sell China…

Ok, that’s it for now. Oh and sell China. More on that later, but the Chinese government is intent on reminding Chinese billionaires and multinational companies that they need to understand their place in the system and fall in line. China is a state capitalist economy and it intends on staying that way. They do not allow Chinese companies to list shares on foreign markets (there’s a workaround through the Caymans, obviously) and if Hong Kong is any indication, there’s no way to stand up against the system, even on the global stage. Alibaba, Tencent, JD, Baidu and the list goes on, are all down 10 – 30% this year. I hope Jack Ma is doing ok. Some traders see this as an opportunity. I don’t. I’m even more concentrated on US equities than ever before.

Where is Bitcoin Going?

There’s recently been a whirlwind of activity in the cryptocurrency space that could begin to shape its very future. Both the Fed and the SEC have started to weigh in heavily on potential regulations, China is charging ahead with its own digital currency, El Salvador is very close to accepting Bitcoin for basically all government services, and Venmo will let you convert your US Dollar cash balance to crypto for a ridiculous fee. There is significant expansion and regulatory attention being paid to the cryptocurrency markets right now and that can only mean one thing: prices will go up, down, stay the same, or go up and down and back to the same.

According to the Economist, there are three types of crypto investors: Fundamentalists, who believe a non-governmental currency has long-term societal benefit and value above the daily network transaction costs, Tacticians who basically think the price will go up because more people will buy it in the near or medium future, and Speculators who respond to Elon’s Twitter account faster than their latest Tinder match. Take a moment to reflect and put yourself in one of those buckets. Now try that same exercise with a few different asset classes. I bet you never pegged yourself as a Speculator. That’s unfortunate. That’s where all the upside is.

Before we chart out a path for the price of Bitcoin, let’s take an aside to talk about Stablecoins and GovCoins. In theory, these classes provide all the value of a cryptocurrency with none of the dreaded price swings. A couple of weeks ago Yale in combination with the Fed released a well researched paper about the place of stablecoins and its impact on the US Dollar. It’s a good read if you appreciate the history of money.

What Are Stablecoins?

Stablecoins, as the Economist put it (but I’m rewording), are the proverbial grease for the crypto wheels. They are a form of private money that is backed one-for-one with government fiat currency. Of course it’s not that simple. Economists generally agree that money has to satisfy three properties: money is a store of value, a unit of account, and a medium of exchange. However, there is a fourth property known as the ‘No Questions Asked’ property, which means that money is accepted in a transaction without due diligence on its value. This ill-defined property is where there be dragons.

We all know banks do not actually hold onto your money when you deposit it; they lend it out. If there is a run on a particular bank because customers do not trust its ability to pay back its deposits at par, the bank’s federal insurance policy would kick in and pay back its customers at par. Since the creation of the FDIC, no person in the US has ever lost money putting their money in a checking account. Regulations on how banks can invest demand deposits, Federal insurance on these deposits, and the backing of the US Government and its army creates the stability of the dollar that we all take for granted.

The advantage of Stablecoins is portability, openness, and low fees (known as gas for all you Ethereum fans). You can send a Stablecoin to anyone in the world without the use of a financial institution. Banks charge customers monthly account fees, minimum balance fees, overdraft fees, overdraft protection fees, returned deposit fees, check fees, ATM fees, debit card transaction fees, lost card fees, foreign transaction fees, wire transfer fees, savings withdrawal fees, inactivity fees, account closing fees and even reserve the right to charge negative interest. Those fees hit hardest when your account is at its nadir; digital currency and wallets remove this burden and open up the world of finance.

Now that we’ve established a place for Stablecoins, here’s the catch. They’re not backed 1:1 by a US dollar and they’re not regulated. If you’ve ever seen an advertisement from BlockFi, Linus, Gemini or even Coinbase offering a 10%+ yield on USDC (a Stablecoin), this is an example of unregulated money market fund. And if left unchecked, can have dire consequences for the entire US economy.

I would go into the intricacies of GovCoins, but is literally a government’s currency converted to cryptocurrency. Nothing really changes except the medium of exchange and even that looks the same. Banks can still be custodians of your cash and can even shield every day customers from even knowing the US Dollar is now a cryptocurrency. Institutions can still transfer money between themselves to represent customer digital transactions. I don’t know, but it’s probably a good, if not a necessary, idea to hop on.

Will GovCoins Usurp Bitcoin?

I think there will always be a place for a currency not tied to a government. There’s more than enough people in this world who do not trust any government entity with their wealth. The intrinsic value of any digital currency is the total sum of fees charged for processing and recording transactions. If transactions seize up, the currency is no longer a medium of exchange and the value of the currency should go to $0. The value of any currency is tied to its ability to fulfill the three properties of money: a store of value, a unit of account, and a medium of exchange and of course the fourth property ‘No Questions Asked’.

Today it takes about 10 minutes to send money via Bitcoin, but can take as long as an hour. Sometimes days. Also, the fees are variable. It can easily cost $20 to send $1. A lot of work is being done on lots of different crypto currencies to reduce both fees and transaction time, but I hope we can agree Bitcoin is hobbling in its attempt to look and feel like money. That said, today the average transaction fee is $2.23, which is a far cry from the $35 international wire transfer fee. Not so great for buying a cup of coffee though. – look at that $65 transaction fee though!

Side note: I hate sending money on crypto rails. It’s terrifying and irreversible. Banks can reverse ACH transactions and can generally work with other banks to return errant wires. What I’d really like is the ability to ‘ping’ a wallet’s address across the network. The ping should probably go through faster rails so it is received in minutes, not hours and it should cost about $.01. So next time you want to pay for your house in BTC, you at least can be confident you’re sending it to the right person.

So let’s just agree the current value of Bitcoin is speculative. Gold, Bitcoin’s physical counterpart, is part tactical and part speculative. The dollar is fundamental. Stablecoins are in a murky area, but leaning towards fundamental assuming there are no bad actors. Speculative value is ok, but if you invest in something speculative, you should expect speculative returns. This post isn’t about how high Bitcoin can go or the chances it disappears (which is very low, but also its disappearance would literally be without a trace), but its about whether or not you should ‘invest’ in it.

My simple advice is ‘no’, Bitcoin is not that interesting of a speculative investment, but if you do, do so without paying any fees. Venmo recently opened up ‘investing’ in crypto currencies and charges a 1.8-2.5% fee for doing so. What really grinds my gears is hedge funds whose sole strategy is to buy and hold Bitcoin. The literal point of Bitcoin is that is universally accessible to anyone with a computer and internet connection. How on earth would anyone pay fees, let alone a 20% promote for an asset designed to serve every human on earth in an open and equitable way? Classic sales adage: if you customers are struggling to see the value of your product, just charge more.

Here’s a look at who is trading Bitcoin, brought to you by the Economist and further brought to you by Chainanalysis. Algorithmic traders dominate crypto markets, grinding out profits from bid-ask price discrepancies and exchange price differences. Wealthy people all over the world started parking some of their money in Bitcoin and a few very loud Reddit traders starting posting gain and loss porn on the Internet. Frenzies ensue, followed by periods of cooling off where those late to the game are left holding the bag. Invest if you will, but certainly not because you must.

But Do You Believe?

So I’m clearly not a fundamentalist investor. I don’t belong to any financial church and I believe in things that exist. So if asked if I ‘believe in Bitcoin’, yes, of course. It exists. Do I believe it will stick around? It’s been around since 2009, so, yes, it will probably stick around for the foreseeable future. Will I park my money in it? No. It doesn’t create any value and in my opinion it’s not a scarce resource because by some measure by Statista there are over 6000 crypto currencies in existence. DogeCoin was created as a joke and has captivated the world’s attention and achieved a market capitalization of over $55bn. Woof indeed.

So am I a speculative investor in Bitcoin? Not since 2017. When it comes to speculation, I prefer to be doing things other people aren’t doing. Everyone knows about cryptocurrencies. So, I must be a tactician! Tactician is rather generous term, but, yes, I believe that offering cryptocurrencies as a product and reward to existing financial customers, such as Venmo or Visa, means the pool and awareness of cryptocurrencies will increase in the near future. I only like to write about speculation, so I’m not going to actually act on any tactical Bitcoin investments. If I were to invest in Bitcoin, I would do so tactically.

The headwinds are plentiful. China is doing its best to remove both investors and miners from its country. Money laundering is still rampant, though only represents about 2% of all Bitcoin and the rise of Stablecoins or Govcoins might usurp the medium of exchange and No Questions Asked part of money. The price is so heavily influenced by Bitcoin celebrities like Elon Musk that it dwarfs any intrinsic or fundamental value created by widespread awareness and adoption and will probably also overshadow any tactical gains by crypto permeating into the every day financial lives of billions of people. There is currently little to no regulation, but that will certainly change. Oh, and Bitcoin mining accounts for 35.95 million tons of carbon dioxide each year. Honestly, if you care about the environment, don’t buy it, hold it, or even talk about it.

I don’t have any interesting big bet ideas today. Crypto is a fine place to take a risk, but the returns aren’t what they used to be. Even if you 3x your money. So what? You can just as easily lose 70% in a few days. I’m staying away, but I don’t necessarily disagree with anyone taking the other side.

What’s Next and What’s Happened?

I haven’t written much recently. Honestly, my last few posts summed it up. I dumped all my Robinhood speculative stocks, bought some real estate and put the rest of it in ETFs and Big Tech. Nothing interesting, but it was a bit nerve racking buying real estate, mainly because I hate paying fees and even though buyers don’t technically pay the fees, I know they are there.

The next idea I’m toying with is patience. There’s a strong correlation between broader market bull runs and derivative asset, like BTC, ETH, $MEME, and $WSB. Unfortunately we are at the tail end of a few-times-in-a-lifetime bull run from trough to peak, but that shouldn’t stop speculation. A few solid days for market indices could mean high volume stocks and crypto could have a short-term pop. Think of it like a pass line bet in craps; you’re supposed to bet the house max. But this isn’t Vegas and the house is anyone showing up late.