Tuesday, October 26, 2021

Guest Post by "Louisiana" on Meme Stonks

[This guest post is by our correspondent from Louisiana, who previously wrote "Modern Art is a Giant Tax Scam", and "Time to Assess Practical Risk" about coronavirus. He was the winner of the 2018 CBS Prediction Contest.]

In my ongoing conversations with CBS, I've floated a thesis that explains the "value" behind meme stonks from Gamestop to Tesla. I live near Houston but visit family in Louisiana often. The small city of Lake Charles, just across the border, has two major industries: petrochemicals and casinos. The Texas Republican Party is too strait-laced to allow gambling in the state, so more morally flexible Louisiana gladly fleeces Texans on the weekends at remarkably nice casino resorts just two and a half hours from Houston.

From an Austrian subjective value perspective, obviously the casinos must provide some value to their patrons. The value is the manipulation of endogenous neurotransmitters through engagement in artificial addictive behavior, akin to junk food, pornography, or even our beloved nicotine. My thesis is that advances in gamification through mobile-friendly brokerage services like RobinHood, in addition to the obscuring of commissions and the ability to buy partial shares, have made certain parts of the stock market function exactly like a casino. Cryptocurrency is even better for this purpose.

From the gambler's perspective, the ideal stonk or crypto would have certain qualities:

1. High volatility. Gamblers get excited by low-probability but high return outcomes. The perception is even better than this, however. The historical growth of these issues makes the risk seem minimal compared to blackjack. One way to conceptualize these stocks is like the Powerball lottery. The more tickets that are sold, and the longer the jackpot goes unclaimed, the larger the prize becomes. Imagine the appeal of Powerball if tickets never expired until the prize was awarded. Either way, earning an inflation-proof 7% in Altria or oil royalties for 20 years is not on the menu.

2. Like smokers, alcoholics, and other addicts, gamblers demand cues associated with their vice. A casino does more than simply provide a volatile negative expectation redistribution of funds. It also must provide what the industry calls "gingerbread." Resorts are themed in various ways (Caesar's Palace, the Bellagio), and aspects of community are provided with nice restaurants, shopping, and social events: in other words, all of the things brain-damaged extroverts need to distract themselves from even a moment of introspection. Even at the micro level, slot machines obscure their brutal, mathematically ordained outcomes with game themes. Some gamblers prefer a Wheel of Fortune themed game. Others may prefer one themed from a recent action movie. Similarly, a feature of meme stonks and crypto is some sort of plausible story to provide gingerbread for the gambler. Just as some people believe there is a strategy to win at lotto or slots, the stonk gambler needs a rationalization for destructive, addictive behavior. The best stonks have some compelling story: Elon Musk is Tony Stark, the idealized version of themselves every nerd can idealize, and will eventually own the entire transportation market worldwide and the entire planet of Mars. Crypto is the new gold, or the new currency, and if you don't want to be stuck holding wheelbarrows of worthless dollars, left behind by our new crypto kings, you'd better get in early. The key quality of a stonk or crypto is that it must have no objective value, and with no objective value, its value could be anything. Communities form around these memes that are emotionally meaningful to the participants, including a penchant to engage in infantile bonding behavior (literal baby talk with words like "tendies").

3. It is impossible to analyze the casino business from an objective perspective. Objectively, they provide no real economic value (or at most very expensive entertainment value), which is one of the reasons most jurisdictions severely restrict or ban their operation. Nevertheless, where they are allowed to operate, they are consistently profitable. Perhaps the best explanation for the emergence of meme stocks and the crypto bubble is in-person gambling being shut down during Covid, along with the more recent crackdown on online poker. Those animal spirits demanding their dopamine hits (and frankly, a salve for the profound loneliness in the culture) had to find an outlet somewhere.

I think some value investors are operating under an old paradigm where a stock's value is equal to the net present value of cash flows delivered to the investor. But stonks and crypto can pay a different type of dividend in the form of neurotransmitters to gamblers. Once a stock or crypto becomes a meme, it is as useless to attempt to short it or otherwise predict its crash as it is to predict when the lotto will pay out. With the recent short squeeze of Gamestop, short sellers have to be extra cautious that they will be targeted with a campaign of forced bankruptcy and margin calls before their bets can achieve their "rational" value. On the flip side, no one can "call" my oil royalties or tobacco dividends, no matter how low innumerate or irrational ESG managers sell the stock. If well managed, these shares are being bought back in an accretive way anyway, limiting the mark-to-market downside.

It is possible, maybe likely, Tesla and Bitcoin will continue to trade at high levels simply out of their entertainment and gambling values. If recent years have taught us anything, never short the stupidity of the Kwa's population.

Once the Covid crisis is over, it will be interesting to track publicly traded casino earnings. Does legal gambling in stonks increase or decrease their foot traffic?


CP said...

"Crypto Investors Are Bidding to Touch a 1,784-Pound Tungsten Cube Once a Year"

Over the past two weeks, a joke fired off by Coin Center's Neeraj Agrawal about a non-existent tungsten shortage thanks to crypto traders buying cubes of tungsten due to a meme actually caused one for Midwest Tungsten Service. The Illinois manufacturer actually creates small cubes of tungsten, and the tweet caused a 300 percent increase in sales that depleted the company’s stock on Amazon, Coindesk reported.

Last week, The Block reported that the company entered a partnership with crypto payment processor OpenNode to accept Bitcoin payments. One explanation as to why this is happening, which doesn’t really explain why this is happening, was offered to The Block by CMS Holdings' Dan Matuszewski, who said "crypto just has a propensity for the density." Tungsten is a very dense metal, comparable to uranium or gold, and its surprising weight is, apparently, pleasurable.


CP said...

The Tungsten Cube - 14.545 inch, ~2000 lb (1 Ton, 907 kg) cube held in Willowbrook, Illinois, USA by Midwest Tungsten Service

Minimum bid ETH 47.74 ($199,699.28)


Stagflationary Mark said...

For your amusement:


We recycle many solid forms of tungsten including drill parts, cutting inserts and rods. We try to make the recycling process as easy as possible for you. Contact us today to learn more about your options when recycling your tungsten scrap.

Current price: $3.25/lb

viennacapitalist said...

Well written
There is no way it would have gotten that bad without the pandemic, i.e. monetary policy is a necessary but not sufficient condition for what we are observing.

Crypto has certain advantages from the perspective of a gambler, see:

so it might stay with us, even after the pandemic has passed (spring of next year, my prediction)...

CP said...

So let me paint a picture. Nigeria has always been a highly unequal country. The poor are very poor, the rich are very rich. There is plenty of poverty (although this is improving) and not much of a government-run social security net. Nigeria also suffers from endemic corruption, and this impedes the ability of regular folks to improve their lot.

The yearning and frustration that this creates gives rise to a constant demand for quick financial escapes, or zero-sum games. But what sorts of zero sum games? Nigerian authorities take a relatively paternalistic approach to gambling. Depending on the game, Nigerian law either prohibits it outright or limits it. For instance, Nigeria has only three land-based casino for 200 million people. Non-skill based card games are illegal. Apart from sports betting, online casinos are prohibited, and many foreign websites don't accept Nigerians.

So a big part of the demand to play life-changing betting games gets channeled into whatever the underground market can provide, like ponzi schemes.

If you start with a large population of unhappy young people who want to play life-changing zero-sum games, combine that with limitations on legal gambling, and add in a massive economic collapse which only makes their lives worse, you're going to get a big wave of illegal ponzi schemes cropping up.

Canada and the US also have problems with inequality and poverty, albeit not as extreme as Nigeria. Our economies have also been hit by the biggest shock in decades.

But unlike Nigeria, Canada and the US have well-developed capital markets. So when desperate Canadians and Americans look for long shot life-changing bets, they needn't limit themselves to traditional gambles like lotteries, casinos, or online poker. Online brokerages like Robin Hood and Wealthsimple make it easy for us to make hundred-to-one bets in options markets or leverage up on Tesla or GameStop stock.


CP said...

In suggesting that bitcoin should be labelled a game rather than an investment, I don’t mean to belittle it. Financial games provide value. A casino employs not only croupiers but also managers, marketers, cooks, cleaning staff, programmers, security guards, and more. These jobs help the economy. People fly to Vegas for a reason. In moderation, financial games are fun, sort of like how going to a horror movie provides thrills.

Likewise, bitcoin’s price contortions can be entertaining. Combine this with the constant soap opera generated by the personalities involved in the space, and you’ve got a form of recreation that competes head on with Netflix, League of Legends, or the NFL. Bitcoin and its many ancillary services—exchanges, payments processors, and wallet providers—create jobs for programmers, marketers, lawyers, and economists.

If financial games were illegal, then the provision of lotteries, poker, and other forms of betting would shift to the underground economy. Not only would the quality of the product decline, but violence could rise as criminal organizations fight to control their gaming turf. Bringing these activities into the light—in bitcoin’s case by implementing an open and transparent online version—makes society safer.

And of course, there are times when bitcoin serves as more than just a financial game. In 2011, for instance, Wikileaks relied on bitcoin to maintain its connection to donors after being cut off from the banking system. This payments function was why bitcoin was originally created, but it has taken a distant back-seat to the technology’s dominant role as a decentralized financial game. Indeed, what makes bitcoin such a thrilling game—its rollercoaster peaks and troughs—is the very feature that militates against its usage as a medium of exchange. People don’t want volatile money, they want stable money.

This gets me back to Brian Armstrong’s admonition to Coinbase’s customers to invest responsibly. His warning label just doesn’t cut it. No one invests in a zero-sum game, they play it. A casino owner daring to suggest that playing roulette is akin to investing would be justifiably pilloried for engaging in purposeful deception or, at best, sloppy word usage. Same with a lottery operator who advertises Powerball tickets as an investment. Likewise, people buying bitcoins should not be encouraged to believe that they are engaging in the age-old art of investment appraisal. They are playing a zero-sum game. The word “investment” should be reserved for the act of allocating capital to win-win games like shares in private businesses, publicly traded stocks, and bonds.


CP said...

The majority of newcomers are attracted to the crypto scene not for ideological reasons, but by the scent of big winnings. Many are betting a big part of their wealth on bitcoin or other cryptocurrencies. And no wonder. If a 20-year old with life savings of $1,000 can turn that amount into $10,000 in just a few weeks, they will have advanced their financial status far faster than by toiling away at a job, or putting it in a savings account. The dark side is that this $1,000 in savings can just as easily be destroyed by bitcoin’s inherent volatility. Dropping the word “investment” and replacing it with “game” would be a more accurate description of the activity in which bitcoin owners are participating. The flocks of new entrants might get a better inkling what kind of door they are entering. Maybe they will avoid doing serious damage to their futures.

With a game, nothing is assured. Games are something to dabble in, not vessels for one’s retirement savings. A problem gambler, someone who continuously bets their savings on zero-sum financial games despite the financial harm being inflicted on themselves and their family, doesn’t need the affirmation that the word “investing” brings to their activities. Instead of asking Coinbase users to “invest responsibly,” Armstrong should have used a version of the disclaimer that most American lotteries use, including Powerball: “Play Responsibly. Remember, it’s just a game.”

CP said...

The world is overpurchasing proof-of-work (POW) blockchains. How do we fix this?

Let me quickly outline the argument for why the world is buying too much POW. Blockchains such as Bitcoin, Dogecoin, and Ethereum provide coin buyers with a special sort of security – proof of work. POW requires huge amounts of electricity, so much so that Bitcoin and Ethereum together currently use up more energy than Italy.

It's not the energy-intensity of POW that's problematic. The issue is that the biggest buyers of POW coins – speculators and gamblers – care very little about POW security. What they value is the thrilling price movements that blockchain coins provide.*

Coin gamblers also have the option of buying non-POW blockchains. Non-POW coins offer gamblers the same wild price movements as Bitcoin, Dogecoin, and Ethereum. However, the security that these non-POW coins rely on requires far less electricity.

On net, the world would be better off if all blockchain gamblers migrated away from POW coins and onto cheaper non-POW coins. The gamblers themselves would not be any worse off. They'd still get all the crazy up-and-down fun & entertainment as before. But the rest of us would benefit, since far less of the world's energy would be burned. That's what I meant at the outset when I said that we have a POW overpurchasing problem. Coin speculators are unwittingly over-gambling on energy-heavy POW blockchains and under-gambling on energy-lite non-POW chains.


CP said...

Crypto is no longer a very useful term, since it encompasses so many different types of phenomena. There is bitcoin, programmable blockchains like Ethereum, stablecoins, non-fungible tokens (NFTs), decentralized finance (DeFi), and more.

Let's start with Bitcoin. In this category I've included other volcoins like Dogecoin, Shiba Inu, Bitcoin Cash, and Litecoin. I call them volcoins because they are incredibly volatile.

In the early days, many of us thought it possible that Bitcoin might develop into a legitimate threat to the dollar. But enough time has passed now that we know this isn't case. The dominant reason people have for owning volcoins is to get exposure to their exciting price moves. That is, volcoins are a gambling technology, not a monetary technology. Rather than competing for dominance with the relatively stable payments instruments issued by central banks, volcoins serve as substitutes for casinos, meme stocks, lotteries, poker, and OTM options. None of these bets will ever be a credible threat to Fed or Bank of Canada dollars.


CP said...

Gambling and speculation. I wrote the whole article expecting bitcoin to fail at being a currency, but that charade ended almost immediately. What exists now is an expensive, power-hungry, distributed, online gambling system. The house still always wins, but it’s not totally clear who the house is, which is how the house likes it. Gambling has always been fundamentally a drain on society (a “tax on the uneducated,” someone once told me), but it’s always very popular anyway. Bitcoin is casino chips. Casino chips aren’t currency, but they don't “fail” either.

CP said...

The grifters and true believers that Penny met onboard (sometimes the same people are both!) split their time from using Telegram to procure the services of sex workers and shouting at each other about block sizes. Penny gets right into the psyches and the compartmentalization that powers the whole scene.